Executives
David Radulski – Director, IR
Michael McGavick – President and CEO
Irene Esteves – CFO
David Duclos – EVP and Chief Executive, Insurance Operations
James Veghte – EVP and Chief Executive, ReInsurance Operations
Sarah Street – Chief Investment Officer
Analysts
Jay Gelb – Barclays Capital
Matthew Heimermann – JP Morgan
Jay Cohen – Bank of America Merrill Lynch
Doug Mewerter – RBC Capital Markets
Brian Meredith – UBS
Vinay Misquith – Credit Suisse
Joshua Shanker – Deutsche Bank
Ian Gutterman – Adage Capital
Keith Walsh – Citigroup Inc
XL Group plc (XL) Q2 2010 Earnings Conference Call August 3, 2010 5:00 PM ET
Operator
Good afternoon. My name is Shirley (ph) and I will be your conference operator today. At this time, I would like to welcome everyone to the XL Group TLC Second Quarter Earnings Call. (Operator Instructions) I would now like to turn the call over to David Radulski, XL’s Director of Investor Relations.
David Radulski
Thank you, Shirley. Good evening and welcome to XL Capital’s Second Quarter 2010 Earnings Conference Call. This call is being simultaneously webcast on XL’s website at www.xlgoup.com. We’ve posted for our website several documents including our quarterly financial supplement and our fixed income portfolio data.
On our call today, Mike McGavick, XL Capital’s CEO will offer opening remarks. Irene Esteves, our CFO will review our financial results followed by David Duclos, our Chief Executive of Insurance Operations and Jamie Veghte, Chief Executive of Reinsurance Operations, who will review the segment results and market conditions. Sarah Street, our Chief Investment Officer is with us today and available for Q&A.
Before they begin, I’d like to remind you that 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, and therefore you should not place undue reliance on them.
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’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’ll turn it over to Mike McGavick.
Michael McGavick
Good evening. XL Group provided investors with another quarter of solid results.
We generated net income to ordinary shareholders of $192 million or $0.56 per ordinary share.
For the fifth straight quarter, we grew book value per share, this time by 5% and tangible book value per share was up by 6%. These gains were driven by investment portfolio market to market and net income.
Operating return on equity for the quarter was 10.5%. Our investment portfolio’s favorable market to market of 349 million this quarter was driven by interest rate declines even as corporate credit spreads widen. We believe our repositions to be in sheet portfolio weathered this latest credit market turmoil relatively well aided by its limit of exposure to the impacted Euro denominated governments.
Our P&C combined ratio is 92.2% and was still at 99% excluding prior year development.
In addition, we made another big step forward to complete our focus on our core team sheet strategy with our previously announced termination of the Syncora EID guarantees.
In the quarter, we also completed our redomestication to Ireland and we are very pleased that both S&P and Russell decided to retain XL in their U.S. indexes.
Also, our advances in risk management continued to bear fruit. One example of this is the fact that Fitch (ph) recently confirmed our insurance financial strength rating at a strong and upgraded our outlook to stable. Another example of our ERM progress in seasoning is the fact that our current loss estimates for the Chilean earthquake and windstorm Cynthia remained within our original arrangements as has been true for every cat events since your current management team was assembled.
Likewise, we have seen no material change in the property losses, we announced for the Deepwater Horizon Tragedy. Now, I’m on this Deepwater topic, perhaps I can save some time later. Similar to our peers in the marine and excess casualty markets with regards to the reliability as too complex and we think still too early to predict anything meaningfully.
Before handing it off to Irene, I would like to take Tom Hutton for his service on XL’s Board of Directors and particularly for his role as Chairman with our Special Committee on Enterprise Risk. Tom’s time with us and his success during that time is well illustrated by our Board’s recent determination that ERM at XL is now seasoned enough to allow our Special Committee on Enterprise Risk to be merge into a newly combined Risk and Finance Committee, and you can look forward to seeing transparency around XL’s approach to risk management in our upcoming 10-Q.
Now, I’d like to turn it over to Irene Esteves. This is her first call, of course, as our CFO. I can tell you that she has hit the ground running, already made substantial contributions and we are delighted she is here. Irene?
Irene Esteves
Thanks, Mike, and good evening. Turning to our summary financial results on slide four, operating income for the second quarter was $243 million or 0.71 for ordinary share. An annualized operating ROE of 10.5% compared to $291 million or 0.85 for ordinary share and 20.1% respectively in the prior year quarter.
P&C gross written premiums were up less than 1%, reflecting continued underwriting discipline.
P&C net premiums written were up 3.4% versus the second quarter of 2009, reflecting a continued reduction seeded premium as well select new business opportunities in the Reinsurance segment.
