XL Capital Q1 2009 Earnings Call Transcript

XL Capital Ltd (XL)

Q1 FY09 Earnings Call

April 28, 2009 11:00 AM ET

Executives

David Ridowski - Director of Investor Relations

Michael S. McGavick - Chief Executive Officer

Brian Nocco - Executive Vice President and Chief Financial Officer

Sarah E. Street - Executive Vice President and Chief Investment Officer and Chief Executive Officer of XL Capital Investment Partners Inc.

David Duclos - Executive Vice President and Chief Executive of Insurance Operations

James H. Veghte - Executive Vice President and Chief Executive of Reinsurance Operations and Chief Executive Officer of XL Reinsurance America Inc.

Analysts

Matthew Heimermann - JPMorgan

Jay Gelb - Barclays Capital

Robert Glasspiegel - Langen McAlenney

J. Paul Newsome - Sandler O'Neill & Partners L.P.

Brian Meredith - UBS

Trevor Winstead - Strategic Value Partners

Donna Halverstadt - Goldman Sachs

Joshua Shanker - Citigroup

Ian Gutterman - Adage Capital

Vinay Misquith - CS First Boston

Presentation

Operator

Good morning. My name is Regina and I will be conference operator today. At this time, I would like to welcome everyone to the XL Capital Limited First Quarter Earnings Call. (Operator Instructions). After the speakers' remarks, there will be a question and answer session. Thank you.

I would now like to turn the call over to David Ridowski, XL's Director of Investor Relations. Please go ahead.

David Ridowski

Thank you, Regina. Good morning and welcome to XL Capital's first quarter 2009 conference call. This call is being simultaneously webcast on XL's website at www.xlcapital.com. We've posted to our website several documents including our quarterly financial supplement and our fixed income data supplement.

On our call today, Mike McGavick, XL Capital's CEO, will offer opening remarks. Brian Nocco, our CFO, will review our financial results, followed by Chief Investment Officer, Sarah Street who will discuss our investment portfolio. Dave Duclos, our Chief Executive of Insurance Operations and Jimmy Veghte, our Chief Executive of Reinsurance Operations will review their segment results and market conditions. Then we will open it up for your questions.

Certain of the matters we'll discuss today are forward-looking statements. These statements are based on current plans, estimates and expectations. Forward-looking statements involve inherent risks and uncertainties and a number of factors could cause actual results to differ materially from those contained in the forward-looking statements. Forward-looking statements are sensitive to many factors including those identified in our annual report on Form 10-K, our quarterly reports on Form 10-Q and other documents on file with the SEC that could cause actual results to differ materially from those contained in the forward-looking statements.

Forward-looking statements speak only as of the date on which they are made and we undertake no obligation publicly to revise any forward-looking statement in response to new information, future developments or otherwise.

With that, I will turn it over to Mike McGavick.

Michael S. McGavick

Good morning. I would characterize this quarter as another quarter of solid progress at XL.

We had solid progress in reshaping our mix of business as we stated we desire to do so at the end of the year. We had solid progress in reducing our expenses to support that block of business. We had solid progress in derisking the investment portfolio to give greater stability to excel over time and we have solid progress in rebuilding and strengthening the reputation of XL and its ability to serve our clients and customers. We are very pleased with where we stand.

One of the best examples of why we are pleased came recently when a group of us attended the RIMS Conference in Orlando. You are all familiar with RIMS, with thousands of providers... purchasers from around the world gathered. And it's a little bit like speed dating in the insurance world.

And I have to say those meetings went extremely well. You will all buoyed by the reaction of the market to the progress we have made. And frankly the question shifted from questions about XL to lots of questions about how we could serve our clients and the opportunities ahead. That meeting has put on... we think that meeting is exemplary and a good example of why XL is rapidly able to meet the goals we have set for ourselves.

Turning to the quarter itself, our P&C combined ratio of 93% for the first quarter was an improvement, both over the same quarter last year and over the full quarter of 2008. We have resisted the trap of chasing uneconomic business, particularly business requiring long-term agreements as we believe that the markets that are hardening the most are the ones that will deliver optimal returns based on our current ratings and given our capital resources.

We are retaining our valued customers and our skilled professionals. In fact, our staff's voluntary turnover rate is currently at or below last year's level.

As you know, in the quarter, we completed the review of our Life operations and determine that instead of selling into an illiquid market, we can provide great value to our shareholders by retaining the largest part of that business and actively manage the runoff of the existing treaties.

Our refocus on P&C has also allowed us to lower what you can call our superstructure cost and we are on track to deliver our planned expense savings.

Now as it respects to the investment portfolio, you will hear from Sarah in a moment on how our P&C refocus benefits our investment portfolio. Our portfolio at the end of the first quarter had over 55% of its assets in cash and securities, supported by governments or agencies.

We sold over 1.3 billion of the securities or 70% of the securities identified for sale as part of the $400 million in restructuring charges we took in Q4. This progress along with other actions has meant that we have reduced our holdings in more volatile asset classes by over $2.4 billion during this first quarter. And we have identified further opportunities to reduce risks in a portfolio that we expect will generate $3.5 billion in run rate cash in 2009.

We were particularly heartened that while we had net realized losses of $252 million, only $167 million of that was due to new impairments in the quarter. We see this as a sign of strength for the portfolio over time. And while we are certainly not happy that the portfolio marks have yet to trend our way, we are certainly seeing the kind of progress in the asset class that have bedeviled us so that we see better days ahead.

At worst, we believe we are bouncing along the bottom in terms of our investment portfolio.

Now Brain will cover our financial results in a moment including the capital management efforts that contributed $957 million to our book value this quarter. And while those efforts did not quite offset our marks, our overall financial performance and capital activities resulted in a slight increase in our ordinary shareholders' equity.

With that, I'll turn it over to Brian to discuss these financial results.

Brian Nocco

Thanks Mike and good morning.

Turning to our summary financial results on slide four, total P&C underwriting income was $105 million for the first quarter compared to $108 million in the prior year quarter. The P&C combined ratio during the first quarter of 93%, benefited from favorable prior year development of $90 million, was $7 million from the Insurance segment and $83 million from Reinsurance.

