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Executives

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

Michael S. McGavick - Chief Executive Officer and Director

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

Gregory S. Hendrick - Chief Executive of Insurance Segment

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

Unknown Executive -

Susan L. Cross - Global Chief Actuary and Executive Vice President

Sarah Elizabeth Street - Chief Investment Officer and Executive Vice President

Analysts

Unknown Analyst

Keith F. Walsh - Citigroup Inc, Research Division

Jay Gelb - Barclays Capital, Research Division

Matthew G. Heimermann - JP Morgan Chase & Co, Research Division

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

Jay A. Cohen - BofA Merrill Lynch, Research Division

Brian Meredith - UBS Investment Bank, Research Division

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

Vinay Misquith - Evercore Partners Inc., Research Division

Michael Zaremski - Crédit Suisse AG, Research Division

Meyer Shields - Stifel, Nicolaus & Co., Inc., Research Division

Josh Stirling - Sanford C. Bernstein & Co., LLC., Research Division

XL Group plc (XL) Q4 2011 Earnings Call February 9, 2012 5:00 PM ET

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 XL Group plc Fourth Quarter and Full Year 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 fourth quarter 2011 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. 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 Greg Hendrick, our Chief Executive of Insurance Operations; and Jamie Veghte, our Chief Executive of Reinsurance Operations, who will 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 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 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. With that, I'd turn it over to Mike McGavick.

Michael S. McGavick

Thanks, David. As you have seen by reading our release, the fourth quarter of 2011 was highly unusual, and that understanding it requires some explanation, which we will attempt to do thoroughly tonight. At the same time, once we clarify the unusual items, I think you will come to the same 3 conclusions that we do. First, that XL has become an excellent manager of catastrophe risk across the firm. Second, that while there are large blocks of excellent underwriting at XL, we remain plagued by lost activity in a handful of insurance lines that undermine our results. And third and most important, that we have the proper focus on improving or eliminating these sources of poorer results.

Now for clarity's sake, this is how the call will go tonight. First, I will walk through the unusual items for the quarter at a high level. Second, I will similarly walk through our underwriting results highlighting the evidence of the 3 points I just made. Then I'm going to turn the call over to our CFO, Pete Porrino, who will walk through these unusual items in deeper detail, as well as updating you on other critical aspects such as investments. After Pete, our newly appointed CEO of Insurance, Greg Hendrick, will provide even more detail on the breadth of correction underwriting actions underway, and give some examples of the early results that would not yet appear in the financials, but will give you a sense of why we have such confidence. Finally, we will conclude with a very positive report by Jamie Veghte on our Reinsurance operations. Both Jamie and Greg will also give their perspectives on the improving rate environment. Then we will take your questions.

So let me begin with some of the unusual items that drove the quarter's results. First, I want to give you the thinking behind the largest item for the financial note, the goodwill charge. Next I want to give you some perspective on expense levels, as you will notice, that expenses ran higher in the fourth quarter. Finally, I need to provide you with some perspective on tax in the quarter and for the year, as without understanding this nuance, one could wrongly conclude that our underwriting was worse that it in fact is.

First, about the goodwill charge. As you well know, the P&C insurance sector is continuing to trade at low valuations, and XL is traded at an even greater discount. When these conditions persist long enough, we must closely examine the goodwill we carry, in relation to the purchase of these operations. In our third quarter 10-Q, we described that this examination was intensified. When the fourth quarter showed higher levels of non-cat loss activity, as had the third quarter. We felt that our assessment of how the market would value these operations had to reflect these recent poor results, even if we remain bullish about our potential over time.

Pete will give you the greater detail, but this is the basic thinking behind our goodwill write-down of $429 million. Note that this has no impact on our calculations related to excess capital. Second as to operating expenses.

Back in June, we said that we thought the fourth quarter of 2010, would have been a good proxy for the 2011 run rate. And so it proved to be. Our 2011 full-year expenses were, in fact, roughly 4x the expense load in the fourth quarter of 2010. But what does this say about 2012? While we generally stay out of the business of giving guidance, for 2012, we expect to come in at the right around about 100 more -- $100 million more in expenditure, than our actual full year 2011 level. But we need to emphasize that going forward, there will likely continue to be meaningful volatility from quarter-to-quarter. Technology spending, for example, can be quite lumpy. And new hires can be very hard to predict in terms of quarterly timing. And it is in those less predictable areas, we are exactly where we are making investments. Investing teams who can grow the business in lines where we find current and future returns appealing, upgrading talent where we have found it to be deficient, and building pricing and product modeling and the technology to deliver it while lowering costs.

And so on to the third item. Tax. Now this item would not be obvious just from reading the materials you have in front of you. At XL, we typically have an effective global operating tax rate in the mid-teens. And this was true through the first few quarters of 2011. But in the fourth quarter, an unfortunate phenomena took place. Pete will get more granular about this, but it has a simple idea behind it. The heavy losses we experienced, such as the Thailand floods, ultimately were written in low tax jurisdictions. While our positive earnings, such as the reserve releases in our London markets operation, came in a high tax jurisdiction. As a result, the effective tax rates for the year, instead of being in the mid-teens, was in the mid-30s. And in the fourth quarter, this tax item added fully $59 million to our operating loss. This rare phenomenon of tax adding insult to injury has happened at XL before, in cases of high volatility, low earnings quarters like we just experienced. In general, however, and over time, our tax strategies have proven to be very effective. And while we will always work to make sure our global structure is tax efficient, there are no obvious changes suggested by our studies of this fluke pattern. I should add that the move of the holding company last year to Ireland, has nothing to do with this result.

With those 3 unusual items discussed, this brings us to Underwriting. The essence of what we think our business is all about. Again here, there are 3 ideas, as I enumerated at the start of the call. First, strong relative performance in the face of incredibly high cat losses around the globe, second, mainly strong underwriting performance in Insurance, undercut by pockets of poor performance; and third, intense corrective actions, well underway in those businesses requiring improvement.

So first, with respect to cat losses. In one of the worst years on record for catastrophe losses, including the fourth quarter's devastating Thailand floods, XL's cat loss profile relative to our peers, once again demonstrated the effectiveness of our risk management discipline. Remember that we would expect to be infected in both our Reinsurance and Insurance operations, given our global footprint in each. That said, our total losses across both businesses of $761 million, compares favorably to the global carriers we compete with, especially, we considered as a portion of our shareholders equity. As analysts have independently noted, as compared to 19 other major insurers and reinsurers with whom we compete, our loss as a percentage of shareholders equity was in the best quintile of performance. And looked at another way, while market share is hard to get at, and while our market share varies around the world, given our view of pricing adequacy and our drive to put our capital to work where returns are best, we believe that yet in nearly every case, and certainly overall, our loss compared favorably to our market share. This is an impressive result, and a real improvement, given as history in the first part of the 2000s.

As for the second Underwriting point, we note the challenge to businesses at XL represent only about 20% of the 2011 global teams seen net premiums written. Meaning the lion share of our premium comes from key businesses that continue to demonstrate their excellence, covering a wide range of parallels on a global basis. For example, our excellence in Reinsurance method, despite the high level of cash, we showed an Underwriting profit for the year. Professional lines, broadly speaking continued to generate tremendous results, despite downward rate pressures.

Our Specialty businesses, mainly known by our businesses at Lloyd's, also had excellent performance. And we remain very pleased with our performance in global casualty, over time. In fact, out of our 25 businesses in Insurance, it is precisely 7 that are challenged. To put it in perspective, without these businesses, our x cat, x PYD combined ratio, would be below 95%.

As I said, I will leave it to Greg to provide greater detail on our various Underwriting actions. But I want to emphasize the role of leadership and talent. Talent is at the core of the completion in the complex risk Underwriting businesses, of which XL is comprised. And while there's a lot of excitement and commentary about our entry into a few new lines of similar business, the far bigger story is the broader upgrade of talent at XL. Of the 96 underwriters we hired at XL in 2011, only 18 were tied to the noted new activities. The balance was hired to add to or to upgrade the Underwriting talent in existing lines of business. In fact, all 7 of these challenges businesses, not only went through an in-depth review of all aspects of their operation in 2011, but we changed the leadership and the top underwriters in 5 of the 7 businesses. The new leadership and the action of all these businesses are undertaking under the new plans, are monitored intensely at all levels of XL.

