XL Group's CEO Discusses Q1 2014 Results - Earnings Call Transcript

May. 2.14 | About: XL Group (XL)

XL Group plc (NYSE:XL)

Q1 2014 Results Earnings Conference Call

May 2, 2014 8:00 AM ET

Executives

Dave Radulski - Director, Investor Relations

Mike McGavick - Chief Executive Officer

Pete Porrino - Chief Financial Officer

Greg Hendrick - Chief Executive, Insurance Operations

Jamie Veghte - Chief Executive, Reinsurance Operations

Sarah Street - Chief Investment Officer

Steve Robb - Controller

Susan Cross - Executive Vice President, Global Chief Actuary

Analysts

Jay Gelb - Barclays

Amit Kumar - Macquarie

Vinay Misquith - Evercore

Jay Cohen - Bank of America Merrill Lynch

Meyer Shields - KBW

Dan Farrell - Sterne Agee

Ian Gutterman - BAM

Mike Nannizzi - Goldman Sachs

Randy Binner - FBR

Operator

Good afternoon. My name is Shirley, and I'll be your conference operator today. At this time, I would like to welcome everyone to the XL Group plc First Quarter 2014 Earnings 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. Please be advised that this conference is being recorded.

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

Dave Radulski

Thank you, Shirley. And welcome to XL Group's first quarter 2014 earnings conference call. This call is being simultaneously webcast on XL's website at www.xlgroup.com. We posted to our website several documents, including our quarterly financial supplement and a presentation titled Sale & Retrocession of Life Reinsurance Business.

On our call this morning, you'll hear from Mike McGavick, XL Group's CEO, who will offer opening remarks; Pete Porrino, Chief Financial Officer; followed by Greg Hendrick; and Jamie Veghte, who will review their segment results and market conditions. Others with us today include our Chief Investment Officer, Sarah Street; and our Controller, Steve Robb.

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.

With that, I'll turn it over to Mike McGavick.

Mike McGavick

Good morning and thank you for joining this call. If you will permit, I'd like to start with a quick personal note. This is a call I have been looking forward to for six years. We are very pleased on this call to be able to discuss the transaction we announced last night on our now largely exited Life Reinsurance businesses. I'm truly excited by the culmination of an effort that we started working on immediately after I was hired in 2008.

Here is how we are going to approach this call. We will get into the results from the quarter first, so you will hear from me, Pete, Jamie and Greg in the usual fashion. And then Pete and I will come back to discuss more fully the Life Re transaction as we want to them get into the details and give you plenty of time for your questions.

So with regard to the quarter, XL had a very good start to 2014, the solid results across both our core business segments and from our investment affiliates. In fact, across many total P&C metrics, this was one of the best quarters since the end of 2008. Our Insurance segment continued to improve and Reinsurance performed strongly in spite of the widely discussed tough market conditions.

Some of the results highlight. Excluding the first quarter of 2013, which we have noted in many ways was an outlier in terms of outperformance. Our total P&C combined ratio of 89.7%, our total underwriting profit of $145 million and our loss ratio of 58.9% are the best result since the fourth quarter of 2008. And once again we produced double-digit ROE of 10.4%, excluding unrealized gains on investments.

Contributing to the strong quarter was an Insurance segment underwriting profit of $45 million and an insurance accident year ex-cat combined ratio of 94.6%. Meanwhile, the 76.3% combined ratio for the Reinsurance segment is obviously a very strong result.

Now we do expect to see variations from quarter-to-quarter as we’ve discussed many times with you. We are mindful and this was a relatively low cat quarter and we of course know from last year. The strong starts do not necessarily project the same kind of performance across the entire year. All of that said, we like these results and we really like the way this quarter positions us for the rest of 2014.

With that, I am going to turn it over to Pete for a quick rundown of the financials in the quarter. Greg and Jamie will have the segment highlights, and then Pete and I will return to get into the details of the Life transaction. Pete?

Pete Porrino

Thanks, Mike, and good morning. Given all that we have to cover today, I’ll make my remarks brief covering four items, reserve development, expenses, investment results and capital management.

Prior year reserve development in the quarter was a net favorable $39 million or 2.7 loss ratio points, compared to $31 million or 2.1 loss ratio points for the same quarter in 2013. This reflects favorable development from short tail property and catastrophe lines in this A versus E quarter of $8 million and $31 million in the Insurance and Reinsurance segments. Our semiannual full actuarial review will be reported on next quarter. Our reserve related note, we do intend to publish our global loss triangles next week.

Turning to expenses, you may have notice that in prior years our first quarter expenses historically tended to be lower than the annualized run rate. In the past that was largely due to the lag in spend for technology and other areas in the first quarter, followed by a catch-up over the rest of the year.

We are doing a better job of more evenly distributing our spending this year, so that while total expenses in Q1 2013 were 9% higher than Q1 a year ago that were virtually even with the most recent three quarters. And as we’ve discussed on previous calls, we expect our total full year 2014 operating expenses to be higher than 2013 by mid single digits on annualized basis.

Regarding investments, our investment portfolio delivered solid total returns of 1.8% in the quarter, P&C portfolio was 1.5% and the life portfolio of 3.2%. We had a positive mark-to-market of $302 million, with $236 million, and $66 million between P&C and Life.

Unrealized net gains in the portfolio were $1 billion at the end of the first quarter, of which $800 million is in the P&C portfolio. This excludes the $365 million related to our held to maturity assets in the Life portfolio. And $162 million net investment income on the P&C portfolio in the quarter was 7.1% below the same quarter last year, due primarily again to lower reinvestment rates.

The P&C gross book yield at the end of March remained pretty much unchanged at 2.7%. We still have a gap between the yields and maturing assets, and where we are reinvesting which will keep downward pressure on net investment income.

Our investment and operating affiliates, all held in the P&C portfolio continue to produce strong results. Net income from investment affiliates was $60 million, up $10 million from the prior year quarter.

We also had good earnings from our investment manager affiliates, also held in the P&C portfolio, reflecting the strong fourth quarter of 2013, which produced healthy incentive fees for affiliate managers.

Now to capital management, during the quarter we continue to buyback our ordinary shares as we view such purchases as an effective use of surplus capital. Following the February Board of Directors meeting, we announced an increase in our ordinary dividend by 14% to $0.16 per share per quarter and the authorization of a new $1 billion share buyback program.

This authorization includes the approximately $200 million remaining under the previous program. In total, during the first three months of 2014 we purchased and canceled 5.8 million ordinary shares at an average cost of $30.19 for $175 million.

I will now turn it over to Greg to discuss our Insurance segment results.

Greg Hendrick

Thanks, Pete, and good morning. Today, I'll cover results for the segment, give a brief update on talent, provide some color on our continuing improvement and finish remarks on current market conditions.