The only significant natural catastrophe for XL in the quarter was Windstorm Klaus which resulted in losses net of reinstatement premium of $27 million across both Insurance and Reinsurance.

Foreign currency movements resulted in a gain of $25 million for the quarter compared to a loss of $68 million in the prior year quarter. FX movements had essentially no impact on capital during the quarter.

Our operating expenses of $268 million for the quarter included $40 million in restructuring charges. Excluding these charges, the underlying operating expense run rate was lower year-over-year, reflecting progress in our cost reduction initiatives.

Operating income of $212.4 million or $0.63 per share for the quarter with an annualized operating ROE of 16.6% compared to $276.9 million or $1.55 per share and 12.9% respectively in the prior year quarter.

Operating contribution from Life Reinsurance of $29 million was essentially flat year-over-year.

Our higher effective tax rate for Q1 reflected limited deductibility for realized gains and losses from our investment portfolio. On an underlying basis, our effective tax rate of 14.7% for the quarter was in line with our expectations for the year.

Our book value at March 31 was $15.02 per share versus $15.46 per share at year-end 2008. While we continue to review the recent FASB Staff Positions on investment valuations and impairments, we have not chosen to adopt them this quarter and maintain the valuation processes we had in place at year end.

A forward sale potion of our ESUs resulted in XL issuing 11.4 million shares of common stock to ESU holders in February. The net result of this transaction was that debt declined by $745 million with tangible book value increase by the same amount. The tender offer for our Series C preferreds resulted in 63.5% of the outstanding value being tendered. This provided a book value gain of $212 million.

Now to Sarah to discuss our investment portfolio.

Sarah E. Street

Good morning. We've posted our fixed income supplement to our website last night. And I'll highlight that we've expanded the disclosure to cover the entire fixed income portfolio.

The first quarter mark-to-market, consisting of realized and unrealized loss movements, totaled a decline of $1 billion. Slide six shows the key drivers. In this quarter, we have shown the split between our two portfolios as P&C and Life.

In the P&C portfolio, spread widening in financials, non-agency RMBS and CLOs and the impact of increasing U.S. interest rates resulted in the negative mark-to-market for the quarter. The significant sell off in prices of UK and European Tier I and Tier II hybrid securities hurt our Life portfolio.

We have seen an improvement in the tone in the credit markets in general so far in April. Both financials and CMBS spreads have tightened and many RMBS securities are trading at prices higher than at quarter end. We believe that this is in part due at the number of the government programs starting to take hold as well as signs that some risk capital is returning to the market.

Turning to the slide seven, our net investment income on the P&C general portfolio was $242 million, a decline of 21% compared to the prior quarter and 12% from the fourth quarter of 2008. This decline was driven by lower yields as we increased our allocation to lower risk US Treasuries, agencies and cash as a result of both our continued de-risking of the investment portfolio and prudently holding more liquidity during these turbulent markets. Our allocation for the floating rate structured credit also results in declining yields with short-term liable declines.

Our net income from investment fund affiliates was a loss of $27 million. These losses were... the losses were due to fair value adjustments in the fourth quarter in our private investment fund portfolio of $43 million which we report on a quarter lagged basis.

The alternatives portfolio had a good quarter with a positive return of 1.72%, which was above the industry indices.

During the quarter, we realized investment losses of $252 million. This included OTTI of $167 million on securities where we believe that the security is not likely to recover to its current cost basis; $37 million, representing further price declines on securities that were part of our fourth quarter restructuring charge and $81 million of OTTI for change of intent to hold on a number of UK hybrid securities. In early April, both the Royal Bank of Scotland and Lloyds HBOS announced a series of exchange offers where investors in certain Tier I and Tier II securities could exchange their holdings to senior unsecured bonds at a premium relative to where the hybrids were trading.

We view this offer as a good opportunity to reduce risk and improve liquidity, so we opted to participate. Given this decision, we could no longer assert our intent to hold these securities.

We continue to build upon the significant progress made in 2008 on derisking the investment portfolio. As you can see in slide eight, we have reduced our allocations aggressively to a number of the severely impacted or risk asset classes.

Last quarter, we recorded a charge of $400 million for certain holdings in P&C portfolio to enable it to accelerate this derisking process. During the quarter, we have executed over 70% of the sales from this program. We are pleased with the execution prices we achieved relative to where the bonds were marked for the end of the year and did not have to pay large liquidity discounts to move the bonds.

We focused on initial efforts on asset classes that we felt were more vulnerable to economic downturn and assets exposed to the U.S. consumer. We reduced exposures by over 700 million of CMBS and over 550 million of consumer ABS backed by credit cards and autos. We also reduced our corporate credit, our equity and our alternate portfolios during the quarter. The remaining assets identified for sale under this program are principally corporate bonds in more vulnerable sectors. We do continue to receive cash flow from our non-agency RMBS and in first quarter, this was about $125 million.

All in all, we achieved a reduction of over $2.4 billion of more volatile securities in the quarter.

I would like to spend a few minutes on our structured credit portfolio. This now total $7.7 billion and remains AA+ rated. Of this total, $3 billion is in agency mortgages, which are now supported by the U.S. government, and you can expect us to buy more of these high quality bonds given this governmental support.

Next in terms of exposures is the $1.5 billion in CMBS, significantly down from the peak of over $4.5 billion. Our exposures are dominated by AAA, but importantly, our senior... or super senior tranches with very high levels of subordination. We own very few junior AAA bonds, which are those that are experiencing the downgrades. And the performance of the underlying collaterals in our portfolio remains very strong with only 10 basis points of cumulative losses versus almost the 30% of subordination that we have.

Next is the 1.5 billion in the non-agency mortgages, or non-agency RMBS. We experienced pain (ph) here, but these assets are now marked at very depressed prices with pricing at less than $0.50 on the dollar but where our holdings are principally at the top of the capital structure. We've already taken $900 million of OTTI on these RMBS assets and we believe we have diligent in identifying real losses here in a prudent and timely manner. We are seeing signs that pricing has stabilized with distressed buyers showing up as they see value in these securities at these prices.