P&C net premiums earned decreased by 5.1%, primarily due to the rolling effect of prior period’s lower written premium.
The P&C combined ratio for the second quarter of 92.2% were slightly better than prior year’s 93%, and includes $83 million of positive prior period development, which is inline of the same quarter last year – $47 million of the releases in the current quarter or from short tale lines.
A significant portion of the remainder of the favorable development relates to 2006 and prior years for professional lines, particularly from business written outside the U.S. This favorable development was partially offset by strengthening of casualty reserves related to U.S. primary and international excess casualty exposures.
Our underlying combined ratio excluding prior year development and natural catastrophe’s was 97.6% or 2.4 points better than the prior year quarter. This was driven primarily by lower current year losses in acquisition cost. Dave and Jamie will provide you with additional detail on this in a minute.
Turning to slide five, investment income on the P&C portfolio decreased in the second quarter compared to the prior year quarter. This was due to lower portfolio yield, driven by low U.S. interest rates along with the cumulative impact of holding a portfolio of a P&C insurer. New purchases were mainly in high quality investment grade corporate credit as well as agency mortgage back securities.
The average new investment rate was 2.1%, reflecting the lower absolute levels we are currently facing.
Our P&C duration decreased to 2.7 years and the P&C portfolio book yield gross of fees at the end of the quarter was 3.5%.
Please note that on page 31 of the financial supplement, we have expanded our disclosure on government and corporate holding by country of risk. I’d also like to mention that we have elected, effective August 1, 2010, to designate another $2.1 billion from our live books investment portfolio is held to maturity. This is in addition to the 546 million that we designated in Q4 2009 and is intended to reduce the interest rate sensitivity on our GAP space book value.
Slide six includes the con-covenants (ph) of our increase in market to market, which was driven by lower interest rates on government securities partially offset by widening credit spreads.
Our $245 million of operating expenses for the second quarter of 2010 were $19 million or 7% lower year over year, reflecting the benefits from prior expense management initiatives.
Turning to slide seven, the largest drivers are our 5% growth in book value per ordinary share in the second quarter or an increase in the value of our investment portfolio and our earnings for the quarter, offset in part by charge to currency translation account.
The overall impact of foreign exchange movement during the quarter was a reduction in shareholder’s equity of about $50 million reflecting the strengthening of the U.S. dollars much like NC (ph) or European currencies. While the capital of our European subsidiaries as reported in our 10-K, totals approximately $3 billion, part of that capitals already held in U.S. dollars.
In addition, we have active hedging programs in place to reduce our exposure to non-dollar currencies, net of these activities where now long non-dollar currencies by about $400 million using June 30th exchange rates.
We set out on slide eight, we ended the second quarter with $13 billion in total capital an increase of 3.7% in the quarter with common equity at $9.5 billion, up 5%, and or book value per share is now $27.74 up 12.8% for the year-to-date.
Now, I’ll turn it over to Dave to discuss our insurance business.
David Duclos
Thank you, Irene. Insurance segment results for the second quarter were strong given current market conditions as we continue to enhance our risk management activities and operational effectiveness while lowering exposures to less attractive markets.
Our combined ratio of 97.6% for the quarter was 2.1 points better than our Q2 2009 results of 99.7%. Adjusting for both cuts (ph) and prior year development, the Insurance segment’s Q2 combined ratio of 99.6% was 4.1 points better than the same period last year.
We are fully aware of the difficulty in sea environment, so as we face market conditions as competitive as pre-9/11 in many lines in geographies, we continue to fix, call, and grow our Insurance lines on a very selective basis.
We wrote 38 million or 3.4% less in gross premiums in Q2 than in Q2 2009, primarily driven by programs that we acted last year. Walking away from new and renewal business due to market pricing is also impacting premiums adversely.
Our premiums written for the second quarter were just over 95% on a segment basis, significantly better than the low 70s experienced in the depths of last year. We are now back on track with historical retention levels, a good spot to be as we see no imminent change in how this market is pricing business, which is quite competitive.
Our Q2 2010 loss ratio 68.2% was basically flat compared to 67.9% last year. However, when adjusted for both cats and prior year development, our underlying loss ratio was slightly better year over year at 70.2% versus 71.9%. This improvement was driven primarily by a lack of property losses compared to prior year, exiting less attractive businesses and the related shift in business mix to a more profitable line.
We are well aware that the majority of this benefit continues to be offset by deteriorating rate environment that is adversely impacting the loss ratio.
Acquisition expenses were favorably impacted by true-ups and are guarantee fund assessments and other non-recurring adjustments. Excluding these adjustments, acquisition expenses as well as operating expenses were right in line with expectations and on par with 2009.