Now, with all of that said, you will logically ask, as you have in the past, when can we expect to see the benefits of these actions? Well, like you, we think we're experts at these lines of business, and we know that it takes real-time for the results to show up on the bottom line. And the speed of impact depends on the lost profiles of the businesses being acted upon. This is especially true at a firm like ours with a strong and continuing track record of prudent reserving. But I can say this, the actions are happening at the urgent pace we have set out for it, the precursor indicators of progress are also showing up as expected, and we expect these actions will show up to an increasing degree on the bottom line, throughout 2012.

So before turning it over to Pete, I would say that in some, while we are frustrated, as we are sure investors are, with the time it takes for an Insurance book to respond to medicine, we are unwavering in our faith that the right actions have been and are being taken, and we are intensely resolved to make all of XL, and not just most of it, match our historical underwriting prowess. Pete?

Peter R. Porrino

Thanks, Mike, and good evening. I'll be covering 3 items in more detail. First, I'll discuss the quarterly year's results, including discussions on goodwill and taxes. Second, I'll provide you with an update on our investment activity, including our exposure to Continental Europe, and third, I will address on capital market activities.

The fourth quarter and full year 2011 results were significantly impacted by severe natural catastrophes, resulting in an operating net loss for the quarter of $80 million compared to operating income of $242 million in the fourth quarter of 2010. For the full year, we reported an operating profit of $89 million compared to $810 million in 2010. Cat losses, net of Reinsurance and reinstatement premiums in the fourth quarter were $195 million, which is at the midpoint of our preliminary cat loss estimate range, included in our January '11 press release. And that compares to $30 million in the prior year. For the full year, cat losses were $761 million compared to $294 million in 2010.

Our net loss attributable to ordinary shareholders was $516 million for the fourth quarter, and $475 million for the full year. The net losses were driven by a non-cash goodwill impairment charge of $429 million. Now this impairment of goodwill represents all of the goodwill included in our Insurance segment. This was due to a combination of persistent low market valuations for XL and in the Insurance industry generally, and the continuing underperformance in that segment. This underperformance impacts the assumptions used in goodwill valuation tests, such as market multiples and select discount rate and related risk premium, a third-party might demand. Consistent with Mike's comments, we did not fundamentally change the assumptions about the future profitability of this business.

Turning to our summary financial results on Slide 3, you'll see that the P&C gross premiums written were down 3.5% versus the fourth quarter of 2010, with a 4.4% decrease, and 7.9% increase in the Insurance and Reinsurance segments, respectively. The Insurance segment decrease was driven by a prior year quarter multiyear Insurance agreement, excluding this agreement, there was a 5% increase in 2010. Greg and Jamie will highlight the sources of growth in their comments. Our P&C combined ratio for the quarter was 108.2% or 16 points -- 16.8 points higher than the same quarter last year. As detailed on Slide 4, cat losses in the quarter accounted for 14.2 lost ratio points, 11.8 points higher than the same quarter last year.

Prior year development in the quarter was a favorable $68 million or 4.9 loss ratio points. This reflects favorable development of $28 million and $40 million in the Insurance and Reinsurance segments respectively, from our fourth quarter detailed ground-up reserve review. Positive movements came from Specialty and Professional Insurance lines, as well as longer tail U.S. and European Reinsurance lines. Although these releases are down from the prior year quarter, our actual gross is expected loss experience continues to trend favorably x PYD and cat or combined ratio increased by 0.5 points.

In the quarter and for the full year, our operating tax expense was clearly out of line with operating income. In the quarter, we added $21 million pretax operating loss, and $59 of tax expense. As Mike stated, our losses ended up largely in low tax jurisdictions, while our income was seen in the higher tax jurisdictions. The distribution of cat losses was a function both of where the policies were written, and also our internal Reinsurance arrangements, including certain stop-loss agreements. In addition, positive prior-year reserve releases, which are net above positive and negative results for different lines of business, were most significant in our legal entity with the highest overall tax rate.

Other items contributed, such as the tax treatment of unrealized investment gains in certain jurisdictions, but generally, the result reflects the unusual distribution of profits and losses around our global organization this quarter. At $192 million, net investment income under P&C portfolio in the fourth quarter was 9% below the prior year, due primarily, to new money rates and cash outflows from the investment portfolio. The average new money rate on our P&C portfolio in the quarter was 2.5%. The P&C gross book yield at the end of the quarter was 3.2%. From the P&C duration remains unchanged at 2.8 years.

Our net loss from investment affiliate was $24 million, down $70 million from the prior year. Now it's important to remember that we record our affiliate earnings on a lag of between 1 and 3 months. As we discussed in our third quarter call, our private equity and investment management business portfolios state difficult Q3 market conditions. Realized losses were $50 million compared to $104 million in the prior year quarter. Of this total $29 million related to OTTI charges, which were primarily due to foreign exchange items and from non-agency RMBS assets. The total mark-to-market was $130 million positive, with the impact of lower rates being somewhat offset by widening credit spreads, primarily on European investment grade corporate credit.

While we've mentioned our reductions to European investments on previous calls, we think it is worth repeating, given the continued turmoil in Europe. Our peripheral government exposure is immaterial at $27 million. In addition to avoiding direct peripheral sovereign risk, we have also eliminated all peripheral hybrid financial exposure. Within core Europe, we have been concerned about the indirect effects of the European crisis on the banking system, particularly on the risks exposed to hybrid securities, given the amount of recapitalization required of certain of these banks.

Over the past several years, we have successfully reduced exposure, to a point where it is very manageable. Our Continental European hybrid exposure was $102 million at year end, with only $73 million to banks, largely national champions in Northern Europe. Even including subordinated bank debt, the exposure's only $133 million. In fact, including senior debt and other financials, our total Continental Europe financials holdings are $870 million, which is down $350 million from December 31, 2010. Just as importantly, these bonds have an unrealized loss of just $28 million. At less than 3% of our 15 comp portfolio, we have significantly reduced our investment risk to a Eurozone meltdown.

Now to our capital management. We purchased and canceled $4.9 million ordinary shares, at an average cost of $20.21 for $100 million in the fourth quarter, and $31.7 million ordinary shares at an average price of $21.03, for a total of $665 million in 2011. This leaves $190.5 million available for purchase under our $1 billion share buyback program. In October, we announced the termination of the Stoneheath 3 facility, and the resulting issuance of $350 million of series D preference ordinary shares, at 312 basis points over LIBOR, a very attractive rate in today's market.

And in 2012, we repaid, at maturity, the $600 million, 6.5% guaranteed senior notes. All of our actions were designed to maintain a capital structure that balances the ability to build shareholder value, whether it's redeploying more resources behind a considerable underwriting talent we've been building, or taking advantage of attractive share repurchase opportunities or other means of returning shareholder capital.

Since August 2010, XL has repurchased 57.3 million shares, or approximately 17% of the outstanding shares at that time. We reconsidered the amount we repurchased in Q4 2011, as more indicative going forward than the earlier part of the year. Of course, this will be tampered by significant catastrophe -- large loss activity, or a specific opportunity to put our capital to work.

Now before I hand it over to Greg, I'll make some comments on the Costa Concordia situation. We expressed our sympathy to the loved ones of those who lost their lives in this tragic accident. The loss is in early stages and investigations continue, particularly as to the ultimate size of the loss. XL has exposure in both the Insurance and Reinsurance segments. Our exposure is significantly reinsured, which we expect will contain our net loss. Based on our exposure for Insurance and Reinsurance, net of Reinsurance protections and inwards and outwards reinstatement premiums, we estimate our losses in this $40 million to $50 million range. Greg?

Gregory S. Hendrick

Thanks, Pete. I'll focus on 3 topics tonight. First, our results for the segment; second, some of the actions we are taking to improve these results; and third, a brief comment on the current rate trends.

First, the results. As Pete mentioned, we normalized for one-off multiyear deal written in Q4 2010, Insurance gross premiums written grew by 5% in the quarter.