Beginning with the results, the Insurance segment produced a strong first quarter results with accident quarter ex-cat combined ratio of 94.6%, roughly 1 point higher than prior year. In fact, the first quarter of 2013 and 2014 are the two best accident quarter ex-cat results since 2007. The year-over-year change is expense ratio driven and the accident quarter ex-cat loss ratio was 63.5%, just 0.3 points above the prior year.

As we all know and in fact, the last two quarters of 2013 has showed, there is inherent variability in our portfolio. However, the portfolio is in a best shape yet to absorb this volatility through our continuous work to reduce gross limits, grow profitable and diversified businesses and optimize reinsurance protections. Combined with our significantly improved talent, we believe the first quarter results are more reflective of the improving underwriting trends in our Insurance portfolio than those from a year ago.

The underwriting expense ratio is 31% in the first quarter reflecting 0.7 point deterioration from the first quarter 2013, driven largely by certain non-recurring redundancy, recruitment and professional fees. More generally, our confidence in the improving results allows us to spend as Pete noted evenly through the year.

To shift towards quarter share treaties in certain business will distort the comparisons of our acquisition ratio, which improved by 2 points over the first quarter of last year and our operating expense ratio, which deteriorated by 2.7 points. For 2014, it is necessary to look at the total underwriting expense ratio when comparing the prior year.

Insurance gross premiums written grew by $55 million or 3.7% in the quarter when adjusted for foreign exchange movement and by over 5% on adjusted for large return premium on the multi-year account.

Growth was once again particularly strong in North America, but premiums grew by more than 10% with construction, excess casualty and property businesses contributing the largest growth.

New leadership in our International Financial Lines business also contributed along with growth in our cyber and crisis management portfolios. Our momentum continues to build as illustrated by our recent RIMS convention experience. We launched our new Global Kidnap and Ransom capability, and have hundreds of millions of clients and brokers eager to discuss how XL can help solve their risk management needs.

Moving on to talent, we continue to enhance our team throughout this segment. We promoted Joe Tocco, the Chief Executive our North American Property and Casualty Group, and also announced Ken Riegler, Head of Global Risk Management assume responsibility for North American Distribution.

In addition to Joe and Ken, we also added new talent to our International Financial Lines, marine and crisis management businesses, and recognized existing talent with several promotions. For the quarter we increased our underwriting force at 24 positions as we continue to build-out new and existing businesses.

Talent is one of the five wins Mike has discussed previously and we continue to pull out remaining four levers to improve our combined ratio. In particular, our mix continues to shift towards higher margin businesses. In the first quarter, well over half of our business performed better over 5 points of our target combined ratios. This compares only third of the book at the end of 2012.

Growth in some of our newer business such as North America Construction and Cyber and improvement in several other businesses such as Environment and International Financial Lines are contributing to this momentum. Further improvement is expected as 2013 and 2014 underwriting actions continue to earn growth.

On market conditions, we continue to see some slowing in rate, particularly in short tail and International Lines. Despite of increase in competition, the segment achieved an overall rate increase of 2.3% in line with Reinsurance.

In fact, 85% of our portfolio achieved positively in the quarter compared to 75% in the fourth quarter of last year. North American business continue to show the most strength with rate increases in the 5% range, although, on of our North American business had positive rate and rate on rate with only property, which has been widely discussed in the industry decreasing by just over 1%.

Our International P&C businesses achieved rate for the second straight year with rate increases over 2% for the quarter. Our Global Professional and Specialty businesses had rate increase in the 1% to 2% range, adversely impacted by the competitive aviation and U.S. D&O excess markets, respectively.

In closing, we are off to a solid start for the year as evidence by our first quarter results. Although, we benefit from another relatively quite catastrophe quarter, we believe these results are testament to the work has done on over the past 24 months to grow our higher margin businesses and make the hard decisions around portfolio that simply are not performing.

Now to Jamie to discuss Reinsurance.

Jamie Veghte

Thank you, Greg and good morning. The Reinsurance segment got off to an excellent start in 2014 with the combined ratio of 76.3% and a resulting underwriting profit of $100 million for the quarter. We have the benefit of very quiet quarter of catastrophe activity but we are pleased with the performance across the portfolio, particularly in light of the competitive landscape.

Our reserve releases in the quarter were $30.5 million, compared to $21 million a year ago. On an accident year basis, the portfolio generated a combined ratio of 83.5%, which compares to the 79.9% produced in Q1 of 2013.

The deterioration in the accident year result resulted from the Malaysia Airlines loss where we have posted a $3.6 million loss net of reinstatement premiums, a slight increase on our acquisition ratio and nonrecurring premium items in 2013 of $5 million.

As respect to our reserve releases, our position on long tail business remains cautious, particular with respect to releases in recent underwriting years, a full 84% of this quarter’s release were from short tail lines.

Turning to topline, gross written premiums in the quarter were $858 million, a 5% reduction from the first quarter of 2013. These reductions were largely driven by our international operations, with North America flat and Bermuda showing a slight increase due to new Lloyd’s whole account business.

In the international portfolio, our gross written premium was $445 million, down from $520 million in the first quarter of 2013. In Europe, we faced difficult market conditions in property and dropped a very large motor quota share in the United Kingdom.

Latin America remains extremely challenging, particularly in the Brazilian market and our gross written premium dropped by 40% to $20 million in the quarter. So with respect to our top line and the market broadly, trading conditions are highly competitive.

Since the end of the quarter, the only significant renewal for XL at April, one was in the Japanese market. While pricing was down 10% to 15% and terms and conditions loosened, we are satisfied we have a portfolio that should generate attractive returns.

In fact, I would underscore that theme across our entire portfolio. We haven’t seen trading conditions across the market as intensely competitive as this for quite a number of years. There will be winners and losers.

We bring a number of assets to the table, including a diversified portfolio across geography and class, a stable of excellent trading partners developed over two decades, a strong reserve position and a season team of underwriters who have generated excellent return to our shareholders over a number of years.

In short, while we anticipate continued headwinds in the sector, we enter it from a position of strength and anticipate continued strong performance. So overall we are very pleased with our bottom line results in the first quarter and we continue to successfully navigate our way through very challenging market conditions.

With that, I’ll turn it back to Mike.

Mike McGavick

Thank you, Jim. As I said at the outset of the call, our news about our life reinsurance transaction is the culmination of six years of effort. We are working on exerting the life re businesses when the market turned against us in 2008. At that point, we placed few businesses into runoff and have ever since continued to entertain arbitrators to exit the businesses.

Last night, we announced that we a retroceding the vast majority of our life reinsurance reserves and we want to walk you through the transaction. I want to acknowledge upfront that transaction is a bit complex. And I think you will see that this complexity works substantially in favor of XL shareholders.