Our consumer ABS holdings are now down to 733 million and our primary auto and credit card holdings with high subordination levels and from quality programs. Our CDO holdings are $494 million and do continue to trade at very depressed prices. We believe that we have marked these securities appropriately conservatively, reflecting the risk that defaults will escalate from current levels.

Excluding agencies, the structured credit portfolio is $4.7 billion and is that, we hold almost 3 billion in AAA in these asset classes, which are marked at an average price of 77% at par. As we have substantial liquidity and have made good progress on portfolio derisking, we do not need to sell these securities at distressed prices, not reflective of the intrinsic value.

So to wrap up, our $30.5 billion fixed income portfolio is very high quality and well diversified. It has an average rating of AA and over 97% is investment grade quality. 76% or $17 billion is invested in government and government-related securities, agency guarantees and cash and cash equivalent securities.

Now over to Dave to talk about our Insurance operations.

David Duclos

Thanks Sarah. Today, I'll cover Insurance results for the first quarter, provide commentary on market conditions and conclude with an update on the health of our insurance franchise.

Insurance underwriting results for the quarter were in line with our expectations and in fact strong given where we are in the cycle. Our Q1 loss ratio of 67.6%, slightly better than the prior year quarter, demonstrates our underwriting and risk management commitment with minimal exposures to Windstorm Klaus and the Australian wildfires.

Our combined ratio of 100.1% was slightly higher than our Q1 2008 result of 96.7%. Excluding XL GAPS, our fee-based unbundled global property risk engineering business, the Q1 2009 combined ratio was 98.9%.

Gross premiums written declined 33% or $537 million from Q1 2008. And as we communicated during our February earnings call, this was expected. Well over half of this variance was due to the planned reductions in long-term agreements which accounted for $176 million alone. We were also impacted by the strengthening of the U.S. dollar, a timing issue related to the booking of facility premiums in our London operation as well as one-off adjustments, which increased Q1 2008 GPW. The remaining difference which generated a variance with Q1 2008 of 16% was largely attributable to global economic pressures and our push for rates. Based on current trends, we believe we are on track to meet our guidance for full year in GPW.

Lines most impacted were our standard U.S. D&O book, particularly side A, our excess casualty units and our environmental and construction platforms. Net premiums earned were down 9.7% or $98 million, mostly due to the earn through of lower GPW as well as FX movements which accounted for $39 million.

My last comment on results relates to our Q1 '09 operating expense ratio of 20.9%. 3.4 points of the 4.6 point variance to Q1 '08 is specifically tied to the restructuring charges that we communicated in February and that were brought into the first quarter.

Turning to market conditions. The short answer is challenging with signs of improvement. The markets are simply not yet strengthened enough in all lines that need it. There is clear evidence that macroeconomic conditions have tempered positive premium change as ratable exposure basis have declined broadly in all of our geographic markets.

That said, we have seen improvements in retention and pricing throughout our book since January. And those improvements continue early in the second quarter.

Premium retentions are in the low to mid 70s for most lines with a positive trend developing through the first quarter and into the second. First quarter pricing reflected the competitive environment with an aggregate price decrease of 1.6%, largely influenced by low single-digit rate declines in our European January renewals. But note that this result is still six points better than the pricing decrease we experienced in Q1 2008.

Standard property and casualty rates also indicate low single digit decreases, but are showing steady improvement. For example, we saw March property rates increase by 4%. Rates increased in our core and professional lines by 1%, led by double-digit increases in financial institutions with similarly strong rate increases in rain (ph) and offshore energy and in some of our other specialty lines.

All in, we're pleased with our first quarter Insurance results. Client retentions are in line with expectations and strengthening. Pricing is improving, new business flow and writings are as expected given our disciplined underwriting for this point in the cycle. And not only is staff attrition holding at historically strong levels, we remain focused on and successful at hiring skilled client facing professionals. This is a great time for companies like XL to distinguish themselves through disciplined underwriting and technical insight, providing solutions that our broker and clients value.

This is the message we heard time and again last week at RIMS, and we will continue to focus on these elements along with effective clams handling and appropriate reserving that define our franchise.

And now to Jamie to discuss Reinsurance.

James H. Veghte

Thanks Dave and good morning.

I would like to cover several themes on the Reinsurance segment this morning. First, I would like to review our underwriting performance in the quarter. Second, some comments on current market conditions and our expectations in the near term on this. Finally, I'm sure there is considerable interest on how we have done on franchise preservation. This would include both our business relationships and our people.

Our underwriting results for the first quarter were once again very strong with a combined ratio of 77.2%, producing underwriting profit of $96 million. This compares to our 2008 result for this period of 87.8%. The results were positively impacted by $83 million of favorable prior year loss development compared to $50 million in the first quarter of 2008.

Excluding the impact of prior year releases, the combined ratio of 97.5% was 0.6 points higher than the prior quarter... last year's quarter with Q9's (ph) higher cat loss ratio driven by Winterstorm Klaus.

Gross written premiums for the quarter were $787 million and net premiums earned were $412 million. These represent declines relative to the first quarter of '08 of 27% and 24% respectively. A significant element of this drop was due to our own underwriting actions and the influence of foreign exchange on the book. Specifically, during the December renewal season, which drove our Q1 top line, we lost 11% of our portfolio due to cancellations by customers for security reasons. A small percentage was due to authorization and signing difference within existing programs. However, fully 10% of the drop was from business that we cancelled or the foreign exchange movement.

During the quarter, we also choose to exit the casualty facultative business in the United States. This business has been profitable over the years. However, it was concentrated on a very small number of customers and the branch office network carried an expense structure that we did not view as sustainable.

Our individual certificate premium for this business was $30 million during 2008. We expect to continue with the automatic business which also had annual premium of approximately $30 million last year. We remain committed to our property facultative business, which is underwritten worldwide and has a very solid record of long-term profitability.