The majority of this growth is due to a new premium from targeted initiatives. In particular, our North American construction programs in international professional businesses, each had a significant new premium. Net premiums earned were up $59 million or 6.6% reflecting the year-end grew of higher gross premiums written. The Insurance segments combined ratio for the quarter of 116.2% was 15.2 points higher, versus the same quarter last year. Current year debt loss is accounted for $133 million or 12.2 points of the increase. While Thailand floods accounted for $102 million, we also had $26 million development in the quarter from events occurring in the first 3 quarters of 2011.

Lower prior year of favorable development accounted for 4.5 points of the increase, as we released $28 million in Q4, compared to $66 million in Q4 last year. While the reserve releases in many lines were offset by strengthened reserves in E&S risk management and 2 of our professional businesses. An increase in the expected account were 1.4 points of the increase -- attributable to primarily the foreign exchange rates, and higher compensation cost, as we continue to add underwriters, and make changes in business leadership.

The deterioration that I've mentioned was slightly offset by lower current accident year loss experience, which contributed 3.8 points of improvement, primarily due to lower large losses compared to the fourth quarter last year. However, the current accident loss ratio of nearly 72%, adjusted for prior year development in cats, is unacceptably high. Let me be clear, we view this segment result as a whole, unacceptable. There are numerous bright spots, and there are business that is challenge. So I want to walk you through some of the actions we are taking to improve results.

First, it's important to step back to what we told you at our Investor Day, that we have changed the way we think about managing XL. We used to be a handful of global product lines for sign of goals. We now consider each business a core unit of accountability, but with aligned goals and strategies. This is the portfolio of business that I know well.

In past year, we've examined every pocket of performance, both positive and negative, that would have previously stayed hidden. In businesses that we view as challenged, we have added new leadership and experienced team, and we have re-underwritten strategies. Particularly, this has meant empowering these leaders to re-underwrite the sectors of their books that are underperforming. This takes some time, but we feel it will yield the right results.

In many other areas, we found opportunities to be even better at the things we're already doing well. So it's some specifics. With new leadership in both the North American and international property businesses, we've reviewed our approach to cat underwriting. While we have outperformed relative to the industry in almost all events, we can still improve our catastrophe performance, and cat is an area I know very well. For example, we've looked closely at our approach to flood underwriting, and decided to dramatically reduce limited authorities for our property underwriters. In our International business, we restricted cat authority, and we've seen our exposures reduce at a faster rate than our premium base, as the book renews.

Learning from our improvement in track record in reinsurance, we integrated the latest industry cat models to support pricing and underwriting decisions in this portfolio as well. We also have a new approach for our property Reinsurance treaties, which we knew at May 1. By considering capacity from a variety of capital sources, we will optimize our seat of reinsurance coverage and cost.

With new leadership in our risk management business, we're taking action to deemphasize the guaranteed cost workers comps in this portfolio, and it's lagged the rest of the book by 10 loss ratio points. We know there are real opportunities in workers comp, and we've added new volumes in our North American and construction business. With our focus on very large contractors, most of whom, have outstanding risk management practices, we are selectively underwriting a book that should outperform the general workers comp industry.

To further enhance our results, we're planning a new underwriting workstation, greatly improving our operational efficiencies, pricing data and analytics. Other challenges, we are confronting by shifting our mix of business, and I'll give you examples from E&S and professional. In our E&S business, again an area where we have added new leadership, we know one of the sectors of underperformance is the New York Contractors General Liability Line, specifically subcontractor risk.

We are re-underwriting this book and shifting our exposure to general contractors. We also know our book about partner risk to experience a 20-point higher loss ratio than the rest of our general liability portfolio. We have decided to renew just a handful of our best risks in this class.

Since early 2011, 2 of our professional businesses started shifting their portfolios towards smaller customers, and optimizing a geographic mix. We're already seeing signs of improvement, we've reported claim counts down 30% year-over-year.

We're made more confident, given our lengthy history in some of these classes, and accumulation of data, which we are minding, to yield a strong competitive advantage. Our strategic analytics team is currently working with our underwriters to take advantage of this opportunity.

Another illustration of our re-underwriting is the private D&O portfolio, which peaked at $75 million of premium in 2008. As we experienced the turn of results, we decided to completely revamp the business, and it's now just $10 million of premium in 2011. With new leaders and redefined strategies to improve existing businesses, we're also enhancing our profitability for strategic growth opportunities.

In 2011, this meant the addition of Inland Marine, Political Risk and Surety teams, the latter 2 of which, we view as having true global potential. These businesses will add -- will aid our delivery of expansion into areas of opportunities, in particular, our new offices in China and Brazil.

Finally, a word on market conditions. We have seen positive rate trends across most of our businesses. We achieved our third consecutive quarter of positive pricing in North America and P&C businesses. Specialty pricing was also positive in the quarter and for the year. And we continue to see material improvement in our U.S. D&O book, as rate decreases continue to slow in Q4, and early 2012 renewals are yielding rate increases.

We believe that the positive pricing momentum we see is real and sustainable, and will continue on 2012. While we are taking corrective actions in the quarter of our Insurance businesses, we are very well prepared to take advantage of, and a deep push for, increasing rates in the remaining 3 quarters of our book.

And now to Jamie to discuss Reinsurance results.

James Veghte

Thanks, Greg, and good evening. I'd like to cover 2 principal issues tonight, a review of our fourth quarter and full year results, and also, some comments on a very successful renewal season, market conditions and how we view our position in an improving environment. This segment has a solid result in the quarter, despite the onslaught of significant industry cat losses we experienced throughout the year. In this instance, Thailand flooding. Our combined ratio was 90.8% for the quarter, and included the benefit of prior year releases of $40 million. This compares to a combined of 69.8% in the fourth quarter of 2010. Excluding the benefit of prior-year releases, we had a combined ratio of 100%, which compares to 84.1% in 2010.

The performance in the fourth quarter was substantially impacted by catastrophe losses of $62 million, including $56 million from the flooding in Thailand. Excluding the impact of both cat losses and prior year releases, the segment had a combined ratio of 85.6%, which compares to 80.2% in the fourth quarter of 2010. This 5-point delta from last year was driven by a number of issues, including 2 fire losses from our U.S. operations, a deterioration of performance of our U.S. crop portfolio, and a co-mutation in the fourth quarter of 2010 that was nonrecurring.

For the full year, XL Re had a combined ratio of 97.8%, which compared to the 80.1% combined in 2010. Our year was heavily impacted by cat losses of $406 million, an increase of just under $250 million from what we experienced in 2010. Excluding the impact of both Cat losses in prior year releases, we had a combined ratio of 85.7%, virtually identical to the 85.9 in 2010. Frankly, we are gratified to produce an Underwriting profit in a year when industry global cat losses were north of $100 billion. I think this speaks to the experience and discipline of our Underwriting teams, and the prudent reserve position of our business.

Turning to top line. Gross written premiums in the quarter were $105 million, which compares to the 97.5 written in the fourth quarter of 2010, an 8% increase. This increase was driven largely by the reinstatement premiums, emanating from the Thailand flood loss. For the full year, gross written premiums were $2.1 billion, a 12.5% increase from 2010. This increase was due to new business and increased share in both XL Re Europe and XL Re America, increased reinstatement premiums, and an increase in our U.S. crop ratings.

Turning to market conditions, our year-end renewal went largely as we expected. For U.S. cap business, non-loss impacted programs saw rate increases in the 7.5% to 12.5 range, while loss impacted placements saw increase from 15%, to as much as 40%. Loss impacted international business, paid an increase of 30% to 70%. In the U.K. and Continental Europe, we saw fairly modest single-digit risk adjusted increases, a bit below what we expected going into renewals.

Capacity was readily available, although we would say customers that tried to undercut the lead price indication, struggled to get things home. We saw a fair amount of business get repriced and increased during the last couple of days of the season. In addition, both aggregate and worldwide type placements struggled to get done. While there were a couple of headline accounts that bought less capacity than they did in 2010, overall, we saw a fairly healthy demand profile from the market. It's our estimation that north of $1 billion of additional U.S. wind exposed cat cover was bought at year end. Broadly, we were pleased with the renewal of our cat portfolio.