Before I get into too much detail, let me focus on the fundamental purpose of this transaction. We are a global property and casualty insurance and reinsurance underwriter that is what we do. Having this block of life re businesses to tend to and the risk that were introduced inherently into our business by them, distracts and detracts from our core mission. Getting these risks off of our minds and substantially off of our books inherently improves the businesses that our shareholders own.

Now let me walk you through six aspects of this transaction. First, I’m going to walk you through what has changed in the environment and with XL that enables us to get to this announcement. Second, provide a brief description of the transaction itself. Third, I’ll walk you through the aspects of the counterparty and what attracted us to them. Fourth, I’ll give you description of the key protections for XL shareholders that are built in some transaction. Fifth, I'll turn to the right blocks that were not dealt with in this transaction and are retained by XL. And then lastly, I’ll describe the implications of this transaction for capital management, going forward.

Then Pete will come back and add some additional detail. So in terms of the first aspect what has changed? First, it is observable there's a great deal of activity with respect to discontinued blocks of life insurance and reinsurance businesses. And you’ve seen a number of deals already announced.

As I said, ours is a bit more complicated than many of those and hence has taken a bit longer to put together given the unique structure of our reinsurance arrangements with our clients. Second, it has also taken longer for the market to get comfortable with European assets especially elongated European assets, which is the central feature of the books we are dealing with in this transaction.

The final thing that has changed is the direct result of our own work, the improvement in our own property and casualty performance. Simply put, as our P&C ROEs have continued to climb the life block, which represents something like 20-ish percent of our capital and its mid-single digit percent returns becomes a greater and in the future potentially a still greater drag on our results.

We and the investors deserve to have our improving team see results shine through. So as I mentioned at the beginning that is the core purpose of the arrangement. So we can focus on what we do best. And before moving on to the next aspect, there is a third but more minor point to be made. It is obvious that our firm for variety of reasons carries a higher beta than many of our competitors.

It is observable in the market that life operations tend to attract a higher beta than those in P&C operations. And since our goal is to trade like our other well performing P&C brethren, anything that gives the market a reason to attach a higher beta to us is something we’d like to deal with.

Moving to the second aspect of this deal, a description of the transaction itself. The first thing to note is whether it’s a two-step transaction. A retrocession of $4.4 billion of XL Life Reinsurance reserves into an entity that has been sold. Said more simply, we are selling to our counterparty of vehicles so that they can then reinsure our risks.

The risks that are included in this reinsurance arrangement are the overwhelming majority of our European facing reinsurance risk. In the main, there are two large blocks of Life Re business. The single premium annuities that we have discussed with you many times and then a smaller block of European term life. To put it all in perspective that is $4.4 billion of the total of $4.8 billion in reserves we held for life reinsurance.

That brings us to the third aspect I want to describe a description of GreyCastle, our counterparts. The most important thing to note is that the counterparty is a collection of family offices and University endowments. While we had a number of interested parties to choose from, from traditional reinsurers to private equity and also some new life reinsurance start-ups.

We view GreyCastle as exactly the kind of counterparty that should want these risks because their main focus is preserving capital. We didn't want a counterparty that was going to do this as a leverage play or juice the assets. We wanted someone that was going to run it off and take the ordinary benefits of the runoff. So we feel we have exactly the right kind of counterparty.

That brings me to the fourth aspect I said I'd cover which is to walk through some of the obvious risk of the transaction and the way in which they are addressed. While our retrocession is not novel, what we're doing that we're doing it to an unrated vehicle is and I want to talk about that.

First of all and most importantly, this is a funds withheld reinsurance transaction. That means that we keep these assets on our books and in our accounts. What we transfer to GreyCastle is the management of these assets and their economic benefits. But should the counterparty not perform, we are able easily because they're still in our accounts to recapture these assets under a variety of scenarios.

This protects XL shareholders. So not letting these assets go is the ultimate protection in and of itself. One other thing I should note and Pete will describe in a moment, there is one minor inconvenience to holding these assets on our accounts and that is that there will be some accounting noise, nothing more than noise as respect to net income. Pete will get into the details of that in a second.

So I’m sure this leaves you to wonder about what conditions could cause the retrocession agreement to be recaptured by us as obviously this would defeat the purpose of ceding them to someone else. There are essentially three main categories of failure that would lead to their recapture.

One, if failure of GreyCastle to be in regulatory compliance; two, a failure to satisfy collateral requirements and three, a failure to comply with the contractually described capital requirements. To give some perspective, since they have already paid us $570 million, none of these events are very attractive to GreyCastle as they would forsake the investment they have made.

And to give additional perspective, we have modeled a variety of scenarios they could give rise to a recapture and they are extreme events. They are for example beyond the consequences of the Lehman failure. Even when we modeled European defaults and the doubling of the longevity assumptions, GreyCastle would still be able to perform.

So you can see we do not expect to again control these assets and the good news is should these extreme events occur, we will have been paid $570 million for the transaction and XL shareholders will be that much better off in those conditions. We think this combination of funds was held in receiving the payment of $570 million gives us a terrific exit from the vast majority of the risks facing these blocks of business.

To bring up another worry, you might have somehow that GreyCastle would look to manage these assets in a riskier way to get a better return. The answer is they can. We have investment guidelines agreed to with them that are essentially an extension of our own guidelines we used to manage the portfolios today and we have agreements in place to allow us to monitor the activities and to ensure their compliance.

And then lastly you might wonder is there enough capital. Let me give you some perspective on the contractual capital requirements. The answer is that we have defined the capital standard that GreyCastle has agreed to maintain and that is the equivalent of the AA capital standard based on an S&P model. And further we have already required these counterparties to set aside additional moneys that they would commit to further capitalization should it be needed.

That brings me to the fifth aspect that I said I would describe and that is what’s out of the deal and why did we keep it. Here there is a simple answer. The nature of the various blocks we are keeping are so different that we feel that it should be dealt with differently to and separately to acquire the best outcome. Simply put, the potentially best buyer for each block is different.

Since the transaction that we have now announced, includes the vast majority of reserves and the vast majority of the risks. We felt it was important to get this transaction done first. So what’s left. There will remain about $400 million of life reinsurance reserves on our books. About $300 million in reserves are related to our U.S. term life reinsurance businesses and $100 million in a block of income protection business.

There is also about $30 million in another block that were run up very quickly in areas that we’re talking about. So you can see the relative magnitude, $4.4 billion leaving and a residual of just $400 million in reserves left behind. And these blocks, while in -- being in loss recognition for some time now are behaving in a relatively benign way. Just to be clear now that we’re done with this transaction, of course, we are open to dealing with these smaller blocks as well but we are also equally happy to run them off as a small part of XL that will not distract us from our overall objectives.

