XL Group plc's CEO Discusses Q3 2011 Results - Earnings Call Transcript

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XL Group plc (NYSE:XL)

Q3 2011 Earnings Call

November 01, 2011 5:00 pm ET

Executives

Sarah Elizabeth Street - Chief Investment Officer and Executive Vice President

Michael S. McGavick - Chief Executive Officer and Director

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

James Veghte - Chief Executive of Reinsurance Operations and Executive Vice President

Peter R. Porrino - Chief Financial Officer and Executive Vice President

David R. Radulski - Senior Vice President and Director of Investor Relations

Analysts

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Donna Halverstadt - Goldman Sachs Group Inc., Research Division

Randy Binner - FBR Capital Markets & Co., Research Division

Cliff Gallant - Keefe, Bruyette, & Woods, Inc., Research Division

Joshua D. Shanker - Deutsche Bank AG, Research Division

Gregory Locraft - Morgan Stanley, Research Division

Vinay Misquith - Evercore Partners Inc., Research Division

Brian Meredith - UBS Investment Bank, Research Division

Unknown Analyst -

Michael G. Paisan - Stifel, Nicolaus & Co., Inc., Research Division

Jay A. Cohen - BofA Merrill Lynch, Research Division

Keith F. Walsh - Citigroup Inc, Research Division

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 Third Quarter 2011 Earnings Call. [Operator Instructions] Please be advised this conference is being recorded. I would now like to turn the call over to David Radulski, XL's Director of Investor Relations. Please go ahead.

David R. Radulski

Thank you, Shirley, and welcome to XL Group's Third Quarter 2011 Earnings Conference Call. This call is being simultaneously webcast on XL's webcast at www.xlgroup.com. We posted to our website several documents including our quarterly financial supplement. On our call today, Mike McGavick, XL Group's CEO, will offer opening remarks. Peter Porrino, XL's Chief Financial Officer, will review our financial results; followed by Dave Duclos, our Chief Executive of Insurance Operations; and Jamie Veghte, our Chief Executive of Reinsurance Operations, who'll review their segment results and market conditions, then we'll open it up for questions. Also in attendance and available for questions are Susan Cross, our Global Chief Actuary; Sarah Street, our Chief Investment Officer; and Stephen Robb, our Controller.

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 and 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 of which they are made, and we undertake no obligation publicly to revise any forward-looking statement in response to new information, future developments or otherwise.

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

Michael S. McGavick

So the interesting quarters that have characterized the year 2011 continue. It has been an extraordinary quarter at XL. It is a mix of good and a few not-so-good items, as it always is. On the not-so-good side, we saw heavy catastrophe activity, as did the industry. But on the good side, once again, we saw the progress that we have made in ERM at XL shine through as our performance in catastrophe terms, we think, was very much in line with our peers and in some cases, even a little better. And happily, prior quarter Cat events continued to perform as predicted at the time.

Now also on the not so good side, we saw a difficulty in our large property line, which produced one very large loss. And that large loss has been the continuation of a pattern of larger losses that we have seen out of that operation. On the good side, you can be assured that the new leadership we installed over that book in 2011 gets it, as do all of us. Make no mistake. As underwriters, we do not find an x Cat, x PYD combined ratio of 101.7% acceptable at any point in the cycle. But back on the good news side, our challenges are on a short-tail line of business. And we believe the underwriting actions, many of which are already underway, will take hold relatively quickly

But bringing all of that up relates to the quarter just passed. And that belies the fact that generally here at XL, we are extremely excited about the market that is increasingly near at hand. Broadly speaking, nearly every line of business with a notable exception of U.S. D&O is showing -- is now showing either flat or positive rate change for the second straight quarter. In fact, overall in this third quarter, we saw 2 points of rate when you take away the negative pricing in professional lines, and this is the continuation of a trend for the second straight quarter with positive rate. And we believe this understates our progress as it has been accelerating each month throughout the quarter. Now I'm not here to call it a hard market yet. But clearly, managements in our industry are becoming frustrated by reality. The reality that we are in a prolonged low interest rate environment, the reality that for some companies, I think, reserves are running dry, and the reality that the sector has been underpricing most of these products for an extended period of time.

Now while I'm on the topic of reserves running dry, you will notice that there was relatively minimal prior year development at XL in the third quarter. But you will recall from prior calls that we do not do a deep examination of our reserves during the first and third quarters, so it is not unusual for us to have a third quarter likeness. And some will note that this third quarter PYD is less than the same quarter a year ago. But that quarter was driven by specific case anomalies as we described at the time. My point is that this quarter does not mean anything with respect to the overall level of redundancy at XL, which has been favorably reviewed by industry analysts including many on this call.

Now getting back to the larger story, why do I say we're so excited? Most of our businesses are performing very well. The businesses where we've had some noise have our arms around it, and we think quick actions will have great effect. And the reality is if a market starts to turn, you want to be the company who has momentum, the company who has been adding to the talent on the ground working with clients. And we have been adding to our underwriting talent, both in terms of the underwriting in the existing businesses, and we've been adding new lines of businesses where we think we had access to superior talent to drive into these markets. Again, we are very excited about our strategy and its particular timing as we see the markets right now.

Taken together, this is one of the really extraordinary times for XL. We believe we are positioned correctly, and we're ready to get to work. And we are hoping what we are seeing early signs of generally holds true to the end of the year. Now let me be a more specific.

As you've seen from our release in the quarter that had significant Cat losses, we generated operating earnings of $0.28 per share and an annualized operating ROE of 3.6% in the quarter. As I've done on recent calls, I'll briefly describe it in the context of the 5 drivers that build value for XL shareholders: Underwriting excellence, strategic growth, strong enterprise risk management, optimized investing and operating and capital efficiency. First, with respect to our underwriting, our reinsurance operations, again, produced outstanding results with the combined ratio of 78.8%. Our insurance segment's combined ratio of 112.2%, as was described, was impacted by Cat losses and one large non-Cat property loss.

Looking at strategic growth. By far, the most important trend in the quarter was the excelling rate -- accelerating rate achievement we've seen across both Insurance and Reinsurance, as I earlier discussed. New business and improved rate drove most of the quarter's top line P&C growth of 16.4% following last quarter's gain of 16.9%. But that's not the only way we are going to grow in a changing market. A couple of examples: First, we obtained prior approval to establish a Brazilian insurance operation. As XL participates in 1,700 global programs and as nearly 1/3 of them have at least one policy in Latin America, this is an important step in building out our presence in that critical region.

Second, we announced the addition of a globally recognized Political Risk & Trade Credit team led by Richard Maxwell. This is in keeping with the expansion into additional lines of business that you've seen over the course of the year.

Our next value driver, strong enterprise risk management, was again demonstrated by our natural catastrophe loss performance as I mentioned earlier. With our net cat losses of approximately 1% of shareholders' equity and 5.3% for the year-to-date, both comparing very favorably to our industry peers. We've already addressed the importance we have in the confidence in our conservative reserving.

To our fourth driver, optimized investing. As we all know, turmoil ripped the markets with significant spread widening in response to events in Europe and uncertainty about U.S. growth. Despite this volatility, our investment portfolio actually had a small positive mark-to-market. In this low interest rate environment, net investment income remains under pressure. But we are sticking with the strategic asset allocation approach we described at our Investor Day and are not choosing to stretch for yield. We like our relatively conservative positioning in these uncertain times.