Turning to Casualty. The U.S. market was competitive at January 1. Reinsurers were generally quite determined to retain their renewal accounts, and most tried to increase their lines with limited success. There were some increase in ceding [ph] company retention levels, particularly, on business that performed well over time. As Greg mentioned, relative to original pricing, we are beginning to see positive movement in the primary market, with the exception of sectors of the professional lines market.

For international casualty, rate levels remained broadly flat, with those seeing some willing to accept increases, often taking additional retention. We do continue to see improvements in the U.K. motor market, particularly on accessible loss pricing.

With respect to the Specialty areas of the market. January 1 is a fairly light renewal for aviation, and the marine market had a very late renewal season, with significant improvement in the energy sector, from those programs impacted by Griffin and Deepwater.

Overall, we are pleased with our book of business and our market position going into 2012. We've had 6 consecutive years of attractive Underwriting results, a very experienced team, deep relationships across the market, and we are ready to leverage all of these assets into continued success as we go forward.

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

David R. Radulski

Shirley, please open the lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Keith Walsh with Citi.

Unknown Analyst

I guess my first question for you, I appreciate the extra detail around the weaker lines of coverage. But just a couple of questions around that, what percent of total premiums do those 7 lines represent? And how much allocated capital is behind that? And what accident years are really showing the weakness? And then I've got one for Peter.

Michael S. McGavick

Yes, the capital allocation, we'll have to get back to you to get precise. I don't have it broken out that way, but it's about 20% of the net written premium, 1/5.

Keith F. Walsh - Citigroup Inc, Research Division

Any years in particular that are showing strain?

Michael S. McGavick

It would really depend by line of business. Some of them have deteriorated as rates have come off over time and kind of revealed themselves to be under performers. Others have been -- there might have been a year or an event over the years that has given a rise to this. But generally speaking, these are books of business where we, ourselves, when we started breaking the business into separate business lines, rather than this kind of global view of Casualty and Property, that's when we got intense about these particular businesses, as ones that we had a real opportunity to upgrade the performance.

Keith F. Walsh - Citigroup Inc, Research Division

Okay. And then for Peter, just on the rate of repurchase, I think you mentioned $100 million a quarter. And I would guess, you guys have significant excess capital writing $5.5 billion of premium on a $10 billion balance sheet. Why not a much higher run rate here?

Peter R. Porrino

Well, a couple of things, I'd say. One is, we do see some opportunities in the marketplace, and we were certainly investing, as Mike said, in talent. We do believe that we are at the beginning stages of a hardening market. And we also noticed, I mean, catastrophes this quarter was a difficult quarter for the industry and for us. And so to come out and signal, I would say, increased buyback activity would probably not be correct. And then the other thing is, throughout 20 -- the end of 2010 and 2011, I'd say there was a little bit of a catch up in lack of buybacks in the prior periods. Mike, you have...

Michael S. McGavick

No, I just. At the same -- I think your question is a very good one. And the only thing I'd add to what Peter said, is you've heard me walk through the 3-part analysis before, what percentage buffer do we want to hold to our rating agency capital in order to make sure that we do not ever put it at risk to the best of our ability. Second, once we'd determined that, then we understand what this truly excess, and then, we're always judging, where can we put it to work to make the franchise better, and if we can't, how do we get back to shareholders the efficient way. That thought process hasn’t changed in the time I've been here. Right now, you have 2 things kind of going in opposite directions and we're always analyzing across both. One thing, you have an improving rate environment, as Pete mentioned, which can give us some opportunities for profitable growth. You have seen us invest in new teams and some new opportunities because of that. But at the same time, trading where we're trading, it's hard to ignore, the economics of share repurchase. So they kind of move in competition with each other, and we're always analyzing across those 2. So that's why we want to be cautious and at the same time, it's been a volatile time for the industry and I think all of us having seen 2011 in the rearview mirror, we'd like to see that calm down.

Operator

The next question comes from Jay Gelb with Barclays Capital.

Jay Gelb - Barclays Capital, Research Division

First, a quick numbers question. With the change in debt accounting, coming on January 1, will there be any write down of the book value on that, or impact to earnings in 2012?

Michael S. McGavick

Our estimate is that it will be a small number in the 10s of millions of dollars, that will be disclosed in the 10-K.

Jay Gelb - Barclays Capital, Research Division

In terms of the impact of book value?

Michael S. McGavick

Yes.

Jay Gelb - Barclays Capital, Research Division

Okay. Any impact on 2012 earnings?

Peter R. Porrino

No, at least nothing at all material.

Jay Gelb - Barclays Capital, Research Division

Okay. And then more broadly, if I look at the Insurance segment, even excluding net prior year development, cats and reinstatement premiums, the underlying combined ratio, is it 104 of the full year 2011, up from 101 in 2010? And Mike, I know you don’t like giving guidance, but what do you -- what type of improvement you think you can drive through the results in 2012?

Michael S. McGavick

Jay, your first part of your question -- your first part of your comment was the governing one. We don't give guidance. We believe the business is too volatile for that, it just has a general observation about the sector. But I've tried to be as clear as I can, and maybe I could step back and make it a little broader to at least, be as helpful as I can be. You know very well, and all the people on this call being Insurance experts, you know, that the reality of any one period's underwritings, are mainly the product of underwritings from a year and more ago, and decreasingly, the product of more recent underwriting activity. So you're always getting a pretty nice lag, just by the nature of the business, from the underwriters action to the result. What we can tell you and what we have told you going back to our investor call, was that because of our new way of looking at it, with greater insight, greater accountability, we had identified some areas that really needed improvement and we're un-implementing significant change. And you've seen announcement after announcement that really can be tied to that observation. While it's a short-tail line, as soon as you implement a new approach in underwriting, you get the effect, roughly a year after the underwriting action takes place or it can be sooner if you're not underwriting something again, if you're not renewing, you can get an immediate impact, if you're writing your nonrenewal actions. But of course your opportunity for nonrenewal takes place for the following year after you make the decision, because our policies don't all incept, in common at one particular day. We certainly get, in some books, more bang for the buck at the 1-1 renewal point. And at least, some of our actions this past year would have taken place at that time. So you really kind of have to get extremely granular, line by line, action by action and pattern of renewal by pattern of renewal, or pattern of new inception by pattern of new inception, before you can start adding up when exactly an action might take place. And that's why because of the complexity of all that, and bluntly, the fortuity as well, on what we would say is more and more over the course of '12, and certainly, much more impact than we saw in '11, you will see the book remixing to these new underwriting actions, and that should of course, in turn, see the actions take hold in the bottom line. What we do plan to do over the course of the year as we're able to do so, is to give you updates on evidence that we're seeing, that may not be ready to translate into the bottom line. We will not change our very prudent approach to reserving. I know there's a lot of -- kind of commentary that goes on about the industry and the various phases of how people behave during different cycles, during periods of the Underwriting cycle, but in our reserving, we just remain consistent throughout. I would say that actually sets us apart relative to the industry from all the numbers I'm seeing, at least generally. And in fact, I think when you look at the global triangles for this year, for example, you're going to see -- we think, and I think you will judge too, and independently, we're seeing judge that our margins are actually increasing somewhat in terms of reserve redundancy, that is not generally true about the sector. So as I look at it, when you take all of that together, the fact that we're not going to overreact quickly, we're going to want -- we're going have a 'prove it to us' actuarial attitude, and because these actions took place in different pockets over different time periods over the last year, it will work its way into the book, increasingly through each quarter, you should see more influence from these underwriting actions.

Jay Gelb - Barclays Capital, Research Division

Makes sense. Sorry for follow up, but are you also implying that we should expect to see premium volume in the insurance segment to be lower in 2012 than it is in 2011?