And that brings me to the sixth and final aspect that I said I would describe that is going forward to capital management. While the transaction itself does not release capital and we have suggested to the market, it would not in prior conversations. It does make the firm less risky.

This allows us to lower the buffer to the buffer that we carry and that we have discussed with you many times. This will result during the course of this year in us repurchasing an additional $300 million in share repurchases beyond the amount that we already contemplated for the year and that we have already described the magnitude of to you in our earlier calls.

So in sum, I hope you can see why we are so happy with this transaction. We’re getting a quality counterpart. We have a transaction that protects XL shareholders and we are removing the vast majority of the remaining non-core elements of XL’s businesses. This is a milestone for us in becoming a sharper and more focused and ultimately we believe more success for property and casualty insurers and reinsurers.

With that, I will turn it over to Pete who can then get into some of the more specific details on the economics and then we will open it up to questions either on the quarter or on this transaction.

Pete Porrino

Thanks Mike. I’ll take you through three additional items related to the transaction. First a quick description of the structure and leading agency reactions; second, a walk through our calculation of our book value loss due to a transaction and finally as Mike mentioned as a result of some of the protections we built in, a discussion from an accounting perspective on how the transaction will impact the presentation of our results in the future.

Turning to Slide 5 which diagrams transaction structure. It is important to understand that this is a two-part deal. The subject wise businesses are first aggravated and then retroceded into XL Life Reinsurance Limited, which is then sold to GreyCastle. As you can see, we are retailing $5.5 billion of assets on a funds withheld basis. And this compares to the $4.4 billion of GAAP reserves currently held. You may have seen the press releases last night from A. M. Best, S&P and Fitch, all of whom have affirmed our ratings.

I think the best way to describe the book value charge of $585 million would be the start with what you are all most familiar with, our financial supplement, which at March 31 showed GAAP equity allocated to this business of $1.8 billion and by this business I mean the entire life segment.

Our debt amount approximately $1.2 billion is assigned to the business being sold today. I will get back to the $600 million we now assigned to this transaction in a second. Subtracting a small tax benefit in the $570 million in proceeds, results in the book value loss of $585 million. And as we’ve noted, these numbers will changed from March 31 through the completion of the transaction, mostly due to the mark-to-market value of the underlying investment portfolio.

Getting back to the $600 million now allocated for the business and I will make two observations here. First, our estimate of the GAAP capital required for the remaining businesses is approximately $250 million. And second, the excess of this required amount was $350 million, mostly had to do with our method of funding to XXX reserves on our life term business in the United States.

Moving on to how our future reserves would be presented, please turn to Slide 6. First, the obligations assumed by GreyCastle under the retrocession will be collateralized by invested assets that will continue to be legally owned by XL. GreyCastle will direct the investment of these assets subject to a agreed upon investment guidelines and will receive all of the economics associated with the investments. Because of this, the retrocession contains an embedded derivative.

Accounting rules dictate that the movement in the value of the embedded derivative, which transfers the economics to GreyCastle is recorded through XL’s net income. However, the changes in the fair value of the investments that are on our books that is economics we no longer have, are not recorded through net income. They are recorded in other comprehensive income, which is a component of shareholders equity.

There will be mismatch as you will have that embedded derivative mark-to-market through net income and the offset which is the market value gain or loss on the investment portfolio, not going through net income. This will not impact comprehensive income, operating income or book value. The important point here is that there is no economic impact whatsoever but it does create fluctuations in net income going forward.

I will turn to David to go to Q&A in a second. But I would just like to add that we are all really pleased we’ve gotten to this point with the life business. We’ve been pretty clear on our cause and other public communications. So you will all understand that this really was an accomplishment to get this done and we think a big step in the right direction. David?

David Radulski

Shirley, please open the lines for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from Jay Gelb with Barclays. You may ask your question.

Jay Gelb - Barclays

Thank you and good morning. Lots to get through today. I was wondering with the sale of the life reinsurance business, taking into account the affect on earnings as well as book value and the increased share buyback, what do you think the effect is on a run rate return on equity for XL overall?

Mike McGavick

Jay, so the effect at first would be quite small because of course the gap between current P&C, ROEs and the now transacted ROEs is not done.

Jay Gelb - Barclays

Hello.

Mike McGavick

Sorry, really technical difficulty there.

Jay Gelb - Barclays

You cut out for like the last 10 seconds. That was all.

Mike McGavick

Sorry about that. So to start over, the basic impact is very modest at first because the difference in the relative ROEs and P&C today, and the transacted business are not as big as we intend for them to be. So the impact grows over time. And of course the share repurchases has an additional benefit and those will occur over the course of the year. So it’s starts off being pretty modest but it gets to some meaningful impact over the next couple of years and that’s what we are shooting for. That’s why this was such an important time to get this done from our point of view, Jay. You really wanted to do it. You didn’t want it to be a drag on the total return of the firm, which we are positioned to create which we are starting to become. So it was just starting to pinch. It will pinch all the time.

Jay Gelb - Barclays

All right. So less of a -- the earnings dilution from the sale of life reinsurance business taking into account the impact of book value for share buybacks. You shouldn’t see too much overall ROE erosion over the intermediate term?

Pete Porrino

Jay, this is Pete. the other thing -- you used the term erosion. We don’t believe that there is any erosion in ROE. We think that there is a very small, as Mike said, small pick up immediately/

Jay Gelb - Barclays

That’s helpful. Thank you. And then, Pete, on the $250 million of capitals that is being held back to support the remaining businesses, that seems rather large relative to the ongoing liabilities. Why is that and how long do you think it could take for that additional $250 million to get released?

Pete Porrino

So there are three pieces to the $250 million. And they are very good ups between the two of the businesses that we are retaining, the U.S. term and the income protection. And then also there is some amount there for the retrocession that is in places as a result of this transaction. I will tell you that our regulatory capital that will be holding on those is a number substantially less than $250 million. So that will not runoff and really if we -- we can talk a little bit later about the likelihood of any more transactions on the remaining businesses. But some of those would cause that to runoff pretty quickly.

Jay Gelb - Barclays

Okay. And then last one, quick one, the effective tax rate going forward taking into account these transaction has been running around 11% overall on operating income. Is that still reasonable run rate or will that change?

Pete Porrino

That should not change.

Jay Gelb - Barclays

Thank you.

Operator

Thank you. The next question comes from Amit Kumar with Macquarie. You may ask your question.

Amit Kumar - Macquarie

Thanks and good morning and congrats on the quarter. Two quick question, maybe a big question for Greg. If you look at the AY ex-cat LR in insurance, it was flattish year-over-year, you were talking about competition and pricing. How should we think about I guess the improvement on a full year basis for 2014, if you factor in the increasingly challenging pricing environment in insurance?

