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XL Capital ltd. (NYSE:XL)

Q2 2009 Earnings Call

July 29, 2009 10.00 AM ET

Executives

David R. Radulski - Director of Investor Relations

Michael S. McGavick - Chief Executive Officer

Brian W. Nocco - Executive Vice President & Chief Financial Officer

Sarah E. Street - EVP and Chief Investment Officer for XL Capital Ltd and CEO of XL Capital Investment Partners Inc.

David B. Duclos - Executive Vice President, Chief Executive of Insurance Operations

James H. Veghte - EVP and Chief Executive of Reinsurance Operations and CEO of XL Reinsurance America Inc

Analysts

Jay Gelb - Barclays Capital

Brian Meredith - UBS Securities, LLC

Jay Cohen - BAS-ML

Vinaq Misquith - Credit Suisse

Operator

Good morning my name is Molly and I will be your conference operator today. At this time, I would like to welcome everyone to the XL Capital Limited Second Quarter Earning Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. (Operator Instructions). Thank you Mr. Radulski you may begin your conference.

David R. Radulski

Thank you Molly. Good morning and welcome to XL Capital's second 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 Jamie Veghte our Chief Executive of Reinsurance Operations will review their second results and market conditions. Then we'll open it up for your questions.

Some of the matters we'll discus 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 to the date which they're made. And we undertake no obligation publicly to revise any forward-looking statement in response to new information, future developments or otherwise.

And with that I will turn it over to Mike McGavick.

Michael S. McGavick

Good morning. As you might guess it’s especially good to be with you today as this quarter marks both the return to grow and shareholder value and a solid operating performance. We at XL feel that strength of our franchises is finally shinning through the clouds of the market conditions that have challenged both us and the entire sector.

It is also pleasing to demonstrate that in investment portfolio marks can go up, as well as down. Our book value per share of $18.89 rose by 26% from the previous quarter and our tangible book value of $16.41 per share was up 31%. Now, some of the strength in the operating of the quarter is obscured by the significant strengthening of major European currencies, particularly Sterling against the US dollars in the second quarter that had a major impact on our reported results.

Brian Nocco will go into the details because while FX contributed to our book value gain it also lowered our operating income. Excluding the impact of foreign exchange, operating earnings for the second quarter were 292 million or $0.86 per share resulting in an annualized operating ROE of 20.6%.

As you can see from our press release our P&C operations were strong. P&C gross premiums written continued the month-to-month improving trend that we noted during our April earnings call, and in fact they were better than even we expected. This reflects both more new business and better pricing and retention. Our ability to offer national indemnity endorsements for policies on our Side A professional book should only enhance that improvement. The cause of this agreement wasn't even put in place until June 9.

Our P&C combined ratio is 93% in the second quarter, an improvement over the full year 2008 and only slightly higher than the same quarter last year, demonstrates our steadfast commitment to excel its core disciplines of underwriting and reserving. We continued to see progress in de-risking our investment portfolio as well.

Since the first of the year we have reduced exposure to more volatile asset classes by 3.5 billion and have essentially completed the sales covered by the fourth quarter's portfolio restructuring charge. At the end of the second quarter, 17.2 billion of our 32 billion fixed income portfolio was in cash or government related securities and we are well on our way to holding a more typical P&C portfolio as is within our goal since this management team was assembled.

We have also continued managing down our underlying operating expense base. And our previously restructuring programs are on target in terms of timing, cost and savings. And we continue to operate our business very well. But make no mistake.

I'm not sure exactly where we were no longer able to be heard; I did emphasize that we were on track with our expense savings program and I wanted to particularly conclude by making sure that you knew the sense that we have. We are very pleased with where we stand especially given all this going on but we know that the real excitement is what happens next. We see opportunities to improve our business we're going to take them. Well now that we're stable and strong again we look forward to competing with the best in the front foot (ph).

Obviously we are excited to give you the details of these results and answer your questions. We remain focused on delivering value to our shareholders, to our clients and to our colleagues; I'm going to turn it over to Brian Nocco.

Brian W. Nocco

Thanks Mike and good morning. Turning to our summary financial results on slide four, total P&C underwriting income was $89 million for the second quarter compared to $126 million in the prior year quarter.