Michael S. McGavick

Well, I'm going to ask Greg to jump in here too because Greg is the one, I just want to emphasize the point that was made earlier, that I think is really important for the market to understand. While Greg started his job leading insurance on January 1, Greg led our strategic review in 2010 that led us to the changes we made and how we lead the business, and throughout '11, was leading various of the most urgent of our process for reviewing those lines that we found had challenges, along with Jamie Veghte, and a team of our best underwriters. So Greg's starting point had a big run rate to it and the lot of knowledge added to it. So, yes, where we saw business that was underperforming, you should expect to see that there'll be jamming rate through it, changing underwrite terms and conditions, changing our limit strategy and changing our reinsurance strategy, or in some cases, simply nonrenewal. And those will take place over those impacts will take place over time. In those places, you'll see shrinkage, but we also have pockets, but we assure you, we didn't think we were using all of our capacity. And where we'll see growth. And I'll ask Greg to comment a little bit on some of those lines where we saw opportunities for growth, and some of the lines where we actually jumped into the line because we see the conditions as so enticing.

Yes, when I touched on some of them, in my comments. Jerry, but generally, we're looking at -- ones I didn't touch on in particular, our North American property business with Joe Tucker as the new leader, is showing a strong growth of our construction business. I did mention, we also didn't touch upon it, but we're adding new programs as we've re-underwritten, it's one of the areas that we've been focused on, a new leader there as well, and Pete Purpose [ph], and he is quickly refocusing the book and adding new programs, in fact, you will see in the press release, in the last couple of days of our latest program there.

Unknown Executive

There is one new line I would add to my comment, one particular book, the international property book, we're in the last chunk of what we had told you in previous calls are the end of LTAs. And so that book will roll off in 2012, and we'll get a good crack at 1 1 13 for that last big chunk of business, so you'll see some activity there. It's important to point out again, that's 25% of the insurance business that we're talking about, and we are doing some strong growth initiatives in the other 75% of the business.

Operator

Our next question comes from Matthew Heimermann with JPMorgan.

Matthew G. Heimermann - JP Morgan Chase & Co, Research Division

I guess, I wanted to just touch on the incremental $100 million of expenses you're talking about next year. Guess a little surprised by the magnitude of that. But was, rather than talking about what the number is, I was hoping you could help us put in perspective, how you're thinking about the payback on that investment, and what metrics we should be thinking about over what time frame we should be thinking about to kind of judge how well spent that money is?

Michael S. McGavick

Yes, we generally don't think of things over much longer than a several year horizon when we do payback analysis, because I just don't trust numbers and get out longer than that. So that's how we think about it, we wouldn't have, none of these investments will be made if we didn't think they would generate an adequate return within 3 years. So that's a general rule of thumb. Now when you're investing in businesses, they can make their returns at different paces over time. For example, some businesses, with relatively low infrastructure cost, let's say Surety, you could -- depending on what happens in the marketplace, you can have that business grow relatively quickly at relatively low cost, and get to payback relatively quickly. On other businesses that are a little more infrastructure intense, say Inland Marine, would come to mind, I would expect the payback on those investments to take longer to realize. But in no case, would we jump into something where we didn't think over 3 years, we'd be getting to a meaningful return on investment. On the technology side and on the Underwriting Analytics side -- Underwriting analytics, I expect to have fairly rapid payoff, if you think about it because when we make an investment in the new model, and that model gets implemented, the only constraint to the speed of the benefit, is the same factors I described a moment ago, when you're dealing with Underwriting decisions. That is how quickly can you get the book through the new decisions that you've made. And then finally on the broader Underwriting and the technology infrastructure paybacks, those are always the hardest to get to, because the reality is, they tend to be softer numbers that really have benefited, may show up in the expense ratio over time. But we do know that even our growth is enabled by these platform investments. So we couldn't be adding some of the premiums as was described when you take out the one special items of note, it was a 5% growth of Insurance in the last year, we couldn't be doing that without some of these technology investments. So while it's a little softer, we would have the same rigor over return periods that we would expect.

Matthew G. Heimermann - JP Morgan Chase & Co, Research Division

And can you -- well, I guess, as I listened to your answer, kind of the way that it works in my mind is, you've got a certain percentage that's really about investing in people and presence, and that will get paid back, in terms of -- you get production, and ultimately, profits on it. Part of it, on the model side, feels to me like, it's not so much -- it enables you to accomplish a lot of things, but it's more about maybe avoiding losses, then it is necessarily and helping volatility than it is necessarily about an absolute dollar. And the last one, just kind of feels like some business cost to some extent. So -- but I'm just -- I position it that way, because I'd be curious if you give a sense of whether or not, how much of its people versus the other 2, because I guess, from a people standpoint, would've been unfair to expect that over the next 3 years, you'd recoup that expense, plus some margin on top of it.

Michael S. McGavick

All right. First of all, I think the way that you've thought about it is correct. In terms of additional expense, we're talking really about the $100 million in run rate increase, as opposed to the ordinary cost of the business, which we're always trying to grind down. As I think about it, I think the right answer, we'll get you some confirmation, is about 1/3 of this is specifically related to people that we're adding, where you get the return in the profile you described. And about 2/3 of it is related to technology and infrastructure costs, which we would expect to show up in allowing for growth or in some cases, and the reason you were right to split into 3 buckets and not 2, when you get into those analytics, and that's -- we're really investing in what we believe will show up as a lower loss ratio. And for us, I know this will sound trite, but I mean it, for the way, for the businesses we're in, and the way we think about the business, it is the loss ratio stupid. I mean that's how we think about the business, where we make investments, we're trying to drive insight to give us a loss ratio advantage over our competitors, over time.

Matthew G. Heimermann - JP Morgan Chase & Co, Research Division

That's helpful. And then just with respect, just following up on the buyback. I mean, it's part of the issue here when we think externally about your capital. Is that some of the new growth initiatives you have are basically in areas where you're not warehousing a lot of capital. So to some extent, until those get high, the capital efficiency is low.

Michael S. McGavick

Our smaller lines of business don't line up at the beginning, especially given diversification benefits, consuming that much of our capital model. So I don't think that would be a fair way to think about it. If I was going to speculate that there is any particular miss anywhere in the analytical cycle, between how we think about it and how you all think about it, the only place I would speculate, is that it is the way that we, versus the way which you think about the buffer, to rating agency capital. If I was going to guess, I would think that might be the biggest mismatch. But by either how I've seen you analyze it or how I see us analyze it, we don't dispute that there's excess capital. It's just a matter how we're thinking about acting on that, and our degree of comfort given current market conditions and opportunities. But if I was going to speculate about the difference, that's probably where that difference is, and I think a lot of that, where we might be able to do the difference, could really not only relate to how the market works today, but how the market works in the future. Because we are preparing steadily for the impact on our legal entities, as correlated to solvency to and other future regulatory impositions.

Operator

Our next question comes from Michael Nannizzi with Goldman Sachs.

Michael Nannizzi - Goldman Sachs Group Inc., Research Division

I guess, I'm trying to understand here, you're thinking about investing for growth and we're sitting here in mid-single, at least my estimates, kind of mid-single-digit ROEs next year, talking about spending a little bit more on expense, maybe $100 million for compensation, as opposed to maybe buying back stock. And what that difference means from an ROE and book value perspective, what do you look at to make sure that maybe it's not too early to invest for growth right now? And just one follow-up. Thanks.

Michael S. McGavick

I appreciate the question. And I do really appreciate the spirit of the questions, because they relate to the trade-offs that are very difficult trade-offs to judge. So we'd rather salute [ph]to the ground just as you do on our behalf in analyzing us. But again, when we can remix this book of business to more profitable line, we can create returns that are not only more attractive in the short-term, but very much more attractive in the long-term for the franchise. And that is our ultimate mission. Second, as we are able to attract this better talent, it's not the case, and this we talked about last quarter, it's not the case that you just get expense out of that and no other benefit. You can get very quickly to lower loss ratios, which are very attractive for our investors or you can grow in a space of business, where you're already getting attractive returns, and thereby, be affecting the remix of the business towards more profitable activity that shareholders will most appreciate over time. And so, when we think about it, that's why I emphasized the idea that only 18 of the underwriters, 96 of them, only 18 of them were tied to these new businesses last year. Because the new business thing has the lag effects that we've talked about. But the other ones, are immediately put to work on blocks of business that are already in the house, and if they give us headaches, they give you headaches, and if they give us profitable for growth, they can remix this book faster toward more profit. So I view that as very common-sense activity, because to not do that, is to literally continue to produce these kinds of anemic returns, and then, just be kind of worst off over time. The other point I would make is, we can only be in the market timing game to a point. Because in the end, if you dive in after the turn, and everybody knows the turn, you're not ready and you're not going to be active present in the market to benefit from what comes. We want to be present. We want to be active. We want to have the capital capacity, we want to have the cap capacity, and we want to have the talent to take advantage of what comes next. Because while it isn't a hard market, it is sure changing. And in some lines more than others, and we can take advantage of that phenomena to remix the book of business. So I say all of that, and then I'll still say what you know, when we're trading like this, the economics of share repurchase are compelling, we know that, and we're very aware of that as we make this trade-offs.