Greg Hendrick

So let me give you the comparison for me. We talk a lot about the second quarter and the first quarter last year, kind of averaging those out with some of the things we talked about then. It’s about point better first quarter this year versus the average first and second quarter result last year. I’m not going to project the future. This is a volatile business, things can happen.

I feel very good about what we built into it. We are a great matching trend and so we are good on that. We are not losing ground there. We’ve got our discipline on our underwriting actions and we are going to continue to deliver some improvement there. And we’ve build out a new business and the spread of business looks strong. So, I think we are positioned well but I’m not going to forecast as for the rest of the year.

Amit Kumar - Macquarie

Okay. I guess, switching gears, just going back to the discussion on capital management. You mentioned it adds $300 million more than previously contemplated. I think on the last call, we had spend some time talking about buybacks versus operating earnings and how to sort of think about that metrics. Could you just sort of refresh that discussion keeping this number? Should we add that to what we might have previously contemplated or should we apportion accordingly? Thanks.

Mike McGavick

Well, a couple of things. First of all, what we said, when we talked about share repurchases before was that you look at last year, which was about $575 million as kind of a floor for what we might do in the coming year. And of course as Pete has already mentioned in this call, we did repurchase at a slightly higher rate than that would imply in the first quarter of $175 million. I wouldn't read too much into that. We think about a number of things when we are repurchasing. We are looking at our internal models of where the buffer to the buffer stands because we're trying to make sure that doesn’t grow any more. So that can affect what we might buyback in the quarter. Similarly like any purchases or shares, we are looking at the economics of the transaction at a given time, as you would have in a reserve. During this quarter, there were -- there were times during the quarter when we were certainly trading below what we thought we ought to be trading and maybe we could argue we still are today.

So their economic aspects to what amount we might repurchase at any given time. So rather than focusing on the $175 million, I had focused on the guidance we’ve already given you. Just as we don’t emphasize, we want to focus on the guidance we’ve given you on expense. When we say, take last year and add plus or minus low mid single digits, we mean take last year in entirety, add lows, kind of mid single digits and then develop that floor. That would be how we would do it. In this case, we would say take the $575 million you can round it to $600 million, if you want, divide it by 4, that’s about where should expect the quarter. If conditions allow, we might buyback more but that’s kind of how we are thinking about. And then to that, I would add $300 million. That’s the real simple way of thinking about it.

Amit Kumar - Macquarie

Got it. That’s really helpful. I will stop here. Thanks for the answers and good luck for the future.

Mike McGavick

Thank you.

Operator

Thank you. Our next question comes from Vinay Misquith with Evercore. You may ask your question.

Vinay Misquith - Evercore

Hi. Good morning. So, first, just wanted to clarify the $250 million debt remains in capital, that I hear you say that would take a long-term to runoff and so we shouldn’t be expecting that to be soon?

Mike McGavick

Vinay, so what I said was the three buckets that I allocated to, the one that would get would disappear the quickest would be, if we did a transaction in one of the remaining businesses.

Vinay Misquith - Evercore

Okay.

Greg Hendrick

And then as far as, the one point I guess I will make is this is an allocation of GAAP equity, right. It’s not the regulatory capital, right. It is just an allocation of equity. So, I would encourage you not to spend too much time focusing on the allocation. The total GAAP equity enterprise is not changing.

Vinay Misquith - Evercore

So, fair enough. So when you got rid off that piece, I mean I don’t think that would free up any capital, would it?

Greg Hendrick

I’m sorry, I couldn’t quite understand it.

Vinay Misquith - Evercore

So even you got rid of the last piece of your Life Reinsurance business that you have in your books, that would not really free up meaningful capital because you are getting diversification benefits to go ahead.

Greg Hendrick

Yeah. As we’ve talked about diversification benefits in the past, if we continue to exit remaining businesses, it would be same thing that Mike has talked about before, right. I mean, there is a qualitative benefit they are getting out of these businesses. It’s less quantitative than more qualitative.

Vinay Misquith - Evercore

Sure. That’s helpful. And just the numbers question on the life reinsurance business. So just looking at the presentation, it seems that you are retaining about a $1 million worth of quarterly income and the rest is being seated away, correct? I mean, is that right?

Greg Hendrick

Approximately correct.

Vinay Misquith - Evercore

Okay.

Greg Hendrick

The vast majority of the profits of the business where and why is being sold.

Vinay Misquith - Evercore

Fair enough. Fair enough. And then finally on the primary insurance business, I just had a two sided question on that. This quarter, we had about a one-point benefit year-over-year. Do you think that’s enough to get to your combined ratio target and the second point on that is the topline growth was about five points of this quarter? The expenses are growing mid single digits. Help me understand how we have expense ratio leverage in that environment? Thanks.

Greg Hendrick

Sure. Let me start with - it's Greg. Let me start with the second part. The first quarter had some lumpiness to it. I mentioned that return of premium. We are projecting that we will get back in line with the growth that we were trying to get to for this year. And we will control those expenses as we go through the year, if we do not see that growth materializes. It’s clearly a delicate balance. We are not out there pushing underwriters into the market and trying to have them chase premiums, if the margins aren’t there and so we are watching that incredibly closely, month-by-month, head-by-head. And so we will be on top of that.

In terms of the target, if I go back to the first part, I heard you, the one point of improvement relative to the average of the first two quarters of ’13, we’ve been pretty evoke and when I was going towards our targets when I heard Vinay, it’s another step in the right direction. But we are still not there. We are still pushing hard for our 90% combined ratio target and I have talked at length about all the underlying actions, the portfolio construction, the rate has slowed a little bit. So it’s one, not as strong tailwind but we are well on our way to getting towards that overall month.

Mike McGavick

And this is Mike. Maybe I could add a couple of thoughts. One, from my perspective on top of the house, I do expect continuing operating leverage to be gained. And if the market were to some how turn even more competitive than it showed itself to be in the first quarter, it’s a way to do so.

We would always make the judgment to, if we couldn’t get into different segments, in different places around the world, if we couldn’t get appropriate, we would be willing to slow down rate of growth, that’s not a problem. But I am not holding Greg to account for a specific set of expenditures. I am holding Jamie account for the ratio that he has committed to produce.

So if there anything turned down in what we can profitably put on the books, we will manage down the expenses in order to gain the operating leverage that we have expected to achieve as a part of this year’s plan. So I appreciate where you are coming from. I don’t think that’s the way this is going to play because we are in so many different businesses and so many different geographies that tend to be -- it’s a profitable growth available to us. But if we went up in that situation, we will deliver the expansion leverage that we expect.