Turning to market conditions. Short tail lines in cat exposed geographies showed risk adjusted strengthening between 5% and 15%. As we said previously, we would expect these positive pricing trends to accelerate as we go into the Southeast wind renewal in the second quarter. Our overall rate adequacy on our direct cat book is well north of 100% and has improved nicely year-on-year.

While casualty rates excluding D&O continue to remain flat if not down in the mid single digits, we would reiterate our view that this is simply unsustainable in the current interest rate environment and we would expect gradual improvement as we head into the latter part of this year.

Finally, with respect to our staff. As we've said repeatedly, we believe we have one of the finest professional staffs in the industry. Since July of last year, we've lost six of our over 70 client facing underwriters to voluntary departures. While we will miss them, we have a deep bench and do not anticipate having to go outside XL to replace them.

We are very pleased with the results this quarter and continue to focus on our strategy of long-term underwriting discipline.

With that, I will turn it back to David for Q&A.

David Ridowski

Regina, can you please open the lines for questions?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Matthew Heimermann with JPMorgan.

Matthew Heimermann - JPMorgan

Hi, good morning everybody. Two questions. First question I think for Sarah, and I apologize if I missed this somewhere in one of the supplements. But can you tell me of the securities you have left that are part of the restructuring program, what the unrealized loss position is on those securities at the present time?

Sarah Street

That, yes, Matt, is not in there, but it's about $100 million.

Matthew Heimermann - JPMorgan

Say that again.

Sarah Street

About $100 million.

Matthew Heimermann - JPMorgan

Okay.

Sarah Street

But we've already paid that (ph) with part of the $400 million that we've already taken that charge.

Matthew Heimermann - JPMorgan

Yeah, absolutely. I just wanted to know when I was looking at the balance sheet how much potentially would come out. The other question, I guess, for Jamie is just... yes?

Sarah Street

Matt, let me just cover, it's come out of the balance sheet already.

Matthew Heimermann - JPMorgan

No, no, I mean no change to equity, but at some point your AOCI would go down, or some component of --

Sarah Street

No, we've recognized those losses already. So when we took the $400 million restructuring charge last quarter and it floats (ph) with both our P&L and it moved from AOCI into retained earnings, basically --

Matthew Heimermann - JPMorgan

Okay, it is already moved. Okay, sorry.

Sarah Street

We've already taken those... that loss.

Matthew Heimermann - JPMorgan

Thank you for that clarification then.

Sarah Street

Pleasure.

Matthew Heimermann - JPMorgan

The other question I have for Jamie was just can you talk about just attritional loss activity this quarter in the business relative to last year? And then as a follow up, I just was curious how you're thinking about the mix of business changing from an earnings perspective given what you are seeing with pricing as well as some of the declines you've already seen reported on the casualty side.

James Veghte

Well they are actually related. If you strip out the impact of prior year lost development in cad activity in the quarter this year relative to last year, there is a about a close to a seven point improvement, some of that is due to mix of business change the portfolio is less than it was and we carry obviously one of the large ratios on the property business and the causality and last year we had two significant fire losses in the first quarter, one in Brazil and one in Asia Pacific, which contribute about four points to the difference.

Matthew Heimermann - JPMorgan

Perfect. And then as we look forward how much is there -- as we think about the portfolio is there a lot more. I realize that kind of risk adjusted basis, so obviously if there is a mix change there is a volatility component that's changing with it. But is there much left to go as we earn out the written on a go forward basis?

James Veghte

Well, I mean I certainly think that the short tail lines are more attractive right for us right now as is said earlier we would expect the casually a market to improve as we go through 2009 but if we does then we're going to continue that reduce the portfolio. So I would expect broadly between market conditions and reality of our ratings... our ratings that the mixed overtime will move more towards ship short tail.

Matthew Heimermann - JPMorgan

Okay, thank you very much.

Operator

Your next question comes from Jay Gelb, Barclays Capital.

Jay Gelb - Barclays Capital

Thank you. Mike, can you give us a sense of post-SCA, how far along you feel you are in the restructuring process?

Michael McGavick

Yeah, I think we're a great deal of the way through it now with level of efforts that we got down in terms of the expense restructuring which is now in its second round if you will. We had announced one set of it back in the fall and a second set at the beginning of this year. And we are having so much of that completed now as we come to the end of the first quarter. With the efforts we've made at enterprise risk management and the very significant the much more robust we have all of our exposures and all of the supplements that we've established for those and monitoring we have built to that those with the remixing of the business which will go through out the year but some significant portions of it as you heard from Dave and such have already been put in motion.

When you add all of those pieces together, an awful lot of what will be changing about XL is now moving to eth past so that it becomes much more focused as we go forward about how we create the right environment to attract and retain over time the best and kind of the feistiest underwriters going forward. So we have a new challenge that comes from our success in the remaking of the business, but it's a much more fun challenge for the people of XL.

Jay Gelb - Barclays Capital

Okay. And the next question is given the potential for further investment losses, to what extent do you think XL can generate organic capital growth for the rest of 2009?

Michael McGavick

Clearly, we have been clear that we believe that our Insurance and Reinsurance operations should be able to operate a kind of the mid teems ROE. And that will generate good earnings that we could apply. I just look at this quarter, there are some things you take pride. And even though they are not out of the ballpark kind of numbers. But this is the first quarter since I have been in XL that we reported net income positive. That's a good feeling. We are just... we are starting to see the signs that things we've had to deal with, the very severe challenges that came from first SCA and the way in which SCA led into and was in part the mess caused by this economic downturn.

We feel like those things are now moving into the past. And so we have those earnings will be one piece of it. And then on the other side of it, as we look at the investment portfolio and one of the reasons that we chose to have Sarah give that rather long explanation about all of these different structured asset classes is we now see kind of a light at the end of the tunnel, bouncing along the bottom if you will on the investment portfolio and some opportunities coming to the upside.

And then as you will be able to review more and more for yourselves in the coming weeks, we'll be putting out after market close next Monday our 2008 Global Loss Triangles. They continue to show the firm in a position of strong reserves.