The P&C combined ratio during the second quarter of 93% benefited from favorable prior year development of $90 million with $35 million coming from the insurance segment and $55 million from reinsurance. Prior period favorable development in the same quarter last year was $183 million. We did not have any significant natural catastrophe losses in the quarter.

As Mike mentioned, FX movements had a major impact on our reported results. As a global business with operations in many countries, XL has capital investments in foreign subsidiaries that are denominated in local currencies. Our US dollar reported shareholder's equity will rise and fall, as the value of that local currency capital rises and falls against the US dollar. We did not attempt to hedge these long term investments.

We do however attempt to match our assets and liabilities by currency. But accounting rules require that certain currency matched assets and liabilities be revalued in an inconsistent manner, with liabilities revalued in the income statement and investment assets to the balance sheet until the securities were sold. This results in income statement volatility even though there is no capital impact.

As our assets and liabilities are largely economically matched by currency, we do not believe it is appropriate to hedge the income statement volatility. In aggregate, foreign exchange movements in the quarter had the impact of increasing our capital by $144 million. This was reflected in four different areas of our financial statements.

First, we recorded an after-tax loss of $133 million in the income statement. Second, realized losses in our investment portfolio included $8 million from FX. Third, other realized losses in our investment portfolio declined by $99 million due to the FX movements. Finally, we recorded a gain in capital of $185 million through equity to AOCI on the balance sheet.

Turning to operating expenses, the $264 million for the quarter include $9 million in the restructuring charges. Even including these charges, our second quarter operating expenses were $34 million lower year-over-year. Our underlying effective tax rate declined 13% in the second quarter from 14.7% in the first quarter due to change in the mix of geographies of our expected sources of profits. This lower tax rate reflects our current expectations for the full year.

Operating income was $163 million or $0.47 per share for the quarter with an annualized operating ROE of 11.2% compared to $266 million or $1.49 per share and 13.3% respectively in the prior year quarter. Mike has already noted order the impact of FX on these numbers.

During the second quarter, we implemented the recently announced investment accounting guidance. FSP 115-2 requires that OTTI now be split between credit and non credit elements with for most securities, only the credit element ending up as a charge against income. During the second quarter, we reported credit related OTTI charges of $85 million along with further non-credit related OTTI charges of $31 billion direct to equity.

We also recorded a transitional entry as of April 1st to reflect the extent to which OTTI we had previously reported on securities that we held at that date were non-credit related. This resulted in $230 million increase in retained earnings offset by an increase in the unrealized component of AOCI by an identical amount. Now to Sarah to discuss our investment portfolio.

Sarah E. Street

Good morning. The second quarter mark-to-market was an increase of a billion dollars consisting the realized or unrealized losses as well as this quarter's cumulative loss adjustments associated with the implementation of FAS 115-2.

Slide seven shows the key drivers for both our P&C and our life portfolios. In the P&C portfolio, we saw very dramatic spread tightening in corporate, particularly financials, as well as in structured credits that more than offset the impact of rising interest rates. With significant rally in the prices of UK and European corporate and particularly Tier 1 and upper Tier 2 hybrid securities benefited our life portfolio. We believe this quarter's favorable mark is due to both the return of the risk capital to the market, as well as stability starting to return to the banking systems in the US economy.

Turning to slide eight, our net investment income on the P&C general portfolio was 218 million, a decline of 27% compared to the prior year quarter and 10% from first quarter 2009. This decline has been driven by lower yields. We have $5 billion of our P&C general portfolio invested in floating rate securities and as a result investment income is sensitive to the currently low rates in short term -- below levels of short term rate.

And particularly LIBOR, which is recently hit an historic low. You will note that we have started to deploy some of our cash in the improving market conditions, but we have limited the reinvestments to high quality and liquid assets. We've achieved new money yields in the range of 3.5 to 4%. The book yield on the P&C general portfolio at the end of June is 3.6% which should give you some indication of the run rate of the portfolio for the rest of the year.

We now expect P&C portfolio net investment income excluding special products to be in the range of 850 million to 900 million for the year. Due to rationing our P&C portfolio has increased slightly during the quarter to 2.8 years, as a result of putting more cash to work. Our net income from investment funds affiliates was 37 million. Again, primarily reflect the strong results from our alternative portfolio which earns a 5.5% return on the quarter which is substantially above our normal quarter expectations as far as exceeding market industries.