Our fifth driver is operating and capital efficiency, and we believe we have the operating leverage we need to take advantage of the improving market conditions. We believe the strategic investments we've made to our underwriting platform will serve us very well. Regarding capital management, we bought back 15.1 million shares of XL in the third quarter. Since August 2010, we have bought back a total of 52 million shares or $1.1 billion.

Now before we turn to the presentations of others, I want to briefly discuss 4 subjects as respect to the future. We do not give guidance, and we know that's frustrating for those of you who rely on building models. And I think there are 4 things I should comment on to be helpful, and the first is with respect to share repurchases as I just mentioned. I would not want you to take the amount of share repurchases that went on in the third quarter as a signal to the level for the future.

The fact is, in the third quarter, we had 2 anomalies: Number one, we had taken a pause and had the opportunity to catch up, and we found the value we can create during this quarter given what was going on in the markets very opportunistically attractive. Given the opportunities I'm describing, from improved pricing and lines of business, I just wouldn't want you to think that we wouldn't keep some of our powder dry. Look forward for future announcements as we go along.

Second, with respect to affiliate income. As you know, our investment affiliate income is reported on a 1- to 3-month lag. As a result, the turbulence that we saw in the markets over the third quarter, which of course, you are all very familiar, would not show up in our earnings until next -- at the end of the fourth quarter.

Third, with respect to expenses. In this quarter, you will notice our expenses were a bit lower, especially as it relates to lower compensation costs. But the fact is, I would still take the first and second quarter as more likely the level of expenses in the fourth quarter and going forward, And finally, I don't think you need to be reminded but we certainly know it ourselves, our hearts and minds were certainly with the people who are currently affected in Thailand. We have this call in the midst of yet another industry catastrophe that is unfolding. And it is still far too early to say anything specific, but we certainly know it will have some impact across the industry, and we would expect some at XL.

So that's a brief summary both of how we feel about this quarter in specific, how we feel broadly about the markets and the way XL is posed to compete in them and a little bit about some future events that we would encourage you to keep in mined.

Now Pete Porrino will share more detail in a moment on other actions we've taken to streamline our capital structure, lower our pro forma leverage and increase our book value per share. This is Pete's first earnings call, but he is certainly no stranger to many of you, given his industry experience as the Head of Insurance Practice at Ernst & Young. Pete knows finance. He knows insurance, and he knows XL. In fact, you should know that Peter has been integrally involved at XL since my arrival as he and I have worked together closely for many, many years. We are simply delighted the he has joined our leadership team.

Before turning it over to Pete, you may have noticed that XL has a new global brand and logo. We have felt for sometime that we needed to bring XL's public face up-to-date with our strategies and ambitions. And this has been a great opportunity to communicate with our investors, our clients and our colleagues about how XL has changed and is changing. This new brand gets to the heart of everything we do at XL, our opportunities to provide solutions for the world's most complex risks and as our new brand states, to make the world go. Now to Peter.

Peter R. Porrino

Thanks, Mike. I'm delighted to be on this call and to be part of the XL team. I can tell you that after 2 months here, this place has the excitement and energy of a start-up, only with the infrastructure, a deep talent pool already in place and over $10 billion of tangible shareholders' equity. Now as you can see from our release, operating net income for the third quarter was $89 million or $0.28 per share compared to operating income of $175 million or $0.52 a share in the third quarter of 2010. This decrease was largely driven by the impact of Cat losses in the quarter of $111 million compared to $66 million in the prior year and lower levels of positive reserve development.

Now turning to our summary of financial results on Slide 3. You'll see that Property & Casualty gross premiums written were up 16.4% versus the third quarter of last year, with a 16.6% and 16.0% increase in the Reinsurance -- I'm sorry, in the Insurance and Reinsurance segments, respectively. Dave and Jamie will highlight the sources of growth in their segments. Net premiums written grew more slowly than gross premiums due to the growth in our crop business which, as you know, is heavily reinsured.

Our P&C combined ratio for the quarter was 101.6%. It was 6.7 points higher than the same quarter last year. Our accident year combined ratio was 103.0% or 1.6 points higher than Q3 2010. And as Mike mentioned and as detailed on Slide 4, Cat losses in the quarter accounted for 8 loss ratio points, 2.9 points higher than the same quarter last year. x PYD and Cat, our combined ratio improved by 1.3 points, driven by results in the Reinsurance segment. Prior development in the quarter was a favorable $18.4 million or 1.4 loss ratio points. This reflects favorable development in the Reinsurance segment of $39.8 million, offset by strengthening in the Insurance segment of $21.4 million.

Now it's important to keep in mind how our reserving process works. As we've outlined on previous earnings calls and as Mike mentioned, Q3 is what we refer to as an actual versus expected, or A versus E quarter for both our global Insurance segment and our U.S. Reinsurance business. Since we perform our detailed ground-up reserve reviews in the second and fourth quarters with the interim quarters based on actual versus expected, you would generally not expect to see a significant movement in the third quarter. One cannot simply straight-line PYD on a quarterly basis. For those portions of our business covered by A versus E reviews, which account for approximately 80% of our reserves in Q1 and Q3, we respond to movements in the shorter-tail lines or the specific claim movements in all the mature years.

We experienced some strengthening in Insurance this quarter relating primarily to specific non-Cat property claims activity. The remaining 20% of our reserves are predominantly Reinsurance, non-U.S. Casualty and shorter-tail Reinsurance business, for which reserves are reviewed quarterly with more comprehensive assumption updates performed annually. This is a primary driver for the favorable development this quarter. And as Mike said, the release of this quarter were lower than the prior year quarter due to a couple of specific situations that we discussed last year.

Looking forward to fourth quarter, it's too early to forecast the outcome of our detailed reserve reviews, although we can say that actual experience on our long-tail lines continues to develop in line with, and in many cases, better than expectations.

At $210 million, net investment income on the P&C portfolio in the third quarter was 4% below the prior year, due primarily to lower yield as a result of lower interest rates and cash outflows from the investment portfolio. The average new money rate on our P&C portfolio in the quarter was 2.2% with a net yield of 3.2% achieved during the quarter. The P&C book yield at the end of the quarter was 3.1% net of expenses. Our P&C duration remains unchanged at 2.8 years. Net income from investment affiliates was $23 million, up $20 million from the prior year. We sold an investment manager affiliate in this quarter that resulted in a $25 million gain. This helped to offset losses in the alternative portfolio due to difficult Q3 market conditions.

Realized losses were $62 million compared to $69 million in the prior quarter. A significant portion of this was FX-related where they were offsetting FX gains in the income statement and cumulative translation adjustments. The remaining OTTI charges were primarily on non-agency RMBS assets. The total mark-to-market was $84 million positive with the impact of widening credit spreads being offset by lower rates during this risk loss quarter in the capital markets.

As we've talked about in the past and as you can see from our expanded FIN swap disclosure, we have been actively managing our holdings and European assets over the past 2 years in anticipation of the developments we are seeing in the market now. Our direct exposure to peripheral sovereigns is less than $30 million, and our holdings and financial institutions in those countries is only $56 million. Since the onset of the financial crisis a couple of years ago, we've reduced our hybrid exposures by over $1 billion, and our current holdings are now in strong institutions in Germany, Switzerland, Northern Europe, the U.K. and Asia. Since the end of Q3, we've taken advantage of recent market strength to sell an additional $51 million of hybrid securities.