Matthew G. Heimermann - JP Morgan Chase & Co, Research Division

I mean I understand, I guess if you're talking about 80% of your business running at a 95 combined in Insurance, I mean that -- just the delta there is significant to earnings, and you add to -- and then don't add the additional expense from hiring, and now you have more capital to deploy. I just wonder, does it make sense to think about fixing, showing some ROE trajectory, and then growing? And I understand your point about missing a turn, but I just wonder if that -- this puts us in a mezzanine phase for maybe another 12 to 24 months.

Michael S. McGavick

Well again, again a thoughtful question. I would emphasize again, that the remixing didn't start today on this call. It started over the course of last year, which is why I believe that the benefits from this remixing will start to take increasing effect on the book through 2012 and beyond. I think that's a very important notion. So if we were at a standing start today, I'm talking about actions, the equation might be different, we're not. And we're very, we remained resolved to see these plans that we put in place come through. So I think that's part of the difference here. The second thing is, you can -- it is always possible to create short-term benefit by discontinuing a challenged activity or just grinding expenses down as low as you can. You could create some short-term lift out of that, but you're not building a business that's going to be great over time. You're just giving a short term kick to it. And that's not just what we're trying to do. We don't think that's what you want us to do either. So it is always a complex equation, but I do think that on balance we have this equation right and have had through the year.

Peter R. Porrino

This is Pete Porrino. Keith, just to get back to you on your question about the capital on those 7 businesses. So as Mike said, it's just over 20% of premium. It's quite a bit less than that on capital, it's in the 12% to 14% range.

Operator

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

Jay A. Cohen - BofA Merrill Lynch, Research Division

I forget who mentioned it, but there was some commentary around, there were certain lines in the Insurance business, where you saw some adverse development in the quarter. And I'm wondering if you could talk more about that and why you're comfortable that, that won't continue, that's question number one.

Michael S. McGavick

Sure. And we have, as David mentioned, we have Susan Cross, our Chief Reserving Actuary here with us, so she can get very precise about that. Susan?

Susan L. Cross

Yes, sure. So within the insurance segment, we did have net favorable prior development of $28 million in the quarter. And that comprised of $38 million favorable in Specialty, $15 million favorable in professional, $23 million unfavorable in Casualty, and $2 million unfavorable in property. So we had very favorable experience across most Specialty lines, and strong favorable in the core professional lines. Areas of strengthening, include the design and select professional books, and that was about $40 million of strengthening. We had strengthening in North Americas E&S, programs and U.S. risk management businesses of about $20 million. And that's related to the guaranteed workers comp and New York contractors, general liability exposures that Greg mentioned in his remarks. And finally, we had strengthening of about $18 million in excess casualty, related to some large energy claims in the 2010 accident year. So overall, we had very favorable in the quarter, and for the full year. Yet, we are strengthening where we need to ensure that strong balance sheet and foundation for the future. I'll also point out that we continue to experience favorable actual loss immergence, relative to effective levels across most of our businesses, especially, in primary casualty, professional and U.S. Casualty Reinsurance. And that gives us confidence in our overall reserve position, yet we're giving this time, to more fully develop before recognizing it, either in our prior-year development, or in our current year loss ratio picks. So that where we had that strengthening, is very specific portfolios, portfolios where we're taking underwriting actions, and we're confident overall.

Jay A. Cohen - BofA Merrill Lynch, Research Division

Just quickly. I'm sorry, go ahead.

Gregory S. Hendrick

I just want to jump in, it's Greg. Sorry, Jay. Let me just -- on 2 of them in particular, let me just follow on what Susan just said. In the design and select, and in particular, the professionals. 2 strong leaders that have been with us for a while, these activities just started either late in '10 or early in '11, design, while we're disappointed with the development, it's still on an on level and adjusted basis, is a profitable book of business for us over the last 10 years. And we're putting some things in place to make sure that continues into the future, we're very convinced with the future of that book. Select is also refocusing on some smaller customers, and some of the better states, and they're well underway to improve it, and I'll touch on my comments there, where we're seeing already claim counts reducing. So not all this reserved development, if necessary, I mean, these businesses are not going to be future profitable for us in the future, but we are taking it seriously, and making sure we stay vigilant about the performance on each of these books.

Jay A. Cohen - BofA Merrill Lynch, Research Division

And just quickly, and I'll follow up on that. The stabs that you took at both design and select and North American E&S, when you lasted a deeper dive, I guess this would have been in the second quarter into your reserves, were those running a temperature at that point? Is this something new, were there reserved increases bigger than you've done in the past?

Susan L. Cross

In our second quarter review, a couple of these areas, we did have some adverse developments, specifically in the E&S and in the select professional portfolio. So it's not across all the portfolios. So we had seen some signs of it earlier in the year. But I would say this might too, was a little bit more than what we've seen earlier in the year.

Jay A. Cohen - BofA Merrill Lynch, Research Division

Okay. And then just quick numbers question.

Michael S. McGavick

I'm sorry, Jay. I would also add one other thought to that. The emergence of this development wasn't our first clue that these businesses needed attention. When we started -- and this is just such an important plan, I want to emphasize it again. The decision to move away from these very large global lines of business approach where everything got lumped together, really obscured where there were pockets of correctable underperformance. Because you've look at the top level of casualty line and the top-level profit, and you go , all looks okay, and given the time in the cycle, blah blah blah and we just didn't know, we don't want to run the business that way, we want to get very clear level accountability, at the granular business level. So when we start pulling it apart and analyzing it that way, back in the latter half of '10, after this strategy was devised, that's when we got a focused on these lines of business, because we started looking and finding things that we really didn't like, that didn't meet our kinds of standards of activity. And since then, that's when all of these things really get more intense. So I just -- I just want to make that point, because I think it's important to understand the narrative of why we're feeling frustrated, hasn't shown up yet, but confident that it's there, that's the period of time we've been working on this not just in the last quarter or 2.

Jay A. Cohen - BofA Merrill Lynch, Research Division

Got it. Thanks for that clarification. And then one just quick numbers question for modeling purposes. The loss from the Concordia sinking, can you give us an estimate of kind of what is reinsurance and what's insurance at this point?

Peter R. Porrino

No. There are some confidentiality things that we have with our clients. We don't -- remember, we almost never will talk about a single and short events, right? So this is very unusual, only doing it because others have done it. But at this point, we would not be comfortable splitting it out between insurance and reinsurance.

Unknown Executive

We did pretty clear with the client, the way which we've talked about it. But that's just specific as we can get.

Operator

Our next question comes from Brian Meredith with UBS.

Brian Meredith - UBS Investment Bank, Research Division

Just a couple of quick questions here. First, Greg, you talked about looking at some changes to your cat reinsurance program. Can you give us some sense of what you're thinking about doing here? Or could we expect more volatility, less volatility going forward?

Gregory S. Hendrick

Sure, Brian. First, let me stress, our core reinsurers have been with us a long time, and will continue to be important parts of our seated plans. But I personally, and XL as a whole, have a lot of comfort with alternative sources of capital. You'll recall, we did Cyrus Re for 3 years, and our Bermuda book and reinsurance is quite active, and trading with alternative partners. We see the recent activity in this area, we see supply from this alternative source of capital exceeding demand, and we think we can see some of our peak exposures more efficiently. And to be direct -- to be in your question, we will not to an increased volatility at all. This is to try and reduce the volatility of our book, net after Reinsurance.