As Brian mentioned we have net OTTI of $85 million for the quarter. Included in this amount 27 million related to a number of European hybrids where issue is the finance, tender office or exchanges in which we intend to participate as part of our de-risking strategy. So we booked the unrealized loss from the securities given our change of intend to hold.

We continue to build upon the significant progress in 2008 on de-risking the investment portfolio. We've completed the sales associated with our fourth quarter restructuring charge with less than $15 million of securities to go. We are pleased with the overall execution of this program and its contribution to our overall de-risking objective.

Slide nine, shows that we continue to reduce our allocations to a number of the severely impacted or risk asset classes totaling $3.5 billion on a year-to-date basis of which $1.1 billion was achieved in the second quarter. We substantially reduced our exposed certain corporate sectors and issuers, CMBS, consumer ABS, non-agency RMBS, equities and alternatives.

Well structured credit portfolio has been remained at $7.7 billion. The increase in market value in Q2 is a result of spread tightening, marked the actual progress we have made in the quarter. Our unrealized losses on structured credit improved by approximately $400 million, once you exclude the 230 million FAS 115-2 cost adjustments.

We have reductions of approximately 500 million from the $4.6 billion of non-government supported structured credit is a result of sales maturities and cash flow from sectors like CMBS, consumer ABS and RMBS. As Mike mentioned today we have over 54% of our portfolio or $17.2 billion in cash government supported agency and agency RMBS holdings.

To give you some idea of the overall progress we have made on de-risking. I will share with you our model comparison between our actual P&C portfolio results for the past 27 months, our current P&C portfolio and our targeted P&C portfolio composition.

Had we held today's current P&C portfolio at the beginning of 2007 through the end of March of 2009, we would have experienced a negative mark of approximately 1.9 billion compared to the actual P&C portfolio which experienced negative marks of approximately 4 billion.

Our targeted P&C portfolio would have experienced negative mark of less than $1 billion in the same time frame. Therefore our P&C portfolio repositioning has reached at about 65% of our goal. Please note that these are model comparisons that is not possible to re-create the portfolios down to the individual security level. So based on the back testing we've done, we are comfortable with these estimates by reflections of the overall results that we would have experienced.

I believe that this gives you a sense of this substantial progress that we have made in terms of transitioning the PNC portfolio to one that is more typical of the PNC operation. As a stand today, our $32 billion fixed income portfolio effect quality and well about the price at an average AA rating and over 96% in investment grade quality. Now, I'll let Dave to talk about our insurance operations.

David B. Duclos

Thanks Sarah and good morning or afternoon to all of you on the call. Today, I'll cover insurance result for the second quarter, provide some further commentary on market conditions and conclude with an update on the strength of the XL insurance franchise.

Insurance results for the quarter was strong with both revenues and under writing income improving more than we anticipated in Q1. Our combined ratio of 99.7% was higher than our Q2 2008 result of 92.9%. This is almost entirely due to a 100 million of favorable private development in Q2 2008 versus 34 million this past quarter. Restructuring charges added a half point to the insurance segments Q2 '09 combined ratio and two points to the year-to-date combined.

Gross premiums written declined 19% or 265 million from Q2 2008 which was less than the anticipated mid 20's decline we discussed with you on our Q1 call. An example of this improvement can be found in our US professional Side A book where Q2 returns has improved 16 points on the Q1 and continue to trend back the historical levels. This improvement occurred without the full benefit of the recently announced agreement with NICO which was finalized in early June.

Of the three quarters of our Q2, gross premium written variance was due to planned reductions in long term agreements which accounted for 70 million alone. Strengthening of the US dollar which accounted for another nearly 70 million and planned reductions in our financial lines business unit in two MGA programs we terminated recently. With respect to one of these MGA programs, we determined we would write this business on a direct basis and we hired our own underwriting team to do so. As a result, we expect to recover some of the gross premiums.

The remaining difference which generated the variants with Q2 2008 of less than $60 million with largely attributable to global economic pressures and our push rate. Net premiums earned were down 13% or 137 million mostly due to the earned through lower TPW as well as FX movements which accounted for $46 million. On the loss side, while we did have some moderate to large property, casualty and aviation losses in the month of June, there were no CAD events impacting our results in the quarter.

Our Q2 2009 loss ratio of 67.9% is actually 2.2 points better than Q2 '08 we normalized for prior year development driven largely by lower CAD activity in the current year.