Now to our capital management, where there's been a fair amount of activity since our last earnings call. One of our Investor Day goals was to simplify our capital structure and reduce capital leverage to a level more in line with our peers. And with the actions we've taken, we're reducing our pro forma leverage by over 300 basis points. Specifically, we purchased and canceled 15.1 million ordinary shares at an average cost of $20.33 for a total of $307.7 million in the quarter and $566 million for the first 9 months of 2011. Approximately $166 million of this was authorized in 2010 but not completed until the first quarter of 2011. This brings our total buybacks under the current authorization to 33.6 million shares and leaves $290 million remaining available.

In August, we completed the remarketing of the $575 million, 8.25% senior notes that comprise part of the 10.75% equity security units issued and settled the related forward purchase contract. We also completed the tender we offer for all of our remaining outstanding Series C preference ordinary shares. In September, we issued $400 million of 5.75% senior notes due 2021. The net proceeds of this will be used as partial funding for repayment of our outstanding $600 million, 6.5% guaranteed senior notes due in January 2012. And finally, in October, we announced the termination of the Stoneheath Re facility and the resulting issuance of $350 million of Series D preference ordinary shares, at 322 basis points over LIBOR, a very advantageous rate in today's market.

I'll now turn it over to Dave to discuss our Insurance segment results.

David B. Duclos

Thanks, Pete. While insurance results in the third quarter for the industry and XL were adversely impacted by significant catastrophic losses, including Hurricane Irene, the good news is we are seeing what we believe are sustainable rate improvements across almost all of our lines of business.

Some detail on Q3 first. The Insurance segment's combined ratio for the quarter of 112.2% was 8.2 points higher versus the same quarter last year. Clearly, a disappointing result and one which masks continued good progress in many areas as we bring our strategy to life. Prior year reserve strengthening of $21.4 million accounted for 1.8 points of the variance, mostly driven by strengthening in our property and onshore energy line.

Current year net Cat losses of $76 million, including reinstatement premium, accounted for 5.1 points of the increase. An increase in the current accident year loss ratio accounted for another 2.1 points, largely due to a significant non-Cat property loss, partially offset by improvements in our international primary Casualty book. A decrease in net expenses accounted for 0.8 points of improvement mostly due to recalibrations in annual bonus and long-term incentive plan.

Insurance gross premiums written in Q3 rose $165 million year-over-year or nearly 17% from prior year quarter. While this growth benefited from some favorable foreign exchange adjustments and other one-off gains, over half of the increase or 9% was driven largely by new business and improved rate. New business included premium from targeted initiatives such as North America and international construction, North America property and surety and international upper middle markets.

Net premiums earned were up $58 million or 6.6%, reflecting the earn-through of higher gross premiums written. Our Q3 loss ratio of 82.5% was 9 points higher than last year, and 72.2% or 2.1 points higher than last year when adjusted for prior development in Cats. Again, this variance was driven by the large non-Cat property loss and previous price reductions, which have eroded our loss ratio in this line. In recent quarters, we've seen improvement in rate with this business and will continue to push rate hard, given current results are not at targeted level.

Regarding people, Q3 was another active quarter for attracting top industry talent. In addition to Mike's examples, Richard De Simone joined XL to lead our expanding U.S. Ocean and Inland Marine business. In total, we added over 30 new underwriters in the quarter while retaining existing talent as we continue to build out both new and existing businesses. This speaks to the building momentum Mike alluded to earlier and the fact that underwriters value our structure, strategy and culture.

On to market conditions. We achieved the second consecutive quarter of positive pricing in Q3. Both our international and North American P&C businesses achieved rate increases in the 2% to 3% range. U.S. D&O pricing is still being pressured due to the line's excellent profitability. But across all lines of Insurance, x U.S D&O, average rate improvement was roughly 2% and early signs for an even stronger fourth quarter. We believe that the conditions driving the pricing momentum we saw in the last 2 quarters should continue in Q4 and well into 2012. We remain steadfast in underwriting discipline, and we look forward to the opportunities presented to us both by our current clients and our new business.

And now to Jamie to discuss Reinsurance results.

James Veghte

Thanks, Dave, and good evening. XL re-enjoyed excellent underwriting results in the quarter with a combined ratio of 78.8%, producing an underwriting profit of $91.5 million. This compares to a combined ratio of 75% in the third quarter of 2010. Result included positive prior year reserve development of $39.8 million, which compares to releases of $86.8 million in 2010. Adjusting for both Cat losses and prior year releases, the segment had a combined ratio of 80%, which compares favorably to the 86.5% achieved in Q3 of last year. This improvement is generated from the segment's expense ratios with both the operating and an acquisition expenses showing improvement of 2.0 and 2.2 points, respectively. The loss ratio also showed an improvement of 2.4 points, driven by a mix of business change, including the larger portion of property Cat business in the portfolio.

Turning to top line. Gross and net written premiums were $619 million and $420 million, an increase of 16% on the gross and 7.9% of the net. The increases in the gross book came principally from the U.S. crop book due to rising commodity prices. In addition, both the Bermuda and European business units showed increases due to selected new business opportunities.

Turning to the market. We commented on the July 1 renewals on our last earnings calls, we had an excellent renewal with both the U.S. and international Cat portfolios showing nice risk-adjusted gains. We fully expect trading conditions to remain robust in the Cat market going into the January 1 renewals, given the level of global Cat losses this year. Perhaps, more -- most encouraging is the clear expectation of on improved pricing environment on the primary side, particularly on long-tail lines. With the exception of public D&O, there's a positive price momentum across the domestic market.

We've spent a significant amount of time with customers and brokers at various conferences, such as Monte Carlo, PCI and CIAB. And the unanimous feedback were not only a reiteration of the need for rate, but a commitment to achieve it. This is a major benefit to the sectors of our portfolio that are most sensitive to primary trading conditions, particularly our U.S. and international Casualty portfolios where we write a significant amount of proportional reinsurance. Broadly, we are very encouraged by the trading environment that's developing across the market. Given our global footprint, lead capabilities and capacity, we will be in an ideal position going into the renewal season.

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

David R. Radulski

Shirley, can you open the lines for questions please?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Keith Walsh from Citi.

Keith F. Walsh - Citigroup Inc, Research Division

First question for Mike. A lot of talk around rate, not just on this call but all the calls. What do you view -- when you look at written rate, is that currently trending in excess of your loss cost? And do you view the rate increases you're currently getting and expect to get as enough to really offset the loss in yield that we're seeing?

Michael S. McGavick

That's a great question. At this stage, my answer to that would be no. We are seeing positive movement in rate without question, Keith. But we are not yet seeing it to the level that will be necessary, both to offset the losses that are seen across the investment yield in our place or even loss trend. Now I should be specific, I don't mean that with respect to the current loss trend we're experiencing. As you know, it's been a very low period. But we don't look at it that way. We reserve to a normalized loss trend, and that's the number we focus on in terms of where we think rate needs to go. So no, we aren't where -- we -- neither we nor the market are where we think it needs to be. But it is, of course, very positive to finally be working away at it as opposed to continuing to see it get worse.

Keith F. Walsh - Citigroup Inc, Research Division

Okay. And then for Peter, just looking at the next -- thinking about capital structure and the next maturity, I guess, $600 million in 2014, is there a preference to pay that down or refi? And how do you think about excess capital in the context of buybacks, debt pay down and growth in the business? Can you do all 3 at once?

Peter R. Porrino

Sure. So on the first one, we don't have any comment yet on the 2014s, we will deal with that at the appropriate time. And then on your second one, I think it would be yes on all 3. I mean it is, clearly a balancing act that we deal with pretty much every quarter that we think about this.