So when you add up all those pieces together, I think... and then the final piece, which has probably been the most important in getting us through all this is the very strong liquidity we have. When you add all those pieces together, I think one begins to understand why we're feeling this level of confidence and that so much of this challenge is moving to our past.

Jay Gelb - Barclays Capital

Thanks for the answers.

Operator

Your next question comes from Bob Glasspiegel with Langen McAlenney.

Robert Glasspiegel - Langen McAlenney

Good morning. Just a follow up, Sarah, on your slide eight. You said your duration on your U.S. portfolio was 2.5 years. What is your liability duration that that will be associated with?

Sarah Street

It's about three in terms of our P&C portfolio at this point. We have been shortening up durations slightly in anticipation of rising rates at some point, but still within the bounds of the asset and liability match that we're comfortable with.

Robert Glasspiegel - Langen McAlenney

Okay. And what is the duration of the Treasuries that you are buying?

Sarah Street

They are pretty short dated, less than one year.

Robert Glasspiegel - Langen McAlenney

Less than one year?

Michael McGavick

Yes.

Robert Glasspiegel - Langen McAlenney

Okay. So this clearly isn't a commitment to an asset class from a total return point of view, it's in anticipation of rates getting higher and also wanted to the portfolio, is that we like Treasuries?

Sarah Street

I mean what we are buying today and the way you described it is absolutely right in everything that's being added on to the marketplace we view as liquidity as a good thing to have. And therefore, we have built up our cash and our short-term investments quite significantly. Where we are putting new money to work is principally in agency mortgages securities, which are short duration, but have a nice yield and that the government support behind those now, we think that that's an attractive asset class. And a small amount, less than 25% of new money is going into very high quality investment grade corporate credit in sort of systemically important industries. So like utilities and energy, but very much at the top of the capital structure.

Robert Glasspiegel - Langen McAlenney

Okay. Last question. Just how do you make sure that your investment affiliates aren't sort of working against you, sort of on the other side of these trades?

Sarah Street

Well we get pretty good transparency on our investment portfolio in terms of that alternative portfolio that you are talking about. And many of their transactions or positions are more relative value trades. So it's not about the individual direction of the market; it's being longer stock that they think is undervalued and shorter stock that's overvalued. But we do manage the aggregation risk associated with our exposures in the different pockets.

Robert Glasspiegel - Langen McAlenney

Thank you very much.

Operator

Your next question comes from Mahmood Reza (ph) with Raymond.

Unidentified Analyst

Hi guys, how are you?

Sarah Street

Fine, thanks.

Unidentified Analyst

The first question is on the $40 million restructuring charge that you guys took. I just want to confirm that in the operating number of $0.63 that the charge was actually included. So I mean, the way I think about it is that actually adds $0.10 to the real operating EPS for the quarter.

Brian Nocco

That's absolutely correct. I mean we certainly would view that as non-recurring. And it is in operating expenses.

Unidentified Analyst

Got it. And in terms of the $400 million OTTI charge that we took last quarter, so $280 million of it's been used currently, and that enabled us to sell 1.3 billion of assets. And so the $120 million left, would it be reasonable to assume that we'd get the same kind of leverage, so like kind of $500 million to $600 million of assets could be sold based on that?

Sarah Street

It's in about that ballpark.

Unidentified Analyst

Okay. And last question is we now have $4 billion of unrealized losses on our balance sheet. And I think the comment earlier was that we were bouncing around the bottom on valuations. Is it possible to get a sense of what percentage of that mark is relate to securities that pay off in either the current quarter or the current year?

Sarah Street

I don't have that information to hand, but we can come back to you after on that.

Unidentified Analyst

Okay, all right, fair enough. Thank you very much.

Operator

Your next question comes from Paul Newsome with Sandler O'Neill & Partners.

J. Newsome - Sandler O'Neill & Partners L.P.

Good morning. Could you talk a little bit about the current relationships with the rating agencies?

Michael McGavick

Sure, Paul. Good morning to you. We of course are in routine contact with the rating agencies. And of course one of those routine times that we get in touch is when we have a prospective or solid data on the quarter. So we started taking to the rating agencies early last week. And I would characterize those conversations as largely good ones, and I would say that right now I would characterize the state of our agency relationships as solid.

J. Newsome - Sandler O'Neill & Partners L.P.

Great. And just one follow up and I apologize if I got myself confused, but if we are looking at the insurance operations from a pricing perspective and we saw a total at all together, obviously something is going up and something are going down, are we still in a net decline mode for pricing?

David Duclos

Hi Paul, this is David, though the first quarter we are at minus 1.6%, for the over all aggregate number for the segment, and as you say some lines are up some are down slightly and what we are seeing though which is encouraging despite a continued challenging market as step up, our pricing in February gain tractions as well as in March. And so far in April, the indications, and this is the next big month that we have after January, February and March are fairly light months. But in April, we've seen a continuation of that stair step up. We still won't expect to come very close to the rate assumptions that we've built into our plans for the year. And I can tell you that lot of our retention issues; it's as much about us being a disciplined underwriter, trying to price up business in this oft market still a competitive market as it is anything else and it is unfortunate but in some cases some of our customer relationships are coming to conclusion because we feel strongly about what the rate needs are.

J. Newsome - Sandler O'Neill & Partners L.P.

That's great. It's clear you guys are doing what you need to do. Thanks a lot.

Operator

: Your next question comes from Brian Meredith with UBS.

Brian Meredith - UBS

Yeah, good morning, a couple of questions here. First, I was wondering if you could give us a sense of what your 100 year PML looks like as a percentage of equity. You used to talk about how you were going to limit it to 10%. And now that you are moving more to a short tail business, do you think that might actually move up a little bit?

Michael McGavick

Yeah, we would expect that on the Tier I to move up to 15%, which is kind of in the middle of the pack when you are looking at A rated carriers. And that's of course tangible book value.

Brian Meredith - UBS

50% of tangible book value. Okay. And are you pretty close to that, do you think going into wind season?