My last comment on results relates to our Q2 '09 operating expense ratio of 19.1%. While 1.5 points greater than Q2 '08 were normalized for non-recurring adjustments including the restructuring charges, the ratio is 18.3% for the quarter and 17.2% year-to-date which is in line with expectations.

Now under market conditions. They continue to be challenging due to the global general economic conditions as well as the competitive environment. While we've seen some improvement in rate in our book through the second quarter, it is unfortunately coming at a price. Some business has been lost.

As on an industry basis, we're seeing only selective hardening. Further, what rate price gains are archived are being off-set by reductions in ratable exposures tied to the global recession. That said, we continue to see incremental but, steady improvements in retention and pricing throughout our book. Premium retentions have improved into the high 70's for all lines with some lines now in the low 80's. This trend which began during the second half of the first quarter has continued throughout the second quarter and now into the third.

Second quarter pricing also shows continued improvement with an aggregate price change which is slightly positive through June and more than 6.5 points better than year-on-year price change of second quarter of 2008. Price trends are improving across all lines. The aggregate rate change for the quarter was plus 2% with steady increases reflected throughout the quarter, plus 1% in April, plus 2% in May and plus 4% in June. While our property and professional rates were down 2% and 1% respectively our casualty lines and specialty lines both generated a 3% increase for the quarter.

All in, we're very pleased with our second quarter insurance results. Retentions and pricing are improving. Production in some lines with effort near 2008 levels. Our staff attrition is at or better than historical levels. And we continue to recruit quality professionals into the organization as needed. Illustrated by the recent additions to our London and US aviation teams as well as several underwriters supporting our professional unit and other lines of business. We believe these results clearly illustrate that the XL franchise is strong and we look forward to further strengthening our position through disciplined underwriting as we meet the needs of our clients and brokers in these challenging economic and market times. With that now to Jamie to discuss reinsurance.

James H. Veghte

Thanks Dave and good morning. I'd like to cover several issues on this segments performances quarter. First, I'd like to review under writing results. Second, some comments on current market conditions and finally, some comments on franchise preservation.

Our underwriting results in the second quarter were excellent with a combined ratio of 78.2% and a resulting underwriting profit of $87 million. This compares favorably to our performance in the second quarter of 2008 which had a combined ratio and underwriting profit of 89% and $54 million respectively. This quarter's results were positively impacted by prior year releases of $55 million compared to $82.9 million in the second quarter of '08.

80% of these releases came from short-tail lines in the portfolio, excluding the impact of the release this quarter we produced a combined ratio of 92%, almost a 14 point improvement year-on-year. Gross written premiums for the quarter were $377 million and net premiums earned were 400 million, and represent year-on-year decline from the same period in 2008 of 5.2% and 18.4% respectively. The drop in premium is largely reflective of continuing competitive pricing in certain lines and cancellations by our underwriters. Offsetting this for new business opportunities in Bermuda and XL America totaling approximately $20 million.

Turning to market conditions, short-tail lines in CAD exposed geographies continue to show improvement. In particular a substantial amount of South East wind business in the US renews in the quarter. On a risk adjusted basis our renewal portfolio came through with a 14 point pricing improvement. The international renewals this quarter showed a risk adjustment improvement of 4%. We continued to monitor the long-tail markets globally. While rate reductions in the underlying primary portfolios of our customers have slowed to the low single digit range we would expect to monitor this closely during the remainder of the year and take appropriate underwriting actions on the book if the situation is not improved.

With respect to our life operation, we continue to manage the runoff of the various pieces of that business. During the quarter, this segment had a loss of $25.1 million, however, included in this result was a realized loss from investment associated with the life portfolio of $52 million.

This is consistent with the overall de-risking strategy XL has in place for its investment portfolio. In addition, we announced the sale of our US life operations score last week. We expect this to close on September 30, subject to regulatory approval and would anticipate booking at 10 to $15 million loss on the transaction.

Finally, we are very encouraged with the stability of our franchise from both a customer and employee perspective. During the quarter our voluntary employee turnover rate was 3% well in line with historic levels. In addition, our discussions with clients and brokers around security issues have been very encouraging. We remain convinced the quality of our people and the reputation of our franchise has served us very well during this period.

And now over to David for the Q&A.

David R. Radulski

Molly can you please open the lines for questions.