Operator

Our next question comes from Michael Nannizzi with Goldman Sachs.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Just one question I had was other casualty, can you remind us what's in that line and what drove the increase year-over-year?

David B. Duclos

Michael, this is Dave Duclos. Are you relating to the premium?

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Yes, that's right.

David B. Duclos

We had growth in our North America casualty operation specifically, a result of the couple of programs that we wrote earlier in the year. That would drive the majority of the casualty increase.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

And those are platforms that are continuing to grow, or are those kind of reaching a sort of run rate?

David B. Duclos

Those are books of business that we're in the process of rolling in, and they're probably pretty much completed. Books that we are very familiar with, staff and the organization that we brought on are very familiar with.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Great. And then just one on the Reinsurance side. It looks like the expense ratio was low, I think you made a comment in your opening remarks. Was that lower in the third quarter because of seeding commissions because you seeded more business there? Or how should we think about that number?

David B. Duclos

There's 2 parts to the expense ratio. The operating expense ratio is lower due to accruals for year-end compensation. The acquisition expense ratio was lower principally due to the increase in the crop portfolio in the quarter, which after our significant sessions for the government and the open market has very, very low net acquisition expense ratios.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Great. Okay. And so that's going to be more seasonal for third and maybe a little bit in the second quarter then?

David B. Duclos

Correct.

Operator

The next question comes from Michael Paisan with Stifel, Nicolaus.

Michael G. Paisan - Stifel, Nicolaus & Co., Inc., Research Division

A couple of questions. Number one, Mike, you talked about the progress that you've made kind of across the board. Obviously, it's very good. But I guess the question is, number one, when does that progress become -- okay, we've made the progress and now we're kind of heading in the right direction, that's number one. And number two, it gets back to the capital issue in terms of your stock now is trading at pretty low valuations. So how do you guys kind of balance the whole -- just buy back a whole bunch of stock versus deploying into the marketplace?

Michael S. McGavick

Yes, let me talk about that. So you've got a 2-part question. One, how do we feel about the progress. And the way I would have interpreted your first part of your question, "When can we as shareholders expect that to show up?" And then second, given where we're trading on a valuation basis, "Why haven't we just kind of thrown it all in on share repurchases."

Michael G. Paisan - Stifel, Nicolaus & Co., Inc., Research Division

That's correct.

Michael S. McGavick

Let me talk about both in the same kinds of blunt terms that you've asked. With respect to progress, some of the progress is there. When you see the kinds of additions of quality, market respected and leader talent coming to the firm, that is an important harbinger of what comes next. So I would argue that kind of momentum is rare. We're something of a hot chop right now, and that is a very important precursor to what comes next. We're starting to see that already in the top line. This is the second quarter we're at significant double-digit plus top line improvement. In fact, when you boil through all those numbers and you get to what's about rate and real growth, you'll see kind of 9% FX -- x of FX and whatnot. That is very meaningful growth. And that's just starting to see the rate kick in. So I think that part is very real, and it leads to improved, although not at the same rate, of net earned income. And of course, that's the number that starts the whole calculation in motion. So we've very pleased by that. Without question, when you get into new lines of business or when you are correcting an underperforming line of business like our large property international book, it takes time for that to show up on the bottom line. But the things that we're looking internally at and we're very pleased by, again, with the exception of the urgency we have around that property book. And so if I look at the casualty work we've done where we've done, as we call them, fresh starts or deeper views of those business, I'm very pleased with the early actions and the early indications that we're looking at. It's just not ready for that to show on the bottom line. And what pleases us most is where we do have this problem that we have a lot of urgency around. By the way, when we're communicating about this, we do it on purpose. We very much wanted you to know how we're thinking about the book, and this is something that's sticking out us. And I know a lot of our underwriters are listening, and I want them to know that we're paying a heck of a lot of attention to it. But the good news on that is it's short-tail line of business. I'm very pleased with this progress we see with similar actions in our North American property book, and I expect that to be -- soon to show on the international property book. But it does take more of a 0.5 year to 1 year's delay from action to result. But know that these aren't actions that are newly started in this quarter. They've been going on during the year. I just think we're communicating to you and broadly and to all of our constituencies the sense of urgency we're feeling about it because the reality is you don't want to be fixing books. As pricing gets better, you want to be hitting on all cylinders. And we've got a lot of urgent work to do to make sure we are fully positioned even though at this stage where I would call us broadly positioned.

Michael G. Paisan - Stifel, Nicolaus & Co., Inc., Research Division

Do you mind if I follow up on that just...

Michael S. McGavick

No, no, no. Go right ahead.

Michael G. Paisan - Stifel, Nicolaus & Co., Inc., Research Division

Because that's a very good answer. But I was just kind of wondering about when we talk about the progress, because you've been talking about the progress for the better part of couple of years now. And I guess, at least in this quarter, maybe there was one large property loss that kind of hindered underwriting. And if you could quantify them, maybe you did and I missed it, but if you can quantify that, that would be great. But I guess, I'm just trying to -- as you say, you got another couple more quarters until you really start to see it come to fruition. By that time, there will be a good 2, 2.5 years along the lines of progress. I know where you started from versus where you are today is a big, big difference. It's been a ton of progress. But I guess what I'm trying to get a sense of is when does that progress become, I guess, kind of reality because I don't think we've seen it yet.

Michael S. McGavick

Again, what I -- look I would observe that you are seeing it in 2 parts. You're seeing it in top line growth and net earned premium growth, which is the first thing you will see. The second thing you will see is in the next handful of quarters, we would expect that to start dropping to the bottom line as well. Now the real question, in terms of it being more immediate, is when will we stop seeing this broad pattern of larger pops, which has really been then the thing obscuring the fundamental progress. When will see that? I don't know. Some of that is pure futility and some of it is some things we think we can improve. So it will just -- we're both going to have to wait for that. But I don't expect to wait very much longer, and I think we have a proper sense of urgency around it. Yes, we've been working on improving the profitability of XL for a couple of years, that's true. But I would suggest that the intensity of the work that we discussed about at Investor Day with our new strategy in mind, which is really a year old, is what I would focus on. If you go back to 2009, we were really focused on stabilizing the franchise, not on executing the strategy. So I think your time frames are maybe a tad excited relative to where it will come through. I didn't size the loss with respect to the one large loss. It was about a $40 million net loss to us. And of course, that will have about a $10 million reinstatement premium. So you're talking about a $50 million event on the quarter on that one large loss.

Michael G. Paisan - Stifel, Nicolaus & Co., Inc., Research Division

And if you could just address the...

Michael S. McGavick

Yes, on the second part, with respect to share repurchases. As I've told you before, this is always a balancing act across 3 dimensions. Number one, a proper buffer relative to the rating agency capital required to maintain our rating. That buffer meant to protect us against adverse events of multiple kinds in any one period. So we always first make sure that we're maintaining that buffer. Second, we then think what are the opportunities for our shareholders that are present in the current market to put any excess to that buffer to work. And then third, if we cannot find sufficient exciting opportunities and maintain that excess position, we would think about returning that excess to shareholders. But generally, we have found that to be most efficiently done through share repurchases. Although we have used some of it, as we have -- as Peter mentioned, for reducing our debt ratio to produce a stronger franchise. In this period, as respects those 3, we're obviously -- given that we've been repurchasing, we're obviously comfortable with our overall capital position. And I think probably commentators have it right that we are in a very healthy position. We like the flexibility that affords. Second, the only thing I tried to signal early on is as we see the markets improving in the opportunities, we would want to make sure that we had room for growth so that we could do all 3 things, as Peter said, and I believe we can. And that is maintain the buffer that we expect to have, reduce our debt ratio, go ahead and invest in growth where we find returns attractive and repositioning for what we see as an improving market. And then repurchase shares as the board sees fit. And while we never comment on our future actions, I think my comments on directing you toward sizing properly, those future actions probably gives you something to go on.