Brian Meredith - UBS Investment Bank, Research Division

Great. And then, just 2 other quick ones here. The investment affiliates, big loss in the quarter. Was that Select related to performance or was there some type of write off or something that happened? Seemed awfully large at $19.9 million.

Michael S. McGavick

So it was not a write-off, we’ve got Sarah here, who can get into more detail. But as we mentioned, Q3, as you know, is a pretty bad equity quarter. And we've got investment managers that go above the high-water market, and they go below the high-water market. When those happen, you can get a fairly large delta, but Sarah can add a lot more.

Sarah Elizabeth Street

Yes that's exactly, Pete at the high point. I mean the big number was $20 million from our investment manager affiliates, which effectively, was a reversal. If remember, back in Q2, we have very strong earnings from our investment manager affiliates, and it was because a number of them had gone above the high water marks, so we've got a big pickup. But with a very difficult third quarter, one of them fell back below, and therefore, they had to reverse back or give back basically, the performance fees that they were earning.

Brian Meredith - UBS Investment Bank, Research Division

Great. And then last question, Pete, I wonder, you gave us the new money, what you've got right now, we know what your book yield is. What's the maturity profile look like kind of over the next 12 months for the investment portfolio?

Susan L. Cross

Brian, Pete's pointing to me on that one again. No. I mean in terms -- if we look at the bonds that they're maturing over the next year, along with our estimates of the cash flows that we expect to get back from structured credits, in total, it is about $3.6 billion, and they have an average yield of 3.11%.

Operator

Our next question comes from Randy Binner from FBR.

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

On the $100 million expense increase, I'm just trying to understand where that would come through the model? If you can give out, it will just be helpful for modeling, if you can describe kind of the portion that might go through the corporate and other line versus down in the segments?

Michael S. McGavick

Sure, Steve? So why don't you give us a minute to go and collect that.

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

Yes, okay.

Michael S. McGavick

And then we'll get back to you. Do you have another question, we'll probably have the answer to the first one by the time you're done with the second one.

Brian Meredith - UBS Investment Bank, Research Division

Yes, I mean I just want to add, I mean I had another one, thank you. Just on U.S. D&O, in all the descriptions that have happened so far, it seems like losses have been generally benign still, but I thought I also heard commentary that pricing was getting better. So I just wanted to make sure I understood that better. Especially, I'm thinking of large case, U.S. D&O, or our North American D&O, is that the case that losses are benign but you actually are seeing higher pricing?

Michael S. McGavick

Yes. Absolutely. We're seeing, certainly benign losses around the large events. There is some more noise as I would call it, around smaller claims, particularly, the result mostly just the defense costs. But the line has seen rates come off over the last few years. And we are now seeing the early part of '12 here, the first positive rate movement in that book.

Brian Meredith - UBS Investment Bank, Research Division

Okay. I mean, just to sound a little bit cynical, so why, with benign loss activity, you'd think people would still be soft on price. So is there a kind of a collective recognition that there might be some losses coming down the pike?

Michael S. McGavick

Personally, I don't think so. I think there's a fundamental realization here, that when you look at yields on your investment portfolio of where they are today, and the rate decreases that are piling on the loss cost trends, it have been moving out. When I say small increase, let me be clear, we're still not exceeding loss cost trends, we're not covering that in our rate increases. So I think it's the accumulation of the rate decreases coming through, low investment returns, and a realization that you're not writing this business at a big profit in that kind of economic environment.

Michael S. McGavick

This is Mike. I would just add a couple of thoughts. One is, I think as I've observed, the D&O underwriting space overtime, as opposed to general commercial insurance overtime. Maybe it's because they read financial statements all day long, but D&O underwriters tend to be more disciplined. And the down part of their cycles, in my observation of them, tend to get a quicker response. So they've been -- I think, getting into areas they were uncomfortable with, and they're reacting to it, as the market seems to be reacting to that, and I find that very understandable. I think the second thing though, is a broader comment on where rates are. I wish I think it's worth picking up on this theme. With these investment yields now, continuously locked further in place by the governments around the world, I think underwriters are finally getting it through their heads, that you cannot, cannot keep these rate levels and expect to make much money. I mean, it just -- the paradigm has shifted, and people are slowly, more and more reacting to that. And that's why I think we're seeing this, as I said, it's not a hard market yet, but it's a positive turning market. And people have said, well that will fall back as competition persists, I believe what will happen is people will realize that the baby steps they've taken so far, are insufficient. As against the problem of this historic low, and somewhat locked in for the near-term, yield environment. And I think they're going to have to keep chasing their tail on this until they get it right. We're certainly, going to remain as disciplined as possible as against this yield environment. I also would observe that unlike us, unlike the relative discipline that we have historically and continue to show on reserves, when I look at the industry, I don't see -- broadly, across the commercial sector, I don't see increasing reserve discipline, not at all. So when you add that in, to this anemic yields, I think you really got to have a newer discipline in underwriting, and I expect that to accelerate as people's results show the effects of this period of time.

Peter R. Porrino

Randy, to get back to your first question, I don't want to give -- be overly precise here, because this level will move around a lot, based on allocations throughout the year. But ballpark, while the $30 million will be in the corporate line and $70 million would be in the operating line. I'm sorry, the other way around.

Brian Meredith - UBS Investment Bank, Research Division

So the 70 corporate, that's a delta increase, 2012 over 2011, and then 30 is kind of spread among the expense rations basically?

Michael S. McGavick

Just trying to get confirmation. The corporate line, right, would be the 30.

Brian Meredith - UBS Investment Bank, Research Division

Sorry, I thought you switched it back.

Michael S. McGavick

If I miss-said that, I apologize. But the corporate line would be the 30 and the operating line, meaning the Insurance lines, reinsurance would be the 70.

Operator

Our next question comes from Vinay Misquith with Evercore Partners.

Vinay Misquith - Evercore Partners Inc., Research Division

The first question is really the 7 underperforming businesses. I believe you mentioned that's about 20% of your business. So is that 20% of your total business, or is it only of the primary Insurance? And you mentioned that the rest of the businesses were running at sub-95% x cat expire. So it's the onset of the total business or just of the primary Insurance business?

Michael S. McGavick

The 20% figure is of the total global net written premium for the entire P&C business, for the entire business. So Reinsurance and Insurance combined. It would be roughly a quarter of the Insurance premiums.

Vinay Misquith - Evercore Partners Inc., Research Division

Sure, and the 95% of that is only for the insurance, correct?

Michael S. McGavick

That's the whole firm.

Vinay Misquith - Evercore Partners Inc., Research Division

That's a whole firm as a whole. And the -- when will the underwriting actions taken to help these businesses? What has started early in 2011, and what's your target as to when they'll get an acceptable normalized combined ratio? And would you say that, that's a sub-100%?

Michael S. McGavick

Well, first of all, as a target over time, we do find is just fundamentally unacceptable from any lines of business knowingly over 100. I mean, we have -- that just drives us crazy. Now it will happen from time to time, particularly in casualty driven blocks of business, and some of it can be artificial. I'll give you an example of where it can be artificial. We break up, our reinsurance group by geography. And so for example, with our North American Reinsurance group, we basically take away their opportunities write catastrophe, which we write out of -- largely, out of Bermuda. So that line can look like -- if you looked at it narrowly, you can say, well that's running pretty hot. And in reality, it's running terrific. And if you look at the development overtime, it's running even better. But because we artificially have broken that business up between cat and non-cat, you could fool yourself into thinking it's worse than it is. So that's an example of anomalies that can take place. But generally speaking, we are trying to drive all of our business below 100 combined. And in this rate environment, that's even -- this interest rate environment, that's an even-greater imperative than the normal. So in terms of targets, we certainly don't expect these books of business running over 100 combined. With respect to when they'll take place, I think I have answered that before. And in fact, I noticed a colleague shaking their head at the length of my last answer. So I think getting back, probably get a very strong and negative reaction from the group here. But basically, some of these started in late 2010, some started, and frankly, I can give you the same answer about every quarter up until the last, there's nothing that's new in this quarter. Right now, we're basically, fully locked and loaded on these activities and if anything else pops it's head up, we'll whack that gopher too.