The second thing that I would point out, I think this is really important data of what Greg has already said. As you know, this is about portfolio management in the round. We are growing the more profitable businesses, we are shrinking the less profitable businesses, and that is producing an ability for our firm to manage these more difficult competitive conditions and still deliver improvement in the overall result. So this is directionally in line with where we are headed. But I think about the first quarter it demonstrates it.

While we are on an overall combined ratio about a point off of the very, very good in first quarter last year, let’s remember that’s mostly about the expense ratio which is because we spent more rapidly this year to even it out over the year rather than kind of the wait and see and then spend attitude that we’ve had in the past. That’s the reflection of our confidence in where we’re going.

So if it’s just that difference that pulls up above that the loss ratios are in line with that very exceptional quarter and we think on a more solid footing, that’s why we are so excited. This does in fact set us up directionally for the results we do intend to deliver.

Vinay Misquith - Evercore

Okay. That’s helpful. Thank you.

Operator

Thank you. Next question comes from Jay Cohen with Bank of America Merrill Lynch. You may ask your question.

Jay Cohen - Bank of America Merrill Lynch

Yes. Thank you. A couple of questions. I guess first is, as you were putting this deal together, were you out of the market from a buyback standpoint at any point during the quarter?

Mike McGavick

No, we weren’t. We had put 10b5-1 plan in place before this deal clarified, so that we could continue to transact in case something came of it.

Jay Cohen - Bank of America Merrill Lynch

Got it. And then the second question is, the assets that still remain from the life reinsurance business, based on the market conditions you see out there today, would you describe those as easier to sell than what you have already announced?

Mike McGavick

So there is -- as we noted, there is two main blocks there, $300 million in U.S. term life reinsurance and about a $100 million in income protection blocks. And we don’t see much of a market for income protection blocks right now. But, I always at this point pause and I advertise it’s 1-800 Porrino if you are interested in it, feel free to get Peter call.

On the U.S. term re, which is the $300 million, the larger of the two blocks, I do think there is good signals in the market, but we have not been actively seeking to transact at this time because we wanted to get this larger and more complex arrangement behind us. With that done, again it’s 1-800 Porrino. But as I said, these books are performing in a fairly -- in a way that doesn’t worry, we would be happy to just wind it up. And maybe Pete you can try a little more color on that?

Pete Porrino

Yes. So, Jay, the other thing I would add in addition to the capital market is to -- just to give you a flavor of the books and what’s going on. I mean, they are both in loss recognition and they have both been in since 2005. We take the income protection book since 2005 the total reserve changes -- the total reserve charges have been about $12 million, right. So, clearly insignificant. And then the large U.S. term bucket again since 2005, $39 million over an 8-year period. So, again very comfortable running these off.

The other thing I guess that I would say, as Mike talked about, the U.S. term business and the potential of a transaction. And I am changing my phone number by the way. But to give you perspective, if an opportunity came to offload that business, it’s hard to imagine that we would do the transaction where we would incur a loss of, let’s say, $50 million or more, it just wouldn’t be worth it.

Jay Cohen - Bank of America Merrill Lynch

Got it. That’s really good color. Thanks.

Operator

Thank you. The next question comes from Meyer Shields with KBW. You may ask your question.

Meyer Shields - KBW

Thanks. Two questions I'm going to focus on the P&C side if I can. One, can you talk a little bit -- I guess this is a question for Pete about the section or the portion of the loss reserves that were not for short-tail lines, what accident years and lines of business you are seeing those and what trends have been driving the releases?

Mike McGavick

Yes. So I am just going to have Susan cover that real quickly.

Susan Cross

Right. So in terms of the prior year development the quarter as you mentioned it was the 31 million and is slightly driven by short-tail lines. In terms of by accident year within insurance that was primarily the 2012 accident year. And in reinsurance it was spread across the 2004 to the 2012 accident years. There was a modest amount of strengthening in 2013 that related to the German hailstorm losses, the cat losses in 2013.

Meyer Shields - KBW

Okay. Last quarter we talked a fair amount of an uptick in large losses. How did the first quarter play out, I know the general perception was that the weather was kind of bad?

Greg Hendrick

There was in insurance, there was nothing remarkable to the positive or the negative about the quarter in terms of large losses.

Meyer Shields - KBW

Okay. That was fine. Thank you.

Mike McGavick

And back on the reserves questions, remember Pete mentioned in his comments, but Global Loss Triangles come out next week, I am sure you all be waiting eagerly.

Operator

Thank you. Next question comes from Dan Farrell with Sterne Agee. You may ask your question.

Dan Farrell - Sterne Agee

Hi, and good morning. Just when looking at the capital that’s supporting the P&C business, it still looks like you’re going to be operating at a fairly conservative level. I was wondering if you could comment as your earnings power improves in P&C, how if any does that impact your view of the capital buffer as we go forward that’s remaining?

Mike McGavick

Yes, that’s an excellent observation. And clearly, our earnings strengthening, and I would also say us doing a better job as we have been working to do a better job in terms of managing the variability in earnings all the time. As we continue to do a both better job on both of those, I think the Board would agree with us that firm’s risk decline further and that we would take into account. Now, remember we go through kind of a three part analysis. The first part of the analysis is how much capital is required for the primary buffer which is to the rating that we carry.

Then, we look is, are there opportunities to put it to work at a similarly profitable level for our shareholders are better. And then third, we look at what kind of buffer to the buffer should be carry and after we do all of that, we say how much can be return to our shareholders through repurchases or dividend or whatever method. And we look at other things at that time of course like where we are trading and all that kind of things.

So it’s a fairly complex. You will note in there is can we put money to work. We’ll always be looking for ways to grow the impact we make in the world at a profitable return to our shareholders. But still at this time, I would tell you that our -- when we do that, we tend to come back to repurchases as the best use of money that’s left over. But your insight is right, as we have stronger and more robust earnings which we do expect to produce even in this environment, and as we see our ability to through portfolio structure and reinsurance all the tools to better mange the variability of the book, I think you are thinking about that way.

Dan Farrell - Sterne Agee

That is very helpful. Then, just a quick question on your reinsurance purchase. You obviously purchased more reinsurance this quarter. I am wondering just what’s your view going forward given the reinsurance market environment on the ability to maybe do some more reinsurance purchases to improve overall risk management, shape the returns with the portfolio, etcetera in the insurance business? Thanks.

Mike McGavick

If I could start with two introductory comments and then I will turn it over to Greg. One introductory comment is we look at these kinds of transactions through the alliance and partnerships. We believe everybody ought to know what they are doing and do the right thing and we are not looking to arbitrage the hot market is my point. We don’t think that that’s the right way to do business, but we want to understand what the other party gets out of it, we want to know what we get out of it, and then we will do the transaction. But at the end, the second introductory comment I will make is that you would have been in news as you’re asking that question to look at the faces of my colleagues. Greg was smiling and Jamie was frowning just to be really quick. Greg?