Michael McGavick

No, we are very comfortable with what we've put out there relative to those maximums.

Brian Meredith - UBS

Okay. And then the next question would be you elected not to adopt the FASB. I'm wondering if you've done any sensitivity as to if you had what the potential difference in your marks may have been in the quarter.

Brian Nocco

This is Brian Nocco, Brian. We have taken a look at the FASB guidance. And as you know, it evolved a bit through the comment period. We don't really believe that the new guidance, if it is new guidance on asset valuations, is going to have any material effect on us of the industry, we do thin there will be an impact and a positive impact on the level of OTTI should begin to only report or fabricate between that such related to credit and then all other influences and we do think that we will have a meaningful impact going forward.

Brian Meredith - UBS

Great, thank you.

Operator

Your next question comes from Trevor Winstead with Strategic Value.

Trevor Winstead - Strategic Value Partners

Hi, thanks for taking any question. I was just... would like to get an update on your D&O and E&O claims you experience and whether they are still within your expectations. And also, I would appreciate color around the year-over-year decline on the Insurance segment, how much of that was related to sort of business mix decisions versus pricing. Thank you

David Duclos

Sure, Trevor, this is Dave Duclos. Let me take the professional question first. First, let me comment on subprime. We've just completed our first quarter analysis which includes information through February. And our current reserve position we feel is quite adequate and there will be no changes. I would tell you that we continue to monitor the subprime and we've closed off the report year to 2007 and 2008. In the first quarter of 2009, we had seven new notices reported.

And as I've mentioned in previous calls, we continue to see that the high watermark if you will relative to notices was in that second quarter 2008. So on a subprime basis, we continue to feel very confident in our reserve position.

On May loss (ph), I guess let me start with saying it's sort of the same comment I made about a year ago this time around subprime. It's early. Majority of the claims are in the 2009 report year and we will view this as a 2009 clash event. Similar to what we establish for subprime, we have an ongoing monitoring activity underway, involving actuarial claims and underwriting. And right now, we believe the Madoff-related losses will be in lined with our clash load for 2009. We to date 31 reported claims. But we will continue to monitor and assess, but we currently feel comfortable with both the subprime and Madoff reserve positions.

And I would just say generally that our overall professional liability results both in the U.S. and globally on a traditional basis are holding up quite well, although we would expect some deterioration from pretty attractive loss ratio numbers to occur. But so far holding up very nicely.

On your question broadly about our premium results, let me start by saying that numbers really can't tell the picture or tell the story here of what's occurred between how we began the quarter and how we ended it. But let me give you a bit of a technical explanation to begin with. We had in 2008 first quarter $1.6 billion in written premium... gross written premium. We did have the $176 million impact from LTAs, which again, we kept 87% of our global customers in the first quarter. But in some cases, we simply didn't offer multi-year agreements, whether that be for two or three years because of the current pricing scenarios. So we did have an impact from a premium perspective. So 176 is an important number.

60 million is in FX, we have 38 million as I mentioned before related to the facility premium accounting treatment change and then 54 million between true-ups of prior year 2008 and the fact that we no longer write financial lines.

So when you add all that up, it's an adjusted base if you will is 1.3 billion. We actually wrote in the first quarter 2009 just under 1.2 billion and then on a straight basis, that would be a reduction of about 15%.

There are three drivers that influenced our results. One is the macroeconomic impact. And it's clearly impacted our premiums as well as the industry in the first quarter. Much of what was anticipated by us when we did our replan and provided guidance, but I can tell you the breadth and depth of what's occurring is probably a little more than anybody anticipated. Exposure basis are down in most industries and segments globally and there is no safe havens from my perspective. Also, risk managers are for the first time in several years now having to spend against the budget. So the macroeconomic effect has in fact impacted our results in the first quarter.

The other impact was the push for rate in a competitive environment. As I mentioned in an earlier response, we have lost some business as we continue to try and push that... the rate. I would say the other factor that's influenced our results is to a lesser degree the supposed noise that's been referred to XL. That is quickly becoming a past issue for us. And as we exited the quarter, we had less of an impact on issues specific to XL than we did on these broader industry issues.

I would say your question referred... were we impacted by some of the underwriting decisions that we made and announced in February. To a lesser degree, that actually did drive some of the reduction in premiums. We exited two programs in the U.S. and also have deemphasized writing one sublime with our environmental business that had a immaterial impact as well on revenues. But really, this is a story about trying to balance discipline and growth in a conflicting market right now, to be honest with you.

Michael McGavick

But we feel this is how we are positioned (ph).

Trevor Winstead - Strategic Value Partners

Great, thanks. That's very helpful.

Operator

Your next question comes from Donna Halverstadt with Goldman Sachs.

Donna Halverstadt - Goldman Sachs

Thank you. All three of my questions were asked and answered.

Operator

Your next question comes from Joshua Shanker with Citigroup.

Joshua Shanker - Citigroup

Thank you. I wanted to ask you how you are experiencing loss of business on lines where you've lost key employees. I realize you said that that's slowed. But do you see a difference? Are employees taking business with them, the ones the that have left?

David Duclos

Josh, David Duclos here again, and I'd say no impact.

Joshua Shanker - Citigroup

No impact. So similar whether you've lost the employee or not in terms of business retential?

David Duclos

Absolutely.

Joshua Shanker - Citigroup

And in terms of following up on Paul's question, you say you are confident about the rating agencies. Have they given you guidelines with respect to these results here?

Michael McGavick

All I said is that from our point of view, we feel good about our rating agency relationships. We would always expect them to speak with themselves whether in respect to what you've asked or anything else.

Joshua Shanker - Citigroup

Okay, thank you very much.

Operator

Your next question comes from Ian Gutterman with Adage Capital.

Ian Gutterman - Adage Capital

Hi guys. I guess first, Sarah, would you have... you said some of the marks have gotten better in April. Is there any kind of really rough ballpark you can give us or what kind of improvement you saw in April?

Sarah Street

No, we don't run it on a regular basis, but just watching how each of the asset classes on the credit side are improving. We would expect to see improvement on our marks as well.