Peter R. Porrino

This is Pete. The only I would add there is -- on the share repurchase thing is, and I'm sure you realize, that we do not as a matter of course, preannounce when we're going to do share repurchases.

Michael G. Paisan - Stifel, Nicolaus & Co., Inc., Research Division

Yes, that makes sense. I guess, along those lines, my last question is, do you have any sense in terms of what types of price increases you may need in order to get to, all else being equal, get to a return level, an ROE level next year, that would be comparable to what you would get in buying your share at 70% of book?

Michael S. McGavick

Yes. It's really -- first of all, let me talk about the nature of what I'm seeing in the marketplace. This marketplace, right now, reminds me very much of '98, '99. You may remember then that the first signs of a market change were at hand. But it would -- I would describe that market change or that phase of the market change as a management-led change. In other words, there was no big events in '98 or '99 to speak of. What was really going on was managements were looking at their budgets for the next year. They were looking at the positions of their balance sheets and they were saying, "Enough is enough. We're going to have to start driving rate into this book." You'll recall that the rate achievement during those periods was relatively modest, and then it was accelerated dramatically, of course, by the completely unexpected events of 9/11. In this case, I think we are similarly in a managements-driven nascent [ph] turn. It's not full and broad yet, it's uneven but it is clearly gaining steam as the year ends. To really gain the benefit of that kind of turn, you can't just wait until there's been multiple years of it. You have to enjoy the compounding effect yourself. So you've got to be making capacity for the growth implicit, even if it isn't quite at the levels you would you yet like it or need it to be. In answer to your direct that question, I think there's a very, very simple way to look at this, that doesn't require sophisticated modeling or anything else. If you step back from it and you consider this investment environment, these combined ratios to solve for the kinds of returns that should satisfy investors need to be roughly around 90. And they're roughly around 100. You do the math. It's a pretty simple rate, it's just more complicated than that because it will compound over time and depend on, of course, a mix of business, questions we've been moving toward shorter tail lines, there's a lot of other variables that can affect it or accelerate it. But that's a pretty simple way to think about it and, at the highest level, that's how I think about it.

Operator

The next question comes from Donna Halverstadt from Goldman Sachs.

Donna Halverstadt - Goldman Sachs Group Inc., Research Division

How about another question on capital? You have done a lot to simplify and evolve your capital structure and to bring financial leverage toward that of peers. But looking foreward and assuming a perfect world of no restrictions, economics or otherwise in getting from point A to point B, what do you view as the optimal capital structure for the XL tomorrow across 4 key components. Specifically, what's your optimal allocation to, in terms of percent senior debt percent hybrids, percent regular preferred and percent common. So I'm interested in the composition of total capital not just the blended leverage ratio.

Peter R. Porrino

Donna, it's Pete. I'm glad to talk about that offline, it's probably a little more detailed than we'd go into on this call. I think what we said before is that we want to see us to get down to where our peer group is. And that would be total debt plus preferred at about 21% of total capital. And what we said is that we would do that over time.

Operator

Your next question comes from Josh Shanker with Deutsche Bank.

Joshua D. Shanker - Deutsche Bank AG, Research Division

Mike, you made the comparison to it feeling a lot like 1998. The one thing I think that's left out of that equation of course, there were huge losses building in 1998 that didn't come to fruition until a few years later. There's been a lot of losses over the last 2 years in property, so I'm not surprised to hear that property rates are up. I'm wondering are there losses for this industry brewing in the other lines that are being affected or would this be the first time that we've seen rates anticipate loss cost rather than technically trail them ?

Michael S. McGavick

I think it's a grind to be clear. I think, as I commented in my opening remarks, as I study the entire industry and particular results, it strikes us here at XL that a number of our competitors are really running out of the favorable results from the early part of the decade. And as that comes true, it's going to flip over and they're going to have really difficult environments, especially given the yield out there. So it's the new variable that makes it different from what was -- well, I suppose there's a couple of variables to make it different from '98, '99. First of all, you have fewer management teams than you had back then. I think that's a plus for the industry. Second, I think you are running out of the reserve environment that has -- that the industry has enjoyed heretofore, but the biggest is the reinvestment yield rates. I mean, it just so changes the game. And it was only really, if you're paying attention, I think, for 0.5 year or more, you've known, it was be a protracted event. But somehow, I don't know why. Psychologically, these things happen. But if you think about all the comments that were made by the central bankers during the course of this quarter and you think about the euro prices, and you think about the U.S., it just seems to have locked in everybody's recognition that this is not a short-term phenomena and you better stop acting like it is. I just think, when you add all of that to the stew, and then managements have to sit down at the end of year and produce a plan that is acceptable to their shareholders and their board, I think that just creates a different environment for behavior. And then you look at an industry that has seen such a huge portion of its capital wiped out by catastrophes during the first 3 quarters of the year, I just think it creates an entirely different environment. Even the brokers who, to their credit vis-a-vis their customers, like to talk down these events are finally conceding that there is something going on. And I think it's a very, very real if still in it's infancy and it's still less than will be required over time to put the industry on a proper footing.

Joshua D. Shanker - Deutsche Bank AG, Research Division

And just a little bit more depth, in terms of -- you said the rates are about 2% excluding D&O. To what extent are loss affected-lines driving that? I mean to what extent is property which clearly aligns this experienced losses? I probably would mention that's up more significantly. Is design color there sort of subsegment, that 2% number?

Michael S. McGavick

I'm going to ask Dave to kind of break it up by the 4 main blocks of business we operate. But I would just start by saying we're positive in specialty lines, we're -- except for U.S. D&O, we're positive in many of our professional lines. And when we talk about an average overall rate number, we're really, I think, again, I think it masks the actual acceleration. We do our tear-down reviews of the performance of all of our businesses at the end of the quarter and before this call. And the kind of rate we're seeing in some of our sublines gets pretty exciting and tells us a lot about what's going on. And we're seeing that of course at the comments that Jamie has made earlier on the reinsurance side. But Dave maybe you could break it out because it will show that it's not just the property block at all.

David B. Duclos

Sure. Josh, let me start with giving you some perspective on the 4 business groups, as Mike alluded to. For Q3, IPC, which is our International Property Casualty operation, which is predominantly, it's actually almost split 50-50 between property and casualty, it's increase was 2.4%. North America Property Casualty, which is an augmation of different businesses but it does include property, was up 3.2%. Specialty was up 1.5%. And then professional, as we alluded to, the most intense competition now was down almost 4%. So those were the 4 business groups, but underneath that, let me give you some color and address specifically your question about property and then I'll see if Jamie has anything to add from a reinsurance perspective. Bermuda property, I'll just give you a little flavor from what's happened the last 3 quarters. And again, Bermuda property, would be our excess property capability. In the first quarter, we still were seeing rates that were decreasing as much as 5%. Second quarter, that improved to a plus-4, third quarter that's up 12%. So excess property, out of Bermuda, has moved almost 20 points. Now again, there are some specific accounts that influenced that outcome, but that gives you a little bit of a feel. Our North America property book sort of the same trend line. First quarter, we were still seeing negative price. Second quarter, it about leveled off. And then in the third quarter, we actually saw a 4% rate increase. International Property, again the same thing, minus-3% first quarter, 4% up the second quarter, 6% up the third quarter. So we are seeing increases, where we're seeing losses. And I would say that probably what's driving some of those increases is in fact, the cat exposure. The other lines, in the range in terms rate, price changes anywhere from -- Professional is the only one that's still down consistently. The rest of the lines are probably went from 0 to low double digits right now. And each month, for the last 6 months, have been building. And I've said this for the last couple of previous or preceeding quarters. October 1, looks very encouraging. Again, it's a stronger rate than we achieved in the second quarter and third quarter. Jamie, anything to add from the reinsurance perspective?