Greg Hendrick

I think there is some more room to Mike’s point. This is a long-term trading. We have been trading a lot of our reinsurance partners for many, many years, so this is not about chasing the hot money or putting to work new cares. I’ll just use an example. We’ve just recently wrapped up our May 1 property risk and property cat protections. We gave a good hard look at what our portfolio look like to make sure that we had the right protection for XL based on our own internal capital mine and we went out and peer benchmark ourselves on our net risk position. And we found that we could -- we’re able to achieve this renewal a little bit lower risk attention. We purchased a little bit more limit on our international U.S. cat. We’ve got some expanded coverages and we’re able to add what’s called a risk area cover that helps protect us in the middle kind of middleing size losses that might accumulate over a year. And we’re able to do that within a very, very reasonable purchase relative to last year’s payments. I think there is more to be had, but to Mike’s starting point this is not about being egregious and taking advantage of our long-term partners.

Dan Farrell - Sterne Agee

That’s very helpful. Thanks guys.

Operator

Thank you. The next question comes from Ian Gutterman with BAM. You may ask your question.

Ian Gutterman - BAM

Hi, good morning. I guess my first question is the 1-800 Porrino tagline, give us 15 minutes and we will sell you a company?

Mike McGavick

Ian, the only thing I would say is this one took a hell of a lot more than 15 minutes.

Ian Gutterman - BAM

At least it wasn’t 15 years, so that’s good. I would like to -- I guess the problem, Pete, is as soon as one thing gets wrapped up, we focus on the next thing so, but this one is hopefully a good thing. When I look at -- obviously there has been a lot of focus on how much book value you’re going to lose in this transaction. But when I look at another part of your business, the operating affiliates business, it seems the book value there is substantially understated. And I was hoping you could give us some color on how to think about that. I guess I just did a couple quick things using your 10-K and some statutory filings. And the investment managers you had, I'm just focused on the operating affiliates, the investment manager operating affiliates were on the books at $62 million at year end and they earned $78 million last year. And I understand that might be over earning some maybe.

But the point is if you’re earning more than book value, it’s got to be worth a lot more than book value if we put a PE on earnings. And the strategic affiliates, it looks like ASI alone is maybe $150 million to $200 million of book value, and I look at the publicly traded peers in the Florida homeowners market are trading at north of 2 times book. So if I add those two together, it seems that arguably the operating affiliates are understated per book value by the same $578 million or maybe even more that the life reinsurance took a loss on. Am I in the right ballpark? Is there any other information you can give us to help us maybe give you some more credit for the value of those businesses?

Mike McGavick

Well, Ian, as always, a very thoughtful observation and the amount of homework you do shocks me sometimes. I think you know our numbers at least as well as we do sometimes. So your points are exactly accurate, right. So I am trying to add a little bit of color, but I don’t have much more than what you said, because again you went through that in a fair amount of detail. But again as we break out sort of our investment affiliates, as you know we’ve got three categories, the fund investment that we equity account for, our investment manager affiliates, and the insurance affiliates as you laid out. The fund affiliates, these are carried at the net asset value, so really fair value and what’s on our balance sheet are probably pretty close.

For the investment manager affiliates and this is the top one, but I’m trying to walk through it and then give you one specific piece of data. For the investment manager affiliates, we carry those at the end of this quarter with $89 million and just everybody knows what that mean, it’s what we paid for our current stakes, plus our share in the earnings over the years net of the distributions that we’ve received. And according to the equity accounting, we do not write up any of these even if we think that the fair value exceeds the current carrying value, right. So that’s the accounting side of it. From the business side of it, this is a business we really like we’ve been in a long time.

And asset management is a business characterized by strong cash flows and high return on capital. That’s been our experience with our affiliate holdings. So just from numbers around the earnings power that you mentioned the one year, but I’ll go back and I give you a five year view. The $220 million in operating earnings in this business right, the investment management business over the last five years, significant amount of money and again you compare that to what we’re holding it at right now the 89. And again not apples and apples but it is indicative, right.

Now the $220 million includes some meaningful liquidity event realizations and let’s call that sort of 25% have been capitalization event proceed as part of the $220 million, but still significant amount of money. And as we look at the business today, I’d say it’s sort of a mix of established firms, smaller companies in growth, the mix of businesses that look more like asset management companies and may have liquidity events and others that maybe cash generative but less franchise value.

And I now will talk about one company specifically because it is public, but it is hard to put some of the values on these stakes. We are long-term strategic holders of these assets. We’ve got a great track record and we’re very proud of it. The example I would take you to is the one thing that you didn’t talk about is Polar Capital Holdings. It’s publicly quoted in London, we own 7 million shares. We carry our stake at just under $16 million. What it’s trading at these days, the market value of the holding is $23 million above the $16 million. So I can say that you can apply that ratio across the board, but it does give you some sense. Ian, I think you’re exactly right.

And then on the insurance affiliates, new companies, America Strategic is by far the largest one that we have. We record it at book value. Our book value cost on that is something in the $160 million range. And you all know the markets as well as I do. I will disagree with anything you say, but clearly that is a really well-known company in a market that’s getting good valuations right now. And so it’s clearly is worth a multiple of what we carry it on. So I’m sorry for the long-winded answer but it was a very good question.

Ian Gutterman - BAM

That’s very helpful information. Again, I don't think you guys get enough credit for it. The only other follow-up I have is you mentioned, I forgot at the one part, I did forget to ask was you did mention at the book value on the investment managers changes by the earnings minus the distributions and it seems that those distributions are I guess, I would think of that as excess capital, right.

So I think when we think of your capital, we are used to thinking of maybe the insurance earnings. But can you give us a sense of how to think about what dividend capacity out of those? I don't know if there is such a thing as normal distributions but you see what I am getting at, right? Just how do we think about how much capital those things generate on an annual basis just from the distributions?

Mike McGavick

I’m going to ask Sarah, if you don’t mind, Ian, just give a little color on it.

Sarah Street

Hi Ian. Because asset management businesses are not heavily capital uses. The actual distributions of the earnings that we would see every year is relatively high, relative to the earnings that we actually booked through the P&L.

Ian Gutterman - BAM

Okay, that is what I was guessing, so that is basically why the book value doesn't change very much?

Sarah Street

Correct.

Mike McGavick

Correct.

Sarah Street

And then it will also go down obviously from the sales. But yes -- no, we get god distributions in terms of dividends out of them every year.

Ian Gutterman - BAM

Got it. Great. Very helpful answers. Thanks guys. Congratulations.

