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Article Excerpt
Original Source: FD (FAIR DISCLOSURE) WIRE
TODD BAULT, NONLIFE INSURANCE ANALYST, SANFORD BERNSTEIN: Good morning everyone. Welcome to the Bernstein's Strategic Decisions Conference. I am Todd Bault, Bernstein's Nonlife Insurance Analyst. Given it is day 3, I am sure you know the question-and-answer drill. You have cards on your chairs. Please write down your questions. Hand them to the attendant, and I will read them from the podium. And we will read as many questions as we have time for.
I'm very pleased to have both a veteran of our conference and a veteran, a longtime veteran of the insurance industry. XL Capital was one of the earliest specialty companies in Bermuda. It has seen many good and bad periods, and is coming off a very good period indeed. And to discuss what he sees in the future, President and CEO, Brian O'Hara.
BRIAN O'HARA, PRESIDENT, CEO, XL CAPITAL: Good morning everyone. Todd, if you follow him, he has been a longtime champion for increased transparency, and we agree with him. He has been a catalyst in our effort to bring together our Global Loss Triangles. It was quite an effort over a two-year period. And we announced that we had completed them and that we would be releasing them in the near future. And Reg FD prevents me from handing Todd the triangles today, but we would like to present him a binder to keep them in. So Global Loss Triangles.
Our cautionary forward-looking statement. You commit that to memory. Before I discuss our strategic changes, I first would like to touch on our financial performance. We began 2007 by continuing the record quarterly net and operating income that we had been producing. We had solid underwriting results in the first quarter, despite $55 million loss with Storm Kyrill in Europe. Our investment operations continue to provide outstanding returns. And we produced an exceptional ROE in the first quarter of 22.4, resulting in year-over-year growth of XL's book value per ordinary share of $10.72, or 24.2%.
We keep it real simple. Our strategic objective is to grow book value per share in the top quartile of our peer group. And we want to make our strategy very clear and concise. And this is our strategic objective, and everything that we do going forward is aimed at contributing to this objective.
We plan to grow this book value through three main drivers -- maximizing our unique dual platform of insurance and reinsurance, sharpening our strategic focus through selective business changes and alignments, and the continuous improvement in our already strong risk management discipline.
As I mentioned, our dual platform of insurance and reinsurance, including life reinsurance, is unique in that we have a size and scale and breadth geographically that really no one else has. In insurance we become a leading global specialty large commercial and middle market insurer, with a very effective distribution network. And that is something that will be very hard for newer entrants to replicate or duplicate.
On the reinsurance side, our platform gives us considerable flexibility to expand and contract according to market conditions. This will enable us to continue to deliver underwriting profits, although the top line will go up and down. We write insurance and reinsurance on different balance sheets, and this results in less rating agency strain. And the reason that many people in the past who were in both markets withdrew was because they were writing on the same balance sheet. It also is because they had a big overlap by being in the personalized and small commercial lines. We would expect there are a lot of growth opportunities in the U.S. insurance market, organically and through small selected M&A.
I mentioned refinement of our business model. We have been making some changes in our financial lines. We applied our strategic filters over our financial lines business. We discovered that some were not sufficiently connected to our core businesses, and were not producing adequate returns. Therefore we decided to exit some of these businesses that were in financial lines, and to realign the remaining with our core insurance and reinsurance businesses.
We are in the risk business, and so risk management has to be a core driver. And our risk appetite is sized according to our volatility appetite and our capital base. We have set our maximum net event loss limits at a 1% exceedance probability. Our Tier 1 net per event limit, which include natural cat, terrorism and other realistic disaster scenarios, are not to exceed 10% of shareholders equity.
Tier 2, including pandemic, longevity and country risks, are no more than one-half of the Tier 1 limit. Our risk management changes has significantly reduced exposure post Katrina. We're down 35% at the 100 and 250 year periods on an absolute basis, and we have made further reductions of more than 50% in the tail. Our Gulf of Mexico marine and offshore energy exposures are down over 50%. And relative to current shareholder equity, our risk exposure is even further reduced.
We certainly do give heedance and believability to the storm predictions this summer, but we think with the changes that we have made in our risk management that we should weather any of the storms that might come to hit the shore.
The dual platform gives us great diversity in both geography and productline. In insurance we are in over 21 countries. And with our extensive network of fronting partners, we can manage global programs in over 100 countries. We can issue policies, service them, manage claims on a global basis, which is a huge competitive advantage. But what is really important about this is it gets us closer to the customer. If you're closer to the customer, it gets you -- allows you to choose the best risk, get higher retention rates, and lower your acquisition cost. And that is particularly important at this stage in the cycle.
Looking at our insurance product mix, we are at least spread across four major products. In our property and casualty book we have a much deeper penetration in Europe than in the U.S., owning to our Winterthur International acquisition. But because of that, we think we have really strong growth opportunities over time in the U.S. which are very natural, and we will go into that in a little more detail later.
We're ready to drive for value in insurance because of the global network and this opportunity in the U.S. market, as I mentioned. Because we are barely present in some of the bigger markets in the U.S. in the commercial field. And we have that capability, and we have the reputation, we have the branding strength, and we have been filling our branch network in the U.S. And so we think there is strong growth opportunities, but we're not saying this is our budget. It is a five-year strategic map. We're not sure exactly when the growth will occur.
Certainly we're in a more competitive time where you have to be more judicious in your selections and your decisions. But we think because of our reputation...
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