Before I move on to market conditions, let me comment on our Professional lines business. Claims trends year-to-date continue to lower than historical averages and our core professional DNO book, and while we continue to maintain reserves from Professional lines, which we consider appropriate given the uncertainty, we note that various financial crisis related matters from 2007 and 2008 developed favorably for XL along with the rest of the DNO industry.
Regarding the market, health economic conditions mean many of our clients are buying less insurance from an industry with more than enough capital to meet those needs. As a result, broad pricing pressure remains. This was reflected in our second quarter’s overall pricing decline of minus 1.8% following the Q2 2009 rise of plus 2.1%.
While macro conditions may not change soon, we can’t say that pricing does react often very quickly but sometimes not in the sustained matter to large loss events especially in aviation rates, the last year’s loss event is an example and of course, marine and offshore energy rates to this year’s events in the Gulf of Mexico.
We are also booking trends in global programs in terms of price particularly in casualty where our leadership role allows us to drive summary and we continue to see good margins in our Profession liability book.
Operationally, we continue to rollout of our claims processing initiatives, service is a vital part of our business, of course, especially claims performance and we are proud of our strong track record. A record which most recently included the number one rating in service from the American Consul then generic companies for our Design Professional business.
I mentioned selective growth earlier. We see that coming from several sources. Our expansion into Asian markets, our extensions in the U.S. and global general aviation, our pushes into lines that complement our existing strengths including U.K. Professional and targeted the up our middle markets in DNO. We’re also proud that we attract recognize names in this areas of growth, recent examples includes Bob Shine, who is now leading our North America Casualty team and Garry Kaplan in heading up our North American construction practice. They join an already strong team and accomplished a great deal here at XL. We believe all of our actions and results are demonstrating discipline in our underwriting and responsiveness to our brokers and clients.
And now to Jamie to discuss Reinsurance.
James Veghte
Thanks, David and good evening. XL RE enjoys yet another strong quarter of underwriting results and market conditions that continue to provide significant challenges.
During the period, we achieved the combined ratio 78.96% resulting in an underwriting profit of $73.4 million. This compares to combined ratio of 78.2% in second quarter of 2009. The results included positive prior year reserves development of $48.9 million, which compares to releases of $55.2 million in 2009.
Adjusting for both cat losses and prior year releases, the Reinsurance segment had a combined ratio of 92.7%, a 0.7% deterioration from last year. This delta is driven almost entirely by deterioration in the operating and expense ratio resulting from a reduced net earned premium year-over-year.
In fact, our current loss, year loss ratio of 58.6% is actually showing a slight improvement over the 59% produced last year.
Turning to top line, gross and net premiums written were $421 million and 357 million respectively, up 12% year-over-year on growth and 15% net. This was driven by new business opportunities in Bermuda, additional recaptured clients, some new business in Latin America and some timing issues in both Bermuda and Brazil.
As we’ve said before, the lumpy nature of Reinsurance portfolios sometimes creates movements of this nature in written premium and does not reflect broader issues around strategy or an improvement in market conditions. I can assure you the market is very tough and we remain very disciplined.
Turning to the market, the July 1st, renewal environment was certainly more challenging than we expected going in. As you’ve no doubt read and heard repeatedly over the last week, U.S. cat rates deteriorated on a risk adjusted basis by 10% and international rates were down 5% during the renewal.
With respect to floor to business, we were pleased to be named the first Bermuda Company named an eligible reinsurer by the insurance department in the State. This reduces our post loss collateral obligations substantially and allows us to operate more freely in this very important market.
In addition, significant amounts of property proportional business were moved. During last quarter’s call, I outlined what we believed are the necessary changes to that market. Frankly, while improvements were cheap it was nowhere near what we quoted or expected and we produced our capacity commitments in that market accordingly. This was a significant disappointment.
On the long tail side, we continue to see competitive conditions across the market with pockets of exceptions such as the U.K. motor market. The U.S. is very challenging across the market.
Finally, turning to our Life operations, the contribution before net realized losses during the quarter were $23 million. This quarter there was no one off gains from treaty computation, whereas few ones contribution of $49 included a one-time gain of $13.8 million as a result of three treaties being commuted with one client.
Overall, we are very pleases with our underwriting performance against a back draft of continued difficult market conditions and we will be vigilant as this phase of the market plays itself out.
With that, I will turn it back to David for Q&A.
David Radulski
Shirley, can you please open the lines for questions.
Question-and-Answer Session
Operator
Yes, thank you. We will now begin the question and answer session. (Operator Instructions) Our first question comes from Jay Gelb with Barclays Capital. You may ask your question.
Jay Gelb – Barclays Capital
Thanks and good afternoon. First one, I guess for Mike and Irene. Could you talk about plans to potentially deploy the excess capital that XL Group has especially maybe after hurricane season and what are your thoughts about retaining the additional liquidity you have on the books currently?