Mike McGavick

Thank you.

Operator

Thank you. Our next question comes from Mike Nannizzi with Goldman Sachs. You may ask your question.

Mike Nannizzi - Goldman Sachs

Thanks. Can I get a little more color on the other reinsurance business that you wrote? It looks like that lifted a bit. I see the footnote but is there a piece of that business that is growing faster than others and what sort of margin are you writing that business at? Thanks.

Mike McGavick

Yeah. Mike, there are several components in it but far in a way the largest of what we described as other would be whole account quarter shares out of select Lloyd’s syndicates. And this particular quarter we wrote one new one which drove the entire increase in the other category of business. The margins on it I think would be similar to a whole, a quota share on a multi line commercial carrier i.e. overtime certainly not as high as our property cat book but we’ve had very, very steady returns on that business over a longer period of time.

Mike Nannizzi - Goldman Sachs

Got it. And I guess, I mean, you dovetailing off of that. I mean, how would the property GAAP book coming down a bit. And I’m guessing just generally profitability in that book that you’re keeping is probably a little bit lower now versus where you thought it might be at the beginning of the year. How should we think about the target 90 combined and what are -- maybe the answer is you’ve also got higher combined ratio businesses also receiving a bit so maybe the mix is not changing all that much. But just trying to get some understanding for how we should about reinsurance as sort of a contributor toward that 90 goal? Thanks.

Mike McGavick

Well, let’s be clear, the 90 is really what Greg has been driving to. If reinsurance was to run at a consistent 90, there will be about a 5 point deterioration of what it is running?

Mike Nannizzi - Goldman Sachs

No, right, but all-in, I guess, right. And all in, I mean, it is part of the company that also plans to get to a 90 combined.

Mike McGavick

Well, obviously, there is competition all over the place. The property cat business is still on a pro forma basis a very profitable business. And frankly, I still believe even with the pricing pressure on it, it is still driving the vast majority of returns in the reinsurance market right now. I’ll tell you one thing, I'm very happy to be running a reinsurance business in the company like XL now where we have -- there are certainly challenges around running it and doing a platform business.

But we can focus on driving bottom-line profits, wherever the margins are right now. I'm not worried about expenses and so forth, while Greg continues to improve his portfolio business. I'd be much more concerned about the pricing environment if I was running a standalone medium-sized pure reinsurance company.

Mike Nannizzi - Goldman Sachs

Got it. Great. Thank you.

Operator

Thank you. Our final question comes from Randy Binner with FBR. You may ask your question.

Randy Binner - FBR

Hey, thanks for staying on. Just a couple of follow-ups on the deal. I guess the first question is pretty high-level and that is there is been a lot of talk here about $300 million of additional buybacks for 2014. But I think, it is safe to say that when 2015 comes around, you kind of roll into a new set of expectations around leverage, earnings and whatever you would do their to figure out what the incremental buyback would be in 2015 in addition to the $300 million in 2014. Is that correct?

Mike McGavick

Well, we’ll look at ’15 as that year come upon us. We have a hack of a lot of work to do throughout the next three quarters. And we will see where we are when the smoke clears.

Randy Binner - FBR

Right. But just to clarify, the $300 million is not all we get out of this, I guess I would say is that it would be reevaluated every year.

Mike McGavick

I will say it differently from that. We constantly evaluate the buffer to the buffer in light of all the factors that have already been discussed in this call, including the fact that we no longer have this business and possibly maybe even exit some more we will see and unlikely side. And also how do we do in terms of building more robust earnings and dealing with the variability. We’ve been showing from quarter-to-quarter. So, we’ll take all that into account. We’ll take a look at how XL is trading.

There is just a lot of variables that we’re going to think about as we go into it and we have developed something of a tradition that at the beginning of the year we give you some perspective on how we’re thinking about share repurchases. We’ll do that at beginning of next year. And of course, we’ll try to give you as effective as we can some -- the other thing we really give that could even be remotely called guidance around how we are handling expenses because those are in our control.

Randy Binner - FBR

All right. Understood. And then there has been a lot of interest on the call about maybe how you would get rid of the remaining run-off items. But I guess my question is more towards what kind of yield like investment yield or return can we expect on that and the cash inflow? My expectation when modeling this out is that you can generate some positive income from those two pieces and so any color you can give on that would be helpful?

Pete Porrino

Yeah. This is Pete. I would just say that we -- when we run our models, we’ve done in pretty simply and you can look at what our new money rate is, we are not assuming. When we look at that economics of these deals, we don’t assume that we are going to reinvest those at the ROE of the rest of the business, right. It isn’t that we need that capital in order to write that business, right. And so we are looking at a reasonably low yield with the cash proceeds that we get.

Randy Binner - FBR

What is your new money yield right now?

Pete Porrino

1.9% I think that overall mix of the business for P&C.

Randy Binner - FBR

Okay. So you reinvest cash proceeds at that -- at the book yield basically?

Mike McGavick

I mean, yes, basically I’ll say that is true. I mean, we’re not doing anything different with those proceed. I would say that they are more allocated to capital. They’re no longer backing specific liabilities and so they would go at the capital and therefore, they make it a higher percentage of some of our riskier investments, but that is a level of detail we really don’t get into.

Randy Binner - FBR

Okay. Thank you very much.

Operator

Thank you. At this time, I’ll turn the call back over to the speakers for closing remark.

Mike McGavick

Yeah. This is Mike. Couple of things, first of all, again, this was a day we really looked forward to around here and we’re very pleased to have this moment, and I want to, because I know, I’ll have a lot of XL colleagues on the call as well. I want to single out a couple of their colleagues who deserve special recognition for this coming to fruition. On my staff, of course, the Pete and Kirstin Gould, who is our Chief Counsel have been extraordinarily busy and involved in the transaction.

But representing them as on the point for the whole things has been Steve Robb and Arabella Ramage and they have just done outstanding work and I just want to single them out now.

Sometime, the night, I imagine the teams and people that have been involve with those will probably celebrate a moment in time then they will get back to work and bring it to an actual close. What more than anything, I want to thank all of our XL colleagues. They have been doing great work day and day out to continue to improve the overall business, which is a big part of why we chose to do this. We are able to do this.

And that work continues. It is hard work improving a P&C business from where we started to where we are and to where we need to go. And that’s the principle work that this firms engaged and we’re back to work everyday to achieve our objective on behalf of our shareholders.

So I thank everybody for their continued effort and particularly, Steve and Arabella for their exceptional work in this particular exercise and we look forward to nearly delivery for our shareholder especially in light of the better firm we’ve now created. Thank you very much. Have a good day.

Operator

Thank you. This does conclude today's call. We thank you for your participation. At this time you may disconnect your lines.

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