James Veghte

No, obviously, we're not in a sort of daily traded environment. But at our last major renewal period, I previously reported we saw high single-digit risk adjusted improvement in the short tail cat market at July 1. We go into January 1 fully expecting similar improvements in the cat market, even for non-affected geographies from the natural catastrophe losses. And will feed off of the improvement in the primary market that Dave describes on our Casualty portfolio.

Operator

The next question comes from Brian Meredith from UBS.

Brian Meredith - UBS Investment Bank, Research Division

Two questions. One, just a clarification. I think you mentioned there were $25 million gain in your investment manager affiliates. Is that correct or was that a realized gain?

Sarah Elizabeth Street

This is Sarah, that was actually a realized gain, that we sold one of our affiliate stakes.

Brian Meredith - UBS Investment Bank, Research Division

So that's not in the operating earnings number?

Sarah Elizabeth Street

Yes, no, it's [indiscernible] the earnings.

Brian Meredith - UBS Investment Bank, Research Division

And the second one, Mike, could you give us a sense of kind of what P&Ls are looking at, like, right now? It was 12.7%, was your North America or U.S. at the end of the last quarter, you guys are continuing to push those pretty good growth in the property areas. How close do you get in that 15% level? And then I guess also, are you willing to take a 15% perhaps of the 20% as you continue to take advantage of opportunities in the property markets ?

Michael S. McGavick

First of all, we are continuing to grow our exposure because we do find some of those markets appropriately priced. I'm going to ask Jamie to comment on the specific level at this time. I know we have that in mind. Whether we'll change the limits or not, we constantly review our limits in all aspects. From the appropriate buffer to hold relative to our rating, to the appropriate level of exposure to have at any point in time. And I can just say to you that, certainly, in the discussions that we've had with our board, I think our board is very anxious and understanding that this is a relative competition and that at the end, while we like to run our firm with a appropriate dose of conservatism, especially given our history, recent history. That said, we're well aware that at certain times, when the market starts moving hard, you've got to be a participant and we're well aware that that's the right attitude with which to approach any changes in limit structures going forward. But I have none to announce at this time.

James Veghte

Brian, I think we mentioned on the last call that we were still analyzing the impact of version 11, which is our risk management tool. I think you'll see in the Q when it comes out that hour revised number after that review is no 13.7%. Our P&Ls were significantly impacted by the model change. Having said that, we had made adjustments to version 10 significant adjustments particularly around storm surge, which offset the impact of version 11. So we're now planning for 2012, our current Tier 1 outside is 15% of shareholders' equity. We haven't made a decision to adjust that upwards yet but we're very comfortable with our risk management position.

Operator

Your next question comes from Jay Cohen from Bank of America Merrill Lynch.

Jay A. Cohen - BofA Merrill Lynch, Research Division

A couple of questions. First is, on the volatility in the market, the potential impact for the fourth quarter, do you have any visibility of what that could mean for you? It's hard to analyze because you have different strategies in these investment managers.

Sarah Elizabeth Street

I mean it is hard because flowing through that line we had 3 items. We have our alternative portfolio, which is on a 1-month lag. So it's purely September that's not being picked up. August was already in the numbers. We generally perform better than the hedge fund industry as a whole because we're position in a down market. And that's certainly based on estimates seems to be the case. So I wouldn't expect too significant a number. It depends on what happens. The investment managers and the private investments, it's too difficult to estimate at this point.

Jay A. Cohen - BofA Merrill Lynch, Research Division

Okay. I guess, secondly, back to the underwriting side, you talked about professional lines being the one area where you're still seeing decreases. And obviously, lower interest rates given that's a medium to long-tail business. That puts additional pressure on returns here yet you grew in that business. And it just doesn't quite -- why you would be growing that business given those 2 pressures that you cited.

Peter R. Porrino

Jay, let me take that. We're actually not growing in our U.S. Professional D&O book. We've got some growth in international where we see a slightly different pricing competition environment. But actually, the one area where we have seen a reduction in terms of premium is in fact, our D&O standard book in the US. So we're conscious of the long-term interest rate impact that you alluded to. That's why even though the combined still look pretty attractive on a relative basis, the team there has scaled back in terms of some of their writings. I would also add that we have a couple of books in Europe that are getting some strong rate that's generating some of the premium increase as well. But in terms of new business, professional in the quarter was probably one of the least amounts that we written both specialty and Professional show decreases as a result of the competition.

Operator

Your next question comes from Mike Sorensky [ph] with Credit Suisse.

Unknown Analyst -

First, regarding the pretty healthy top line growth. Thinking going forward, I believe you expended the U.S. property retentions to 750 recently. And I also believe you're going to lose some crop Insurance adjustment in '12. I was curious if those are items we should be thinking about going forward.

Michael S. McGavick

Yes. First, with respect to the U.S. Property, we increased the limits we offer, not the retentions that we take. So I would not be overly aggressive in modeling that especially as you think about it in terms of net earned premium. It's really more about what we're able to offer our clients and the expertise we bring. They want us to be able to offer higher gross limits and we've worked out a program to do so. But I wouldn't focus on it as a significant net or in premium item. Jamie?

James Veghte

On the crop, you'll recall we -- when the MGA that we've been dealing with for 10 years was sold, an agreement was reached with the new owner that in exchange for them being a significant reinsurer of us in 2011, we would have the option to reinsure them in a significant way in 2012, we've made no decision around that option yet.

Unknown Analyst -

Okay. I think lastly, Mike, you talked about earlier the 9 loss cost trends that you continue to reserve at "more normalized trends". I'm just curious, at what point do the 9 loss cost experience, what point has become a trend that is factored into underwriting assumptions?

Michael S. McGavick

No, our actuaries, and of course, our chief reserving actuary is sitting right next to me ready to kick me if I get this wrong. But we encourage our reserving actuaries to be very conservative in their view. It is the devil to be wrong and optimistic early. So we just are very patient to wait for them to come through. Now, one of the reasons that I'm so bullish about the progress you're making in the underwriting actions we've taken is we do view ourselves, we do have indicators that we view for ourselves of what we think about what's going on. We just don't drop it to the bottom line until we're sure about what's going on. So that's one of the reasons we talk optimistically about where things are going because we're looking at early indicators in terms of loss cost trends. but we won't take it until we are convinced. And to give you an example, in the much discussed on this call, U.S. D&O space, the loss cost trends continue to be really impressive. I mean, given all of the worry and all of the angst that we all have towards that line. And even with the some of the settlements that we've seen in the recent period. When we look at them as against the whole of the sub-prime events and your made-off events and all that has followed, we continued to see it playing out, very favorably. But we're simply not going to react too quickly. And when you factor in our view that we should be very conservative with respect to inflation, in the medium term, that too weighs on us. And if we're wrong, to the conservative side, the shareholders will benefit on that over time and we simply feel we can sleep better at night with this disposition and we're just not going to change it. We just aren't going to overreact to the short-term positive trends and even as they turn into medium-term positive trends. We're just unwilling to overreact. We've seen too many good companies burned by positive attitude before.