Michael McGavick
Hi, Jay. This is Mike. Thanks for the questions. With respect to the capital situation, the situation remains unchanged. We think about it the same way we have since this management team has assembled. The first thing we look at as you know is the sufficiency of our capital particularly as it relates to our own internal view of risk of the company, which is the most stringent of the test we would apply including rating agencies and regulators.
And then we look at if there is excess and I know many of you judge there to be. We then look at first where could we put that money to work ourselves and then we look second if there’s nowhere whether we would choose to return to shareholders in some fashion such as through a share buyback. This is a process we analyze continuously. We are well aware of the situation. We’re very well aware of what we’re trading and we keep a close eye on it, in regular communication with our board about it and if we make a new judgment on that we’ll let you know.
In the mean times, I would remind you as does our quarterly reports that we do continue to have $375 million in occurred authorization available for action should we choose to do so.
Jay Gelb – Barclays Capital
Okay. And then just to follow-up on that, I believe in the prepared remarks you talked about changing the classification for around $2 billion of life fixed income assets to being held to maturity. Does that change the equation given that it probably reduces the impact of interest rates, if it were to rise?
Irene Esteves
What does Jay is it impacts our book sensitivity, so it doesn’t really change our economic sensitivity, which is what our capital requirements are really looking at our inter-models are looking at the economics. So, it really does change our view on the amount of capital we need.
Jay Gelb – Barclays Capital
That’s helpful, thank you.
Operator
Thank you. Our next question comes from Matthew Heimermann with JP Morgan. You may ask your question.
Matthew Heimermann – JP Morgan
Hi. Good morning, everybody or good afternoon. Sorry, it’s been one of those days.
Michael McGavick
I got it.
Matthew Heimermann – JP Morgan
For Jamie, can you comment with respect to the insurance side sauce (ph) and adverse development on U.S. casualty excess lines. Is there any read through for the reinsurance book and I guess I’m really thinking more prior years given that the portfolio shift quite a bit.
James Veghte
No. As you know we had a fairly significant release this quarter. The casualty component of that was about $20 million and as we’ve said repeatedly over the last several quarters, we’re very cautious about prior year releases on long tail business in recent underwriting, so that’s majority of those releases were 2006 to prior.
Matthew Heimermann – JP Morgan
Okay. I guess then maybe for David, is the development we’re seeing on the insurance side maybe specific to a couple of clients rather than broad transcend?
David Duclos
Yes. Matt, it’s actually specific to a very specific program actually that we have. It’s year is 2006 and pass, so it’s about – I’d say it’s 80% of the cash we released, the North America is tied to the specific that we have in the casualty North America book.
Matthew Heimermann – JP Morgan
Okay. And then I guess just with respect to, I guess two numbers questions. One was you mentioned a cat number, a cat in Verizon number in the press release for the total company, which is a little bit different than you classified cats in reinstatement in the supplement. And so I was just hoping you’d give us the impact of Verizon by segment, both the loss and reinstatement. And then also just, if you could just touch on the strategies that contributed to the affiliate income this quarter.
Michael McGavick
Sorry, on the Deepwater question, the Deepwater isn’t a natural cat. It’s a large loss and treats it as such. And do we have it (inaudible) –
Matthew Heimermann – JP Morgan
Do you still break that impact up by segment?
Michael McGavick
Sure.
David Duclos
Yes, we do.
Michael McGavick
Let’s walk through.
David Duclos
Yes. Matt, the insurance impact on Deepwater was just under $15 million for the PD loss and reinstatement.
James Veghte
$12 million for reinsurance.
Matthew Heimermann – JP Morgan
And what was the reinstatement by segment because that seems to be pretty significant.
Michael McGavick
Yes. Reinstatement for insurance was just over $3 million, just under $3 million, Matt.
Matthew Heimermann – JP Morgan
Okay.
James Veghte
700,000 for reinsurance.
Matthew Heimermann – JP Morgan
Okay, much appreciated.
David Duclos
Hi, Matt. Did you get that on reinsurance?
Matthew Heimermann – JP Morgan
Yes, I just got that. Thanks.
Michael McGavick
Okay, good.
Sarah Street
And then Matt, this is Sarah. On your follow-up question, the two main drivers, the hedge fund portfolio, the alternative portfolio was I mean it had a good relative performance, but it was weaker than we would normally expect it about a 1% return. The investment managers had a sort of we’re pretty much in line with where we would’ve expected them to be. The stronger performance from the private equity portfolio, where we like many of our peers have actually seen some markups and some distributions on those private equity funds that directly accounted.
Matthew Heimermann – JP Morgan
Okay, much appreciated. Thanks.
