XL Ekes Out A First-Quarter Profit

National Underwriter News
April 29, 2009

XL Capital reported first-quarter net income of $3.1 million, with favorable prior-year development contributing to the upside and investment losses continuing to drag the figure to a minimal level.

Excluding dividends to preferred shareholders, net income to ordinary shareholders was $178.4 million, or 53 cents per ordinary share, down 15.8 percent from $211.9 million, or $1.19 per ordinary share in the 2008 period, the Bermuda-based company reported.

Financial statements for the quarter revealed the recognition of over $1 billion of mark-to-market losses, including $252 million of net realized losses directly impacting net income. XL also reported $4 billion in net unrealized losses, or a $770 million change from $3.2 billion reported at year-end 2008.

Michael McGavick, XL chief executive officer, said the company made progress toward its goal of derisking its investment portfolio during the quarter, selling $1.3 billion, or 70 percent of all securities that it had identified for sale as part of a restructuring charge taken in fourth-quarter 2008. The sales reduced holdings in volatile asset classes by over $2.4 billion, he said.

On the underwriting side, Mr. McGavick said the combined ratio for the quarter was 93, in line with last year's first-quarter result of 93.6.

Chief Financial Officer Brian Nocco noted that underwriting results included the recognition of $90 million of prior-year favorable development, and James Veghte, chief executive of XL's reinsurance operations, said that $83 million of favorable development for the reinsurance segment brought the segment's combined ratio down to 77.2.

Without the development impact, the reinsurance combined ratio was 97.5, or 0.6 points higher than last year.

Gross premiums for the reinsurance segment fell 26.6 percent to $787 million. The company said underwriting actions, such as its exit from the U.S. casualty facultative segment, contributed to 10 percent of the drop.

For the larger insurance segment, which reported a 33 percent drop in gross premiums to $1.1 billion, the combined ratio was just over breakeven, coming in at 100.1.

David Duclos, the leader of the insurance operations, noted that $176 million of the $537 million drop in gross premium volume for the insurance segment was expected—fueled by a planned reduction in long-term agreements.

He also mentioned that 16 percent of the drop was attributable to global economic pressures and XL's push for rates.

Overall, Mr. McGavick characterized the first quarter "as another quarter of solid progress at XL," with the company making progress toward goals of changing the business mix of the company, cutting expenses, derisking the investment portfolio and rebuilding its reputation.

"We are retaining our valued customers and our skilled professionals," he added, noting that the voluntary turnover rate of XL staff is now "at or below last year's level."

Assessing the big picture revealed by financial results, he said, "There are some things you take pride in even though they're not out-of-the-ballpark type numbers.

"This is the first quarter since I've been at XL that we've reported a net income positive," he noted. Mr. McGavick became CEO in mid-March last year.

"We're starting to see signs that some of the ... very severe challenges we've had to deal with"--in particular, those stemming from XL's prior participation in the financial guaranty business--"are now moving into the past," Mr. McGavick said.

Mr. Duclos, providing an example to "showcase" the changes that have occurred in XL's reputation in the past three months, noted gains in the directors and officers liability business; the company's retention rate had been in the mid-to-low 60s from late December until early January.

Through April, the retention is now 80 percent. While other product lines don't show that dramatic amount of improvement, they are all doing better, he asserted, "while at the same time, we're showing improvements in rate."

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