Operator

Our next question comes from Randy Binner with FBR.

Randy Binner - FBR Capital Markets & Co., Research Division

I'm just trying to isolate kind of a core run rate number for the quarter. And so obviously, the affiliate income Cat losses and FX should be taken out. I think the 50 million large property loss would be normalized out as well. Is there anything else in all these conversations that we should kind of pull out to get to more of a run-rate number?

Michael S. McGavick

I appreciate the question. This is a difficult kind of noisy quarter, and obviously, we're trying to signal a number of things, including a lot of optimism in the general sense. But a real awareness around a couple of isolated underwriting areas that we still feel real urgency about. We just feel an obligation to communicate about that directly. But the one other piece that I would isolate on is you do have the pattern of reserving and prior year development that we have encouraged you to remember. Just to be very blunt about it, when I look at the models that analysts use for the quarter, I see a lot of plugged-in numbers around PYD. That would indicate to me a likelihood that people have smoothed over the year rather than remember that, generally it's going to be kind of a second and fourth quarter event. So that to me would be another thing I'd be isolating on. And then more trivially, we did have a better quarter in terms of expenses because we've recognized that our compensation costs will be lower this year given all that's gone on. And we would want you to be remembering that we are making investments in the underlying business so that we can gain in a leveraged way from the market we see coming. And the first quarters, the first 2 quarters were more representative than I think was the third. Those are the only things I would add to your list.

Randy Binner - FBR Capital Markets & Co., Research Division

So on expenses, it's more representative on the over the corporate expense lines collectively than what we saw in 3Q?

Michael S. McGavick

Yes.

Randy Binner - FBR Capital Markets & Co., Research Division

One other quick one, if I can. This is a follow-up to an earlier question. But as it relates to the yield on the investment portfolio and how that ties into how you price the business. I don't know if I quite heard the response. But is that something that's actively going into the pricing process? The yield on the portfolio. And if so, is it assuming kind of the current yield environment or is it something that gets reset periodically?

Michael S. McGavick

No, priced to the new money yield rates. We do not price to the -- so we get a double dose of conservatism here. We're pricing to the actual yield rates we are experiencing as influenced by the new yield rates. And at the same time, we are reserving to what we believe will be a return to a more normalized yield environment. So you've got 2 doses of conservatism at work and we believe that's the only way to run the business. Now the actual pricing that's experienced, that's a negotiated process. But that's how our models go into effect as we discover what our appropriate pricing should be.

Operator

Your next question comes from Vinay Misquith from Evercore Company.

Vinay Misquith - Evercore Partners Inc., Research Division

The first question is on the ROE that you are getting on your new business. Just curious what that is. Just trying to figure out, so what's more attractive: growing the business or buying back stock ?

Michael S. McGavick

Again, Vinay, it's not quite that simple because you don't take -- first of all, we don't break it out in that way. Well, I know that we believe we are remixing to new business to a more profitable overall portfolio. That is and over-time view. You don't take -- you have to take it as, where would you be when it's a mature business? For example, when we enter a new line of business, because in the early days, the expense ratio of the new line of business overwhelms the result. So you can only have the confidence to march into a new line. When you look at it, where will it be when it's developed? And what are the opportunities given what you see in that particular pricing environment? When you talk about new business in an existing line of business, we're constantly trying to underwrite our way towards a better mix of business. You've seen us grow our short-tail lines, you've seen us decline in our longer-tail lines. We think this is perfectly appropriate in a low interest rate environment as we are currently experiencing. You take all of that together and you say, what is the book of business you are building? What are the opportunities you are building for your shareholders? Over the medium term, not the short term? Because that's the book of business we're really building, is what's the earnings power of the bloc? And so it just isn't as simple as a point in time what does a share repurchase look like. Well, trading as we are, it's not hard to do the math. But that's very attractive. But you can't throw everything to that. Or you're going to fail to position the book of business for the superior turns we think are ahead. And that would be a failure on our part in terms of managing your investment. So it really isn't as simple a question as the way you framed it. And that's not how we think about it. That said, I think Peter's already said it quite correctly. We can afford the 3 major capital activities that are going on. Bringing down our leverage ratio, growing our business, and as we see fit and as the board directs purchasing shares.

Vinay Misquith - Evercore Partners Inc., Research Division

Fair enough. The second question, was just a numbers question on the operating expense, just a clarification. You mentioned that that should be looked at similar to the first quarter and the second quarter. So would that be for all the subsegment operating expense or is it only for the corporate operating expense?

Peter R. Porrino

That would be across all the lines.

Operator

Your next question comes Steve Edison [ph] from Addage Capitol [ph].

Unknown Analyst -

I just have 2 quick follow-ups hopefully. First, can we clarify on the large losses in the international Property. What specifically is driving that? And you sort of hinted that this was something recurring?

Michael S. McGavick

No, with respect to recurring, if I have confused, I want to be clear. This was 1 event that doesn't have a recurring feature. In fact, if it has a future feature, that there will be subrogation and that subrogation could lessen our exposure to that loss. I'll ask Dave in a moment to give a little more color on that 1 loss. When I was observing, is you go back through the past 3 years, you'll find in '08, and then again in '10 and '11 some, we've described often, an unusual degree of large losses. And we're just saying that we don't view that as an acceptable answer. We think that in general, particularly we've isolated that particularly that IPC property book has been responsible for too high a number of those. And we think that is correctable. And that's not a new thought but it's one that we wanted to make sure we were discussing with urgency on this call. Dave, could you talk about the one event in this quarter?

David B. Duclos

Jay [ph], this is certainly what we would consider a bit of an anomaly from a loss standpoint. But we sustained a large property loss due to an explosion in an adjacent noninsured location. As Mike alluded to, we will certainly pursue subrogation vigorously and the loss reserve we booked this quarter, if anything, will just be positively impacted going forward. But the point there is it doesn't have any reflection on the quality of the book of business.

Michael S. McGavick

I would just add one thing. While we've experienced this trail turbulence and while were not accepting it as something you should expect into the future, I would still observe that, that book of business historically, has been very profitable. So we want to make share that we address it in a way that reflects the urgency of having books of business performing well as we go into what we see as better pricing. But also, we won't approach it softly. The historic performance of the block has been quite good.

Unknown Analyst -

That was my concern, was by recurring it seems there's there seems to have this trend of large losses. And I don't know if there's any underlying pattern you've seen or there was just a long string of bad luck.

Michael S. McGavick

I sure wish I could say that there was an underlying pattern because that would be to get after. But we're just saying, we don't accept it. We don't say, "Gee, that's the way the brags [ph] bounce. We think that we can do better.

Unknown Analyst -

And then my other one is just to this question of when is the right time to start growing and do you need to be there? And stop me if I'm misrepresenting the way I heard you explain it. But the way I understood it was, you feel you sort of have to be there early, if you will? And maybe the market doesn't turn for, let's take a number, 2 years. That the opportunities are going to go to the ones who are already established in those markets rather than people who try to jump in at the last minute. Is that a fair representation before I proceed?