Vinay Misquith - Evercore Partners Inc., Research Division

My second question, I will be quick, is on the prime, Peter favorable development. Your results seem to be actually fairly good. Just curious as to why the level of favorable reserve releases has dropped off in the last couple of quarters? Was it just the year end cleanup? And do you expect a similar level next year?

Michael S. McGavick

I'll take it. Prior quarter, right? We've tried to be clear, we probably didn't do a very good job, but in Q3, would be, we delved to our in-debt analysis, right? So all we do is, it's only in neighbors' e-quarter. It's probably the quarter that would have to the less, least amount of movement during the year. So that one is not surprisingly, went to the prior call about some of the things that happened in the prior year, that caused a larger favorable PYD, than what you would have seen this year.

Susan L. Cross

And I would just say that individual quarter's results, what comes out of that prior development analysis, reflects the unique circumstances of what emerges in each of those quarters, you can have results that are somewhat higher or level in terms of prior development on a quarterly basis. And specific to the fourth quarter of 2010, we had some significant favorable development in our professional insurance business, including some releases on the 2006 and prior cash losses, most notably the Enron related cases back from 2001. And then I went through what actually occurred in the fourth quarter of 2011, where we had strengthening in certain classes. So the pluses and minuses in the fourth quarter of '11 were less than those of 2010, but I wouldn't read anything into that, in terms of any trends, because as I mentioned, we have had continued favorable A vs E, actual versus expected emergence, specifically in primary casualty, professional, U.S. Casualty Reinsurance, those are our longer tail lines, and were we take longer to reflect that favorable experience over time, in both our prior developments and in our current year loss pics.

Operator

Our next question comes from Mike Zaremski with Credit Suisse.

Michael Zaremski - Crédit Suisse AG, Research Division

Mike, in regards to the writing agency capital buffer, is the buffer currently larger that it would potentially need to be due to XL's historical earnings volatility? So said another way, is there an element of the company's past that's suppressing excess capital, which could dissipate over time?

Michael S. McGavick

No.

Unknown Analyst

Okay. And any color on how to think about potential affiliate investment returns assessed in '12?

Michael S. McGavick

This is Sarah. I mean, we still believe that the alternative portfolio can be generating an 8% to 10% return over the fourth cycle. Clearly, last year, it ran at the lower level than that. But we're also optimistic that over the long term, that the 8% to 10% will get generated, and certainly, that put our 3-year and 5-year and 10-year track record show.

Operator

Your next question comes from Meyer Shields with Stifel Nicolaus.

Meyer Shields - Stifel, Nicolaus & Co., Inc., Research Division

One quick question and one maybe a bigger picture, Mike, you talked about 95% sort of being the dividing line between the troubled lines of business and not. Is the 95% command ratio enough? Is that low enough to generate an appropriate ROE?

Michael S. McGavick

It isn't our target. I'm just making the point that there is a really significant delta of performance difference between most of our book and those businesses that require some very intense attention. So that's the -- and the relatively small portion that is that. But no, I wouldn't not tell you that a 95 is our goal. Given the more Specialty nature of our book of business overall, given its complex risk characteristics, I would expect to see this business in -- and let's normalized per cycle conditions, because obviously, you're going to run hotter at the time like this, when this prolonged period of soft pricing. But I would really expect to see this book operating more around the 90 than a 95.

Peter R. Porrino

The only thing I would add, Meyer, this is Pete, would be, as you listen to Susan's talk discussion about reserve in Mike's comments as well, we try to be really prudent when we go and set reserves. And when said that our accident near loss ratios, we certainly are expecting that they are not going to trend up anything they would trend the other way.

Michael S. McGavick

That's a really good point, it would be, in normal times, kind of expected for us to have our accent here. Be it worse than our target in our calendar year, to be the number that reflected our goals more accurately.

Unknown Analyst

And second, recalling the 20% of businesses in these troubled lines, what was the percentage of premiums in 2010 in those 7 lines?

Michael S. McGavick

I don't have that on top of my head, but I know for sure, it would be higher. Those have been reducing.

Operator

Our final question comes from Josh Stirling, Sanford C. Beinstein.

Josh Stirling - Sanford C. Bernstein & Co., LLC., Research Division

This is a great granular focus that you guys are getting us on your efforts in the 7 lines of business. And I was trying to do the math, and I presume, you won't give us the number, but from what it backs into, it sounds like you're sort of clearly well, well above 100 in these lines. And I'm curious, should we view this as sort of XL specific, rate and underwriting issues in these lines of business, or is this more of the generally deteriorating environment that are going to be industry phenomenon, and then I guess, the related question, assuming it isn't just sort of some additional, sort of catch-up or sort of fixing things, that you guys are doing is, do you feel like that they're making these changes in line with your competitors, or your sort of ahead or behind the same sort of things you see playing out?

Michael S. McGavick

I'm going to start with a couple of general comments. But I want to ask Greg to get into it a bit more. As has been my answer pretty consistently, it really depends on the line of business. I'll give you an example of one where I think XL can really do a much better business, job. And I'm really determined and pleased with what I see so far, is our global property business. I really think there -- some of the issues are XL issues, and we can fix, in fact, you heard Greg mentioned, one area where I think we can do a better job in applying some of the knowledge we had in our reinsurance lines around how to treat flood. So there, I would describe as idiosyncratically disappointed. And that's a pretty sizable block of the premium that we're talking about. In other lines, what you're seeing now is really a reflection of what's going on in the marketplace. So for example, in risk management, where you have guaranteed cost comp, that deterioration has been noted by the market very broadly, and I would say, our actual rate of deterioration is comparable, or maybe not even as bad. It's just not satisfying to us, relative to what we know we can deliver in that business. So there you really have something that's going on more broadly in the marketplace, and where our actions are, we think potentially, can give us a leading result. I'm going to stop there, because I'm at risk of giving everything I know Greg will talk about, but it really -- it is syncretic, and it would really depend by line. Greg?

Gregory S. Hendrick

Let me speak specifically about when you hit programs. When you get a program wrong, you're going to be the only one on it, you're the only issuing character, in almost every case, except for some very large MGAs where they might have multiple characters. So there, we might have gotten 1 or 2 wrong, and so we're going to have to shift our way out, and that's going to be a specific XL issue. I'd just touch it a little bit more on the international property piece. The market is making it difficult for us though. We were able to achieve a 3% rate increase as of January 1, but we still have a lot of competitors that are offering rate decreases. And more troubling, as we've said to you before, we're not doing LTAs anymore, we lost more business because competitors are offering LTAs than we did because we couldn't get to the right rate. So it's always going to be a little bit of everything.

Unknown Analyst

That's really helpful. And if I could shift to sort of a more optimistic note, can you just help us think about the relative order of magnitude of the growth that you're likely to see this year? How much of it is likely to be from new -- some from the very sort of new initiatives that you guys are pursuing, new teams, new lines of business, things like that versus merely repricing the book?

Michael S. McGavick

Yes, it's hard to break that out specifically, especially on the team side, because that's how opportunistic of great team in a line that we analyzed we're intrigued by, could come at any time in the year, because that one's really impossible to forecast. And as a result, it's hard to break it by percentage, because you don't know when you're going to get those opportunities. In general, I would expect that next year, the story will be more driven by rate. Because I see rate moving broadly, more favorably than I see opportunistic growth. The only caveat to that is a couple of our lines, like let's say, North American property, we've really analyzed that we have some really great results over time and some real opportunity. And just to be clear, when you get deeply into the numbers, sometimes, this is where it can't always pay off to get too deep on XL's number. I'll give an example. You can find losses that will show up on the yellow apparels is in the U.S., if you choose to dig that far. But what you won't know, is that the originating office of that account was European, and it's written on a global program basis. And it's the European underwriting operations on property that we have this really intense opportunity around, not the North American group that has done a really quite good job over time. And where we actually analyze with some additional pockets of growth, are really going to help us remix the books. So I'm sorry to give an answer that's not real specific. Rate. Generally, will drive more of the story. I think next year, but you could get opportunistic, it depends on what comes available to