Operator
Thank you. Our next question comes from Jay Cohen with Bank of America Merrill Lynch. You may ask your question.
Jay Cohen – Bank of America Merrill Lynch
Thank you. Two questions, first there, just to follow-up. Could you remind us and I should know this but the lag in reporting for the alternative investments, for the hedge funds?
Irene Esteves
It’s a one month lag.
Jay Cohen – Bank of America Merrill Lynch
One month lag. Okay, that’s helpful. And then I guess for Dave, I may have heard this wrong but I thought you said your retention, I assume this is your renewal retention in insurance was 95%? Did I get that wrong?
David Duclos
Yes, Jay you did. No, you didn’t get it wrong, I said it wrong apparently. It is 85%, which is back to historical levels.
Jay Cohen – Bank of America Merrill Lynch
Okay, that makes more sense. That’s all I need to know, thanks.
David Duclos
Yes.
Michael McGavick
Yes, we’d all be panic if he was riding 95 right now.
David Duclos
Yes.
Operator
Thank you. Our next question comes from Doug Mewerter with RBC Capital Markets. You may ask your question.
Doug Mewerter – RBC Capital Markets
Hi. Good afternoon. Just a couple small questions. First, do you renew a reinsurance program in your insurance business this quarter? I just noticed your retention, your net to gross retention drop, but it also seems like it was low second quarter last year, so I just wanted to confirm that. It wasn’t just like a business mix or issue?
Michael McGavick
No, Doug. It isn’t. In insurance, we did have treaty renew in the second quarter. We had our property treatment in 5/1.
Doug Mewerter – RBC Capital Markets
Okay. And also was the terms about similar?
Michael McGavick
The structure was about similar and we benefited from what’s happening in the marketplace.
Doug Mewerter – RBC Capital Markets
Okay. And well have you Dave – I’ve heard a lot of talk that DNO market is getting quite crowded and actually is suffered the curse of a hard market I guess. Can you confirm that? Is it getting to the point where it’s getting pretty bad or is it still relatively stable because I guess it went – the rates went up quite a bit right after the (inaudible) enterprise opportunity backing way off again.
David Duclos
Well, Doug, you’re certainly right about the question or observation that it’s becomes a crowded swimming pool. Just today, a couple more markets introduced or announced their entrée in the U.S. in particular professional liability. I think in the last three years, there’s been over 20 new entrances. It is a competitive marketplace, I would say that we’ve got very strong positions in a number of areas and in our core and we just don’t write large standard public DNO, but in our core public DNO we’ve carved out a niche frankly that we play a very significant role in for the marketplace.
And I would tell you that pricing in the DNO business, as evidence by the second quarter pricing has been under some pressure. But, and I hope – hopefully this comment doesn’t attract more attention to this line. We still feel really bullish about the profitability and in fact on new basis professional lines globally still present its more opportunities for helping returns in most other line, but you’re right on your spot relative to your observation on competition.
Doug Mewerter – RBC Capital Markets
Okay, thanks. And my last question, I noticed there were some sort of settlement for the World Trade Center bomb or attack and a lot of – a couple of your peers actually took some, I guess, meaningful reserve, payable reserve charges because of that. Did that show up at your balance sheet or were you not directly related to the – what came out of that settlement?
James Veghte
It’s Jamie. Yes, we did participate in the settlement with the airlines. But the projected settlement we saw was already contemplated on our reserve, so we didn’t see a significant release on aviation to quarter.
Doug Mewerter – RBC Capital Markets
Okay, thanks. And that’s all my questions.
Operator
Thank you. (Operator Instructions) Our next question comes from Brian Meredith of UBS. You may ask your question.
Brian Meredith – UBS
Yes. Good evening. A couple of questions. First one for Sarah, Sarah, can you tell us where were the realized losses coming from what classes and then where are we as far as the portfolio de-risking or are we pretty much all the way there or is there more to go?
Sarah Street
Yes. Hi, Brian. On the realized, most of it was pretty evenly split between structured credit. Well, I have to say we see encouraging signs there in the underlying performance of the collateral, but we did see some small deterioration. It was about $23 to 24 million from where that range. The last was – although it was about 10 million of sales that we made, we did actually reduced some of our exposure to some European banks earlier in the quarter as a result of the reviewing our exposure there.
And then the last chunk was on the corporate securities, which was really a board of change of intent to hold or more likely to not because it’s part of our de-leverage or de-risking activities. We’re looking at – before we expect it would deem out of some of our MTNs over the next couple of quarters. So, that’s really where we realized losses.