Ian Gutterman - Adage Capital

Okay, fair enough. I guess two underwriting questions. One, given that half the portfolio is now in cash or government type investments. And to be honest, you are not alone in that; some others have done their calls this week and last week as well (ph). How is that flowing through pricing? I mean is that being treated as we are in an extraordinary environment and we realize in a year or two, we'll get back to a normal looking risk bearing profile if we can price for this, or do you have say half's a really big number and we're getting low yields on half the portfolio and that's got to flow through pricing? Because it doesn't seem like the market is necessarily pricing for everyone holding very high cash flow portfolios and therefore low yields.

Michael McGavick

We would agree with you that we find some of the behavior out there not reflective of current economic conditions. I think you heard that from both David and Jamie. My view is and our rule around here is you price to the reality. You don't price to what you wish it was like; you price to the reality of what our returns are. And that's why this is such a crucial time and we think such a wonderful time for organization bit have discipline around there underwriting because the organization have rate under riders and have could do the extraordinary that can take on through - programs which only handfuls scan - right to big lines and tell me handful scam and handy who can had can lead programs to set the pressing parameters for the market, and so if you can. When you are that organization, you want to have and lead with that underwriting discipline. So we don't do it to what we wish the markets were offering in terms of investment returns; we price it to the reality.

Ian Gutterman - Adage Capital

Okay. So just to confirm it, that means you are able to generate mid-teenish type ROEs at current new money yields; not on hope for new money yields?

Michael McGavick

That is correct.

Ian Gutterman - Adage Capital

Okay, good. And then finally just to follow up on Brian's question on PML. Obviously... well, first case, define for me again exactly what that 15% is? Is it 1 in 250s, is it the 2 in the 200s? Is it aggregate? Is it occurrence? What exactly is your definition of PML?

Michael McGavick

Again, on the Tier I risk, it's 1 in 100 on an occurrence basis.

Ian Gutterman - Adage Capital

On an occurrence, okay. And do have what the 1 in 100 is on the aggregate, because I think that's what the agencies look at?

Michael McGavick

Again, it's plus or minus 20% on the aggregate, but again, we do have a an occurrence basis 15% shareholders equity, 1 in 100.

Ian Gutterman - Adage Capital

Okay. And that 15%, is that the loss from the events, so therefore, if you are going to do a 15 ROE, you would have a zero ROE for the year, or is that saying you have a 15% loss of capital for the year, so minus 15 ROE?

Michael McGavick

The capital.

Ian Gutterman - Adage Capital

Okay. So it's basically... so it's a 30-ish percent hit to... from the even itself and then your earnings get added to that?

Michael McGavick

I mean in essence, you wouldn't have the credit from the earnings because they would be wiped out. So there would be no capital gain.

Ian Gutterman - Adage Capital

Okay. I guess I was thinking you are not... I guess I was trying to think, are you thinking your non-cat earnings offset it or not, but. Okay, anyway, the main question I had about is just given this year where we are with capital markets and just the investment portfolio risks, are you thinking about any sort of things where to be I don't think you can do if these were... this seems to be the worst year we can imagine to have a bit category right just because your availability of capital and the uncertainty of where the unrealized may go that maybe you'd want to be further away from your target this year than in future years. I'm just curious how you are thinking about managing that so that a Katrina doesn't force you to raise more capital than you would hope to just because of what's going on in the investment side.

Michael McGavick

Yes, we are running the business... I mean I think the only way we can run the business as though today's conditions were to persist.

Ian Gutterman - Adage Capital

Okay

Michael McGavick

So you have to have the attitude that for some reason, things will just kind of bounce along like this. We price to it, we use these kinds of assumptions to influence all of our decisions. So we don't really try and say gee, because it's a low interest environment, we should somehow have lower hurdle return rates. We believe that in true markets, there are different markets, our kind of underwriting talent should generate a 15% return for our shareholders. So we just don't adjust that according to market conditions. Obviously, pricing changes over time depending on return assumptions and our reserving is influenced by future views of economics. But in the end, you price to where we are and you don't assume things will change.

I just want to clear up this earlier question, because I think I managed to confuse you. On our Tier I risk limit, it's 15% of tangible shareholder equity. Obviously, any earnings would offset the loss from such an event. So if for example somehow you had a 15 return on equity for that period, then you had an event like this, it would simply offset those earnings.

Ian Gutterman - Adage Capital

Okay. Because that's what I thought. Thanks for clearing that up. The final question now; I'll let someone have it is just the agency is being so jittery and some having different views on unrealized or not and so forth that. My concern is if we had a significant cat that the agencies might treat you differently than in a normal year as far as their willingness to allow you to sort of absorb it or push you to raise more capital than you would have in a more normal year. So I guess that's what I was wondering is if you though you had a few more sensitive and protect your tail more than usual because of that.

Michael McGavick

We did feel that way last year. You may remember, we choose to put an ILW across the book to protect us from (ph) sort of extreme tails. We have not chose to bring such programs back because we they are not economic as you know and we feel very confident that there is good understanding of the strength of our liquidity and when you have strong liquidity these investment market just can not have the same impact as them otherwise, because your not going to be forced to sell into these environments even with significantly cats, which of course are scenarios that we model.

Ian Gutterman - Adage Capital

Great, okay. Thank you, very good answers. I appreciate it.

Operator

Your next question comes from Josh Smith with TIAA-CREF.

Unidentified Analyst

Hi, thanks for taking the question. I am going to follow up on a few other questions that have already been asked. With respect to the premium growth, I think you mentioned about 60 million ForEx and Insurance ops, around 4%. Is it similar on the Reinsurance side? Is that how we should look at the hit from ForEx? And along those lines given at you were down 30%, can you help me get to where your original guidance was in mid-20s for the overall year? What's going to change between the first quarter and the rest of the year? That's the first question.