Question-and-Answer Session

Operator

(Operator Instructions).Your first question come from the line of Jay Gelb with Barclays Capital.

Jay Gelb - Barclays Capital

Thanks very much. Mike, the property casually gross written premiums are 25% for the six months and down 15% for the second quarter. I know there is some pretty significant foreign exchange impact in there but could you update us in your outlook for the where you think gross written premiums for P&C will come in for the full year?

Michael McGavick

Yeah. We had well we don't really update guidance, we do try to give you a sense of what's going on. At this point, we do believe that the trend you see in the second quarter is more likely to be where we are, through the rest of the year. Kind of a -- rather than mid-20 is down, more right around 20 or so down and that's just because of the strengthening retentions. The fact that we are writing new business better than we had expected to be able to by this point and we're seeing the improvement rate that you see.

Jay Gelb - Barclays Capital

Okay. That's helpful. On a separate issue, could you explain a bit more of your exposure to DNO from the financial crisis and are you handling that issue?

Michael McGavick

Sure, let me start but I think it's most important for Dave Duclos to give you a more detailed update. We remain very confident in the way in which we've approached this business, in the way in which we're reserved and the underwriting strategy that has produced the superior results over the year but I am going to turn it over to Dave to give more detail.

David Duclos

Thanks Mike and thanks Jay. With regards to sub-prime and laid (ph) off, we just completed our second quarter analysis which includes information through May and as Mike said that we remain very confident in the position we have in the organization. We continue to monitor this event closely and just for clarification we closed off what we call sub-prime for report years 2007 and 2008.

As the peak relative of the notices we've actually in mid-year 2008 if not for second quarter. In the second quarter 2009, we had 10 new notices reported and a total of 17 here today. The combination of our own company information that we track as well as the recently announced Stanford and Cornerstone report which suggests that CapEx until its continue to trend down and the continuation of favorable court rulings really gives us confidence on our current position.

So, as we talked about in previous quarterly calls, we feel confident and all of the trends both internal as well as external for the industry point to the fact that we have no concerns about our reserve position.

On laid (ph) off, let we comment quickly, the majority of the claims are going to be in the 2009 report year and we will do this as a 2009 class even, which we believe will be adequately covered in our class note for the year. Similar to what we've established for sub-prime, we have on-going monitoring activities underway involving actuarial claims in underwriting, they meet quarterly.

For the quarter, we received an additional five reported claims bringing the total to 36. And again consistent with sub prime we felt very confident in our reserve position.

Jay Gelb - Barclays Capital

Okay, thanks. And then just a quick one on the tax rate what's the outlook there on an operating basis, for effective tax rate?

David Duclos

The effective tax rate, we accrued at 13% in the quarter, which is what we anticipate for the year and it’s reflective of where -- what geographies or countries and the effective tax rates in those countries, where we see the income coming from this year.

Jay Gelb - Barclays Capital

All right, thanks very much.

Operator

(Operator Instructions). Your next question comes from the line of Brian Meredith, UBS.

Brian Meredith - UBS Securities, LLC

Hey, good morning a couple of question here for you. First one on the investment portfolio. I noticed the slight, having some nice returns out of the alternative funds the actual asset balance was down, is there a conscious decision right now to try to decrease the amount of hedged funds that you have in your investment portfolio?

Sarah Street

Brian, hi this is Sarah. That we did have some additional redemptions in place but it was really part of the actions that we took in the fourth quarter of last year to reduce the overall size of our investment -- our alternative portfolio. We're probably now at the level that we're comfortable with but it was more really -- there was just some delays on the redemptions.

Brian Meredith - UBS Securities, LLC

Okay excellent. And then, the next question. Jamie can you talk what -- the amount of CAD business that you wrote quoted in Florida and then July 1, what do the P&L's look like right now?

James Veghte

Well, as you know Brian, the corporation manages the Tier -- what we call Tier 1 exposures to 15% of shareholders equity and we give an allocation within that, we've filled up our allocations although, we're not managing the full 15% as a corporation now. So, we had a very successful June and July one when all the relative support or when we are able to utilize the capacity that's been allocated up to us was in the corporate risk guidance and streamline.

Brian Meredith - UBS Securities, LLC

Great, terrific. And David, I'm just looking -- and maybe I'm calculating this incorrectly, but if I take a look at the insurance company's, accident year combined ratio excluding loss activity, it looks like its north of a 100 like call it 103,104%. Am I my calculating that incorrectly and if that's the case, is that number too high, do we need to guess one way to get it down?