On the – where on we’re on the de-risking and I think as we’ve said, we still have some assets that we will look to work out overtime in terms of the Legacy portfolio, particularly in the non-agency RMDS and the CDOs, which is actually south (ph) of non-agency RMDS this quarter. It was about $50 million, so we’re actually pleased with the price that we achieved. But we are going to do it gradually when we see sort of prices that are economic and we’re much more focus on sort of the optimization of the portfolio today than we are on sort of pure de-risking.
Brian Meredith – UBS
Great. And then next question, can you give us a sense of where your PLM stood at July 1 on (inaudible) to year? Hello?
Michael McGavick
As I mentioned, we have some tables coming that you’re really going to enjoy in the Q, so Friday it gets – feeding all of that detail of beyond what we have presented in the past and we’re still well under limits, but I think we’ll leave it to read those tables to get to your, a deeper perspective on a jack to position.
Brian Meredith – UBS
Great. Thanks.
Operator
Thank you. Our next comes from Vinay Misquith with Credit Suisse. You may ask your question.
Vinay Misquith – Credit Suisse
Hi. Good evening. On the yield on the fixed income portfolio, that’s come down and new money yields are I think 2.1%, you mentioned, and also your duration has come down, I think from three years to 2.7 years. Are you changing your investment philosophy fee from the new money yield investing given the law new money yield?
Sarah Street
Hi. This is Sarah, again. No, I mean we’re very much remaining consistent with the investment strategy that we’ve outlined. We look at other options out there in terms of things that we could do to increase the yield that we’re earning. We honestly don’t believe that (inaudible) pay for it. So, no, we are not looking to stretch the yield and we’re sticking with what we feel the portfolio should look like from the mix perspective going forward.
Vinay Misquith – Credit Suisse
Okay, that’s good to hear. The second point is on the exposures of different national guarantee. I just want to be sure that you have no more exposures to any international guarantees now.
Michael McGavick
You would know for meeting the Q in the case carefully over the years that there are other financial guarantee exposures. This was the kind of the cleanup of the SCI settlement from a couple of years ago, where this basket the EIB lack of international guarantees had not been dealt with and we have come to agreement then that we would try to resolve them over time and date. I’m going to let Sarah walk you through where that all that stands because it’s really a great credit to her team, David and Todd (ph) and the rest of them, really get a hard work to get the progress we’ve got and we even got a little more progress in the wings. So, Sarah?
Sarah Street
Yes. No, as Mike said, in population months we’ve made a lot of progress elimination in sort of what we view was the negative financial guarantee and financial guarantee like exposure that came out of our old financial lines business. And as a result of that focus, including the recent termination of the EIB contract, in amount to we’ve down to just under 900 million, at 874.
Now, within that amount, the losses to transaction is actually just under $400 million, which is a financial guarantee related to a Chilean toll road (ph). Now, the good news here is that the issuer has already decided to repay the debt and then honor this agreement releasing XL from its financial guarantee who had been fined and its being now held in escrow subject to the satisfaction of certain closing conditions. We expect those pleasant conditions to be satisfied and if they are within the next couple of weeks that exposure to will go away, and at that point it leaves around about 500 million and we’ll sort of be continuing to work our way diligently through getting rid of the recipes exposure in an economically sensible way.
Vinay Misquith – Credit Suisse
Sure. And where is the 500 million exposed?
Sarah Street
Well, it’s across a whole number of different deals. I mean just there’s this one large transaction, which has a credit derivative, which was a deal that was done a long, long time ago about $190 million. The underlying class well is, predominantly class securitize pools of (inaudible) and bonds. The transaction is parting all of its tax with the exception of one and tax means that cash flow is actually being redirected to XL’s box, where we would expect and we’ve cleft the deal and up to sort of including 2008 stress event and we’re very comfortable with the class rule. And the rest of our disasters (ph), there’s a series of deals where no one is greater than $71 million and the average is 42 and they’re all performing appropriately.
Vinay Misquith – Credit Suisse
That’s good, thank you.
Operator
Thank you. Our next question comes from Josh Shanker with Deutsche Bank. You may ask your question.
Joshua Shanker – Deutsche Bank
Yes. Good afternoon. My question relates the business that you lost and then came back to you. Could you describe the competitors who took that business and the negotiations that wound you bring it back and why do you think they didn’t try harder to retain that business, they got from you?
Michael McGavick
Let me give you kind of a general comment on and then I’ve ask Dave and Jamie to jump in. First in some cases, it was just a pure panic reaction to XL’s situation as 2008 closed down. We would even get messages that risk managers had been overruled in their desire to stay with XL, by others within the company, but they really wanted to stay. A lot of mixed messages at that time and never or at least rarely was it somehow a rejection of XL, but rather a reaction to current panicky conditions.