Michael McGavick

Yes, I'll turn it to Jamie in a second, but gain, we didn't give quarter by quarter view; we gave a year-end view. And that was kind of a down kind of mid 20s. And we still... everything about how we are performing right now and retention rates and their trend over the course of just this quarter alone suggest that we are still very comfortable with that projection for year end.

James Veghte

And the FX impact on Reinsurance was about 6%.

Unidentified Analyst

6%, great. And now --

Michael McGavick

Just to give you an example, these long-term agreements, that's a front-end loaded decision that would have a greater impact on retention, overall retention of premiums in this quarter than it would in prior... in following course. There is an example of the time-based impact of decisions we've made.

Unidentified Analyst

And then with respect to the rating agency meetings, I mean there has been a... S&P has made a great to do (ph) about investment losses and they've actually commented on premium shrinkage. And we had both of those, there is people out there still talking about your raising capital which I think is ridiculous but did you specifically have those discussion with the rating agencies with respect to the investment losses and premium shrinkage or you are not willing to tell anything about it?

Michael McGavick

We were very clear with S&P about both what our plan would do in terms of premium and how it all fits together to create over time the vibrant franchise that they expect us to be. Those were long discussions as we got to the year end; we reviewed those numbers they were... and the good news once they have put the rating in place at that time as they said and when we review the weapons since we were on plan for what we have said we would do, it was unsurprising to me but that was a fairly straight forward conversations.

Now of the marks, the reality is there's a lot more focus on the actual impairments and the actual impairments level for this quarter again when you back out the decision on the hybrids, which we thought was just prudent derisking to get to the top of those capital structures. But when you back that out and you look at the number, kind of 167 number and I think you can see why felt so good about that conversation as well and then had in the comments you heard from Brian about the way in which we view these accounting global changes as having a were they make - useful is around our TTI and so when you take all of that together I think you could understand why we again leaving rating agency speak for themselves were we feel good about the conversations we have been having.

Unidentified Analyst

Thank you just answer my question the higher rate useful in look the capital structure there was rush now but on the face we growing wound you have a much bigger impact on the marks if allow this is just liquidity as oppose to credit wound you have... a if you did adopt this, shouldn't we see a significant improvement in the marks going forward?

James Veghte

Well unfortunately, Josh, on that particular FSP, the termination of value really didn't change. The issue was whether companies would be allowed to mark to model to a much greater degree than they now do based on illiquidity in the market and distressed sales, and that turned out not to be the case. So really the only FSP that we believe --

Unidentified Analyst

Okay, so that was a last minute change --

James Veghte

Yes.

Unidentified Analyst

Okay, thanks a lot.

Operator

Your next question comes from Vinay Misquith with Credit Suisse.

Vinay Misquith - CS First Boston

Good morning. I believe you mentioned a little bit about client retentions being in the mid 70's, could you help us understand how the retentions are now and whether you are starter to see an improvement it would at the end of the quarter as you stock price started to improve.

David Duclos

This is Dave Duclos, let me answer that from the Insurance perspective. And first of all, we did see an improving retention result for the quarter, although because of how we aggregate our numbers up on a global basis, it some times gets masqueraded because we did have a very strong one-one renewal growth with our European customers. Outside of that, we saw retentions stripped down probably slightly below what we'd anticipated but in February and March we saw strengthening. And I guess the one example of product line that I'll showcase to give you an example sort of what's occurred the past 60 to 90 days is our U.S. professional business. This would be a combination of both our private D&O as well as standard D&O including A side.

And in the late December and early January timeframe, our retention for that business got to be in the mid 60s, low 60s. And through April now, April 17th actually, the last rounded report that we pulled, the retention is at 80%. I won't say that every product line shows that kind of marked improvement, but each one is in fact steadily improving.

And I think the more important thing is, as I've mentioned before, we're showing improvements in retentions while at the same time, we're showing improvements in rate. So, yes, the trends are certainly there and we're looking forward to continued progression as we look into the second quarter. Very optimistic. And I think there is numbers that make us feel good. And Michael alluded to this at the beginning of his discussion. The numbers are important, but I can just tell you, based upon the interactions we are having with clients and brokers, there is a much higher confidence level, which we work very hard at reestablishing with the market place. And we're trading on a much better basis than we were 90 days ago.

Vinay Misquith - CS First Boston

Fair enough. The total premiums is a combination of your retention as well as new business. Could you explain to us what's happening on the new business front?

David Duclos

Sure. Let me comment on the insurance perspective first. And again, I guess let me start by saying that we are an underwriting company. And in this kind of market, I wouldn't expect a lot of new business production We had a plan and actually we've exceeded our plan in the first quarter of 2009 surprisingly enough maybe. But in comparison to prior year, we're down about $100 million on a quarter-to-quarter basis. We did about $275 million in new business in first quarter '08 and we've done about 175... $180 million of new business first quarter '09. And I think that again speaks to the franchise value. Despite all the noise, we still did write a good chunk of new business. And I would say that the reason why we didn't write more has as much to do about our pricing position as it is about speculation or noise around XL's franchise.

Vinay Misquith - CS First Boston

That's clear. Thank you.

David Ridowski

And Regina, now we'd like to open it up from Mike for final comments.

Michael McGavick

I just want to thank everybody for their attention on the call. I know many of our colleagues listen in as well. I just want to thank our colleagues. They have... the key to XL is their many excellent professionals and their ability to great things in the marketplace. That translates into the kind of client retention we're seeing and the kind of faith in the organization. That translates into solid results. And these results, again our solid progress in strengthening of XL.

Whether you look at capital retention or returns, I just believe we are continuing to demonstrate the kind of leadership that we are expected to. And that all starts with people of XL and their excellence.

We of course are coming up to the release of our 2008 Global Loss Triangle as I mentioned earlier. It will be out after the market close next Monday. We look forward to having a chance for you to review the continuing strength of our reserves and of our disciplined practice around reserves.

And with that, I would just like to also thank our shareholders. It's been no doubt a wild ride, but we sure like this part of the ride better and we are looking forward to creating value over time as you expect.

Thank you very much for your time today.

Operator

This concludes today's conference. Thank you for participating. You may now disconnect.

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