David Duclos

Well, Brian I don't, I don't believe that is the number pretty clear that acts as your basis (ph) but again our loss ratio, when you strip up of prior year events in CAD activity is running about two points more than planned, we do expect to see some recovery by the year end and I'd also no doubt that part of that combined ratio for the first six months of the year includes almost two points of expenses associated with some of our staff-related activity.

Brian Meredith - UBS Securities, LLC

Right. But you really have a point in the quarter, right?

David Duclos

Yes, on a quarter end it was, the combined ratio was 100%.

Brian Meredith - UBS Securities, LLC

So that.. I mean that's the calendar year...

David Duclos

Right in here.

Brian Meredith - UBS Securities, LLC

So that's the calendar year right?

David Duclos

Yes, it is.

Brian Meredith - UBS Securities, LLC

Actually, it would've been higher because of there were developments?

David Duclos

Correct.

Brian Meredith - UBS Securities, LLC

Okay.

David Duclos

And I guess my point on this is, Brian on an actual year basis, the differences we got relative to the plan and choosing actual results compared to prior year is largely associated with the change we have related to rates for the full year, on a full year basis.

Brian Meredith - UBS Securities, LLC

Okay. Are you still putting up a couple of points for the DNO losses?

David Duclos

No, we're not.

Brian Meredith - UBS Securities, LLC

Okay.

David Duclos

And again just for clarification, the year-to-date June 30 combined ratio on an actual year basis is 101.3%.

Brian Meredith - UBS Securities, LLC

Okay. Great, thank you.

Operator

(Operator Instructions). Your next question comes from the line of Jay Cohen of Bank of America.

Jay Cohen - BAS-ML

Thank you. I want to address the topic of risk management which arguably has been...

Operator

Jay, your line is open.

Jay Cohen - BAS-ML

Can you hear me, okay? Hello?

Sarah Street

I hear you.

Jay Cohen - BAS-ML

Can anyone hear me? Hello? Operator?

Operator

Jay, your line is now open to ask a question.

Jay Cohen - BAS-ML

Can you guys hear me?

Michael McGavick

Yes we can.

Jay Cohen - BAS-ML

Oh good. I want to ask a question on risk management which I guess has been probably the weak point of XL historically given all of the enormous volatility in the earnings and the capital. How do you feel, Mike, now about your risk management capabilities? If you could talk somewhat specifically about what the new Chief Risk Officer has been doing, since he came aboard last fall?

Michael McGavick

Sure. I appreciate the question, this was scenario where clearly there have been some need for improvement and we set about the improving, at first by finding Jacob Rosengarten, who of course runs that operation. And then by really with Jacob's leadership focusing the entire senior management team and all of the various parts of the organization that are affected, in not only detailing all of the risks of the company as we could imagine them, but then specifying great detail of limits and controls around all of those areas of risk.

So we have now created a relatively massive framework of risks and limits that we not only set as a senior management team but then also review in adherence to in regular updates. It’s difficult to discard much of this, going on, I would tell you that, we kind of joke among ourselves right now that we seem to be in these meetings all the time now. And that's a good thing, because we feel very confident that we know the risks of the company that we have them, boundaries and there we are managing to those boundaries in a very effective way.

I would also point out that we chose to create a special committee of the Board to oversee the framework here and the implementation of these limits, so that the Board would have its own say on the effectiveness of this program, and we're very pleased with the progress to date. There's some, some more modest efforts are still required, but at this point I think we have the right framework and the right leadership and structure in place.

I would emphasis one thing to you. I think the biggest area where that was new work to do, was thinking about our risks outside of just our insurance and reinsurance operations. In those areas, chasing to buy some unfortunate losses in prior years, we'd already done some pretty good work and understanding class risk and understanding and modeling various kinds of exposures emanating from our core underwriting operations.

But we haven't then taken those same kinds of events or same kinds of stress test and added in how would we be effected by credit or how would we be effected across the enterprise and given that Jacob has a particular background in investment risk management, we were I think able to really super charge our efforts to understand how risk spread across the entire enterprise and not just in a silo (ph) way. I think this is part of what give us and certainly our special committee particular confidence where we stand today.

Jay Cohen - BAS-ML

Right, thanks Mike.

Michael McGavick

Sure.

Operator

Your next question comes from the lines of the name Vinaq Misquith of Credit Suisse.

Vinaq Misquith - Credit Suisse

Hi good morning. On the accident or loss ratio in the insurance segment, I see pick up in the second quarter versus the first quarter. Was it some seasonality and I believe you mentioned some large loss events in primary insurance?

David Duclos

Hey, this is Dave, let me address that for insurance first. It's a combination a large loss that did to last quite of our loss pegged for the second quarter, but that was relatively small impact, its under $10 million. The other adjustment, we made on the accident loss ratio in the second quarter was to reflect the difference in terms of our assumption around pricing for the full year and where we believe will now end up for the year, which is about a two point difference on a price basis and that also then has been properly reflected in earned through on a loss ratio. So those were the two things I'd point out that would suggest the difference in the second quarter for the insurance results.

James Veghte

Yeah Vinaq, on re-insurance we had Air France $4.6 million in the quarter and we had a fire loss in Brazil from the food processing plant that was $8 million. Having said that if you strip out prior year releases and CAD activity this quarter relatively, second quarter of 2008 with a seven point improvement in loss ratio from 66% to 59%. There was actually a lot more attritional loss activity last year, in addition to CAD activity than we've had this year.

Michael McGavick

Hi, this is Mike, I just have the overall observation that, we find these to be a quite encouraging numbers at a time, when we are kind of bouncing along the bottom of pricing and actually seeing some turn in pricing. But when you add that into these kinds of results and the kind of confidence we have in our reserves as to bit analyzed by many other parties, we feel very good about where we're positioned for the next stage of this market.

Vinaq Misquith - Credit Suisse

For the primary insurance operations was the two points of catch up, like a one time catch up and so we should see that in the next few quarters?

David Duclos

Correct. That is our assessment of where stand right now for the full year?

Vinaq Misquith - Credit Suisse

Okay. The second question is on financial guarantee. XL had insured about 48 financial guarantee contracts, but not part of Sincora which I believe total insured payments of around 947 million. Could you provide us with some color as to what those underlying exposures are and how they're trending?

Michael McGavick

Yeah. This is Mike. Beyond the Sincora related which is a EID block which is separate; we have some other Legacy/FG portfolio. They're generally investment grade, they continue to perform well, the majority of this exposure, it's kind of like the EID exposure. This is a bunch of international infrastructure projects, mostly dating from '98, '99, 2000.

By the way, we continue to wind down this portion of our risk portfolio. It came down a 158 million in the quarter, it would have been 947 in our first quarter. It's in -- it's 789 million at the end of Q2. But we are always actively managing down this risk and just in the last week we had another 70 million come off. And so it's now standing more at 719 and of course this is all disclosed in the Q's.

Vinaq Misquith - Credit Suisse

Thank you.

Operator

(Operator Instructions).

David Radulski

Well, if there are no more questions in the queue, then I'd like to hand it back over to Mike McGavick.

Michael McGavick

We certainly appreciate any questions that do come up and presume its not just technical difficulties that's preventing you from asking them. I do want to make sure its clear; on one question that was asked on the loss ratio in the insurance segment. When it was asked if it's a catch up, yes it's a catch up, but we would expect it to stay at that level that has been caught up to for the remainder of the year, at least we'd look at it today.

I just want to add one last quick thought, there's a lot of common side that comes when progress like this is made. But I woke up this morning and I'm sure like many of you first thing to do is check my black pen in the morning which my wife quite resents. But, I would tell you I was greeted by a story from a bunch of hundreds of a long string of e-mails, about an account out of Australia, that had joined us new when things were more challenging back in last year and our people just did a great job making them come forth, excel in the franchising and its just been up for renewal and now they're talking about expanding their lines with us.

And its in the client involves our Australian operation, our GAAP's operations which are global property engineering units. So, a great example of how XL does great business through all conditions and that story I think was a great reminder of why we are, why we're here. We have great people out there solving problems for clients, and when clients get a taste of doing business with XL, they want more. So, we're very proud of our people around the world and they're the ones that produce these great results we look forward to more progress in the times ahead. And we thank you for your attention today.

David Radulski

That completes our call, thank you.

Operator

Thank you, this does conclude today's conference call. You may now disconnect.

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Source: XL Capital Q2 2009 Earnings Transcript

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