As those conditions subsided, we often saw business come back very quickly because of that underlying depth of relationship. So, it wasn’t so much that someone else took it from us, but rather they just felt they couldn’t stay with us until things improved, and when it improved, they directed brokers or reach out to us and just got right back into the relationship. So, it’s really to us a testimony to the strength of our core book and the relationships we built over many years through the kind of quality service and particularly claims service we provide.
So, I would tell you it’s more about that dynamic than it are about the current crazy pricing dynamic or anything else. It’s about – I’ll ask my colleagues to give you any further depth they’d like to give.
David Duclos
Mike, just real quick in the insurance standpoint, the primary jobs for business is coming is related to service. Service one, in terms who ever took the business last year not performing at the level XL provided and then also addressing the primary concern that Mike just talked about, which was the capital concern, which went away.
And I would say that the majority of business that we lost was in insurance was in the first half of 2009 and just to give you some perspective, the amount that we’ve recaptured, if you want to use that word is about 25 to 30%, so it’s not a 100% and I can’t tell you it’s not because of pricing. It is driven because of the fact that the capital concerns are gone and our service performance.
James Veghte
Yes, Jamie. The big positive variance in gross written premiums in our quarter was driven out of Bermuda $26 million, about half of that was a couple of new deals we found, which were very attractive and the other half were increased lines in business that we like and customers that may have had some hesitation about the security coming back. So, this has been repetitive quarter after quarter since our real recovery began about four quarters ago.
And I would reiterate what Mike and Dave said, it’s about our service, our reputation, the relationships we’ve had over the years.
Joshua Shanker – Deutsche Bank
Well, to what extent has business potentially want to come back but you just can’t right under the kind of market conditions?
Michael McGavick
And that certainly happens, that’s one of the reasons it’s in – by this Dave said 25 to 30%. It would be a lot more, if we were willing to chase price but we pride ourselves on being technical underwriters will remain disciplined. I have to tell you it’s very hard out there with these kinds of conditions. I really admire the hard work our people are doing to keep their wits about them and what is a very difficult pricing environment. I think Dave’s got it right, I know there’s some submission data that would help to make the point.
David Duclos
Yes, just to reinforce was Mike just said actually from a submission standpoint, year to year, we’re actually up 8% and that’s largely because we’ve introduce some new lines but our underwriters clearly are working a lot harder to write let’s new business. And our new business through six months is trending down and if you think about how 2009 evolved, the first quarter in particular, about the first half of the year, we were under some pressure and didn’t raise much new business.
The first quarter this year, that capital concern was off and so I can tell you that the trajectory, if you will, in terms of comparing 2009 to 2010 is heading different direction – i.e. new business writings continue to dwindle, but it’s not because we’re not seeing the business we should see and it’s not because we’re not pursuing it. It is because of what you said, it’s not written or something written at the price rate.
Joshua Shanker – Deutsche Bank
Well, I appreciate the answers. Have a good evening.
Michael McGavick
Thank you.
Operator
Thank you. And our final question comes from Ian Gutterman with Adage Capital. You may ask your question.
Ian Gutterman – Adage Capital
Hi, guys. I guess maybe to start. Can you give an update on Chile? You said it hasn’t gotten out your range, but it does look right there was some development from one of the footnotes in the supplement.
Michael McGavick
Yes, there was a small amount of movement. There’s about 6.8 million in increase in our estimate, about 2.2 million of that is insurance in the marine cargo line and about 4.6 million is in the reinsurance side in – the property treaty really has got to do with one (inaudible). But as you can tell, given our range, which was 140 to 205 million, it’s a very modest movement indeed.
Ian Gutterman – Adage Capital
Okay, fair enough. Moving on, to follow-up on the average development and casualty, can you just give a little more color? Was it – is it a Fortune 1000 business, a smaller account, is it industry specific like farmer or environmental or something like that, any color you can give on that?
Michael McGavick
Ian, it was a very niche based program, without to saying what it does. It was relatively small programs in terms of premiums, just under $20 million and I can tell you that the remedy for us is that will pass on the program going forward because the latest development on a liability basis. The good news is it’s not core to our – it’s not key to our core lines of business.
Ian Gutterman – Adage Capital
Okay, fair enough. And then moving on to in reinsurance, if I’m looking at the loss ratio, X development, X cash and if I also put in the Deepwater loss, it looks like you’re down about four to five points year-over-year. Where there other large losses last year to capture that that maybe are missing in that or I know it’s a little bit of mixed shift, but four to five points seems like a lot.
James Veghte
It’s Jamie. Some of that is purely mixed of business changing. We’re carrying our cat, current year catalog ratio at about 16% this year and the percentage of net earnings premium in the overall portfolio has increased from about 18.5% now to over 23% cat. That’s not because we’re going wild on cat, it’s because we continue to reduce in some of the more competitive areas.