Michael S. McGavick

No, I think that's a good thought. In the end, if you think you have a line of business that can produce good over-cycle returns, you want to be as established as possible if there is an inflection point in the market. And again, I've not said there's an inflection point, there's just an improving trend that we're very encouraged by and that we think makes a lot of sense. We can explain why managements are behaving this way. We think that gives it a sustainability over time. And just the simple thought is, the better-positioned you are when that happens, the better you're going to do during that period. I want to add one other thought though. The correcting books of business takes time. And I got a question earlier that I thought expressed an appropriate impatience. I have an impatience too. But the reality is, fixing a block of business during a time of positive rate is a heck of a lot of easier than with the wind in your face. And that's one of the things that makes me kind of excited about where we are. But the sooner you get that behind you and can focus on the future, the better off any book of business is. And across XL's 36 book of business, boy, I'm sure happy that we are where were we are for the vast majority of them and there's a couple that we've signaled we're focused on.

Unknown Analyst -

Can I challenge the premise a little bit that we need to be there early? Because I guess I look at past market turns, it seems that people who got there early take the worst losses. When things get bad, before it finally hit bottom. And then they get gun-shy about growing. When the tables have turned they don't take advantage of the market leadership because they feel burned. And the people who end up winning are the new startups like XL in '85 or Arch and Axis last time. And the people who are established, in some cases they have, but it's really not uniform. They're showing a number of cases where the established players don't participate to the extent the new players do, and maybe it would actually be more prudent to wait and try to be sort of secondary player in these lines and then jump in once you've seen the turn.

Michael S. McGavick

Let me take what you said and refine a degree further. Let divide it into a few. [indiscernible] It's something we've studied a lot. It's one thing when you get a turn that is of such a magnitude and crisis that it requires an entirely reinvented marketplace. That's what XL and our Bermuda brother did in '85. That's a really different thing than what we're dealing with here. With what we're dealing with here, the question isn't whether when to put your teams on the field. The question is waiting to tell them to go nuts. And the reality is, I wouldn't tell any of our new teams to go nuts right now. This is a time to get yourself ready. You can establish a book of business in a disciplined way during this uneven phase. But there's a number of phenomena that work for you. First, broker-driven markets always love a new entrant, and if that new entrant is smart and has an established reputation and relationships, they can drive some profitable business to them because the brokers and the clients are encouraging new entrants. So there is a period during which you can get an unfair share of better business early in the establishment of a team, as long as that team has the right kind of track record and personality. What comes next is the important thing. And I would tell you, I've noticed some of our best underwriting competition thinking about this pretty smartly and I've seen some do it not very smart. There are 2 approaches. One is, accept that, not team may not have, outside of that initial establishing activity, a lot of to do for a little while. And they'll have to bear higher expenses for a while. And that's okay. And that's okay. I won't go through -- you would know some of the companies that we around here really respect and you've seen them put really high-quality teams at work. Teams that we back in our reinsurance programs and they aren't writing a lot yet, and that's okay. The question is, when do you take the leash off? When do you push the pedal? And that comes as markets take shape. So it doesn't really matter if you hit it. You can't time a market perfectly. None of us are prescient enough to do that. So you take it when you can get it in terms of talent. You accept the higher expenses if you can't write a lot yet and you just keep getting ready. If you do it that way, you don't get burned. What I have seen and what you've seen and what we won't do in XL is burn our way into a market thinking we've timed the market turn right. Those are the guys that get themselves sick and then get burned. We aren't going to do that. We haven't been doing that. And we won't do that.

Operator

Our next question comes from Cliff Gallant with KBW.

Cliff Gallant - Keefe, Bruyette, & Woods, Inc., Research Division

Just a quick one on, you mentioned the D&O book that you had great recent results. And a lot of things of course can change pretty quickly. And I was wondering what your outlook is going forward in the near term? Particularly with all the market volatility we've had and we, of course, get MF [ph] Global and Energy this morning.

Michael S. McGavick

Sure. The D&O marketplace, the pricing has been under pressure. But the pricing has been under pressure because the results in the early part of the decade were so extraordinary that clients and brokers have properly challenged whether the pricing is right. And then of course, the pricing stayed strong because you have these huge events that people rightly assumed would lead to huge class-style losses. But as we have talked about earlier in the call, losses of the magnitude that were anticipated by what went on in '08 and '09 and, to a lesser degree, more recently, simply haven't materialized to that same level. So I think the market is continuing to challenge whether we found the right appropriate clearing price yet. And I think I'm not bothered by -- in fact, I really like what our U.S. D&O underwriters are doing. We tend to be, we tend to shine when markets get into distress, we tend to shine when there's dislocation. Things like the event this morning, increased dislocation or perceptions of dislocation. We like this marketplace. And the fact that our guys up there are shrinking a little bit, are accepting that rate is going down kind of in the 3%, 4% range, 5% range. I think that's fine. I think they're really -- they are hitting their various levers, I think, with great art. And I'm very confident where they are. I'm comfortable with where that book heads over time. The fact that we're losing a little top line in that particular space makes sense to me. The fact that we're losing a little bit of rate makes sense to me. The fact that we're being conservative on reacting to the short-term trends in reserving make sense to me. That group I have an enormous amount of confidence in.

Operator

Our next question comes from Greg Locraft with Morgan Stanley.

Gregory Locraft - Morgan Stanley, Research Division

You brought up the Thai loss as one of the 4 factors for the quarter. And I wanted to just -- certainly it's been a difficult year. Is this a -- is this an Australian flood loss type of a thing, is this a Japanese earthquake? Is this a New Zealand quake? Is it Irene? I mean how do we bracket this thing in the early days? I know it's premature.

Michael S. McGavick

I apologize. I tried to -- I suppose I tried to encourage this question not to be asked earlier, not that we shouldn't ask it. We really don't know enough to say. But I just observed it's a very broad event, and it's going to be meaningful for the industry. How it'll fall in terms of individual losses is extremely hard to predict and we certainly have nothing to say on that at this stage. Although, I would point out that so much of the flooding has been in industrial parks, and when you get into flooding in industrial parks, that's where you get those kind of pinpoint losses that certainly I would expect to show up in our insurance book, because we're specific clients, specific locations. And if one gets hit in the flood, it's going to get hit. But I don't have any thing other than to add that I do think that there's been a lot of talk about BI [ph] losses just as there was a lot of talk of BI [ph] losses in Japan in the earthquake and tsunami. And there, I continue to see less reality for losses than I see talk of losses. Maybe that's a need for the market and a gap that the market needs to be innovative to solve. But that's so far been true across both events. But we'll see, we'll see. I just wanted to make sure no one was missing that one because it is a big deal.

Operator

And I'm showing no further questions. I'll turn the call back over the speakers.

Michael S. McGavick

We've obviously gone over the usual length of time, but given the complexity of the quarter, I thought that was completely appropriate. We appreciate that we may, at least in terms of the broad questions for the group, have exhausted you at this stage and I know that David and the rest of our people are certainly available for follow-up questions as they come up. Again, as I opened, I thought it was another of these interesting quarters, there was some good, there were some difficult. But in the end, we are extremely excited about where we see the markets, we're working hard to be prepared and fully engaged in that effort. And I just want to say to my colleagues and our clients and brokers who are listening around the world, XL ends the quarter a stronger company, and more focused and with greater urgency about what we've got to do, and I'm excited to be representing our shareholders at this time.

Operator

Thank you. This does concludes today's conference. We thank your for your participation. At this time, you may disconnect your line.

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