And just to show the trend line, back in the full year 2007, the cat component in the overall portfolio was about 11% of net earned premium. It’s now more than double.
Ian Gutterman – Adage Capital
Okay. I mean that gives me partially there I guess 18 to 23% even if I’m picking up 30% of loss ratio that only gives me a 1.5 half for the way there. And underlying fixed price should be on by about 1.5, right, just because of price deterioration, so I’m just wondering why we’re not seeing something more like that in one or two as oppose to about 4.5?
Michael McGavick
Well, I think there were some fire losses in Brazil in 2009 that bumped the property non-cat loss ratio a couple of points.
Ian Gutterman – Adage Capital
Okay. As far as I mean what about just sort of non-cat attritional losses, have they been much lower year-over-year?
Michael McGavick
Yes, they have.
Ian Gutterman – Adage Capital
Okay, and was that true for last quarter as well?
Michael McGavick
Yes, one.
Ian Gutterman – Adage Capital
Okay. And then just if I can move to Sarah real quick, on the Life insurance portfolio, the investment income seems to be coming down I guess faster than I thought and faster than a team’s the assets are coming down. Is there anything going on there that’s changed?
Sarah Street
That’s just the impact of FX given the fact that there’s also Sterling and Euro portfolio.
Ian Gutterman – Adage Capital
Okay, that’s makes sense. Okay. And then lastly, any thoughts on your MBS portfolio, your U.S. MBS portfolio is pretty large. Sometimes (inaudible) stuff here, just give me where interest rates are and what spreads on that class. Any thoughts that maybe it’s time to tick your games on that and try to find someplace else to put your money.
Sarah Street
I’m smiling here because that’s a debate that we have at the – I see on a regular basis, and we did actually decide most recently that we’re seeing quite a lot of prepayments out of that portfolio, so we’ve actually naturally paying off pretty quickly given the buy outs and whatever the Asian (inaudible) are doing there. So, we have decided for the moment to that we’re not going to redeploy money back into it and we continue to look at it. As you said, performed extremely well, but the spreads are relatively tight.
And the big challenge is that we worry about used supply in the future, so we’re trying to find the right balance there between what that allocation should over the long-term and where we are today. And it has some (inaudible) fields on it today, so when you look at the truth defense reinvestment rate its much (ph) bear back into consideration glove.
Ian Gutterman – Adage Capital
Good point. Okay, thank you. That’s all I have.
Operator
Thank you. We do have a question from Keith Walsh with Citi. You may ask your question.
Keith Walsh – Citigroup Inc
Hey, good evening, everybody. Two quick questions my first – just if you could touch on contingent commissions your, two of your larger distribution partners or in the market thing, they’re going to take them now, if you can just tell us where we stand with your discussions with them and I’ve got a follow-up.
Michael McGavick
We’re not saying the continued commissions in this market. Obviously, we have some program business with contracts in it, but as far as this pronouncements that I’ve seen, they don’t – they aren’t going out at XL right now.
Keith Walsh – Citigroup Inc
Okay. And then the second, I think it’s pretty clear from your commentary your relationships with your distribution partners have stood up well over the past couple of years here. But I guess the question would be, if you could talk a little bit about your opportunity to write bigger pieces of each customers program and how that’s evolved as the financial stress against your company has abated in the last year and a half.
Michael McGavick
So, that has been part of the pickup that you’re seeing that’s offsetting rate deterioration on the top line and that is where a common response to the crisis would be for someone to – maybe this is getting to be old days now, a couple years ago, but someone would take a stand, they want to keep us involved with the program, but they’d take us down in terms of the line size. But that process has been in reverse now and we’re able to be offered larger lines again and that again is a part of what you’re seeing, offsetting rate deterioration in our top line.
We’re very pleased by that, but it speaks well to the franchise, which has held up just remarkably well and now, while we’re able to continue to produce what we think are solid results in what is a very difficult market environment.
Keith Walsh – Citigroup Inc
Thank you very much.
Operator
Thank you. I’ll turn the call over to the speakers.
Michael McGavick
This is Mike. I just want to thank everybody for their time on the call. It is delightful hear to XL to have a boring call that is just about pretty much regular insurance stuff and reinsurance stuff, I think that’s a credit to the progress we’ve made as a firm and to the now, five quarters of documented no surprises around here. We’re going to keep trying to deliver on that promise and we think with the RM we’ve developed and with our underwriters keeping their wits about it, that’s exactly what we’re going to do.
So, thanks for the time tonight. We look forward to continue to fighting our way through this market, and we look forward to talking to you next quarter.
Operator
Thank you and that does conclude today’s conference. We thank you for your participation. At this time, you may disconnect your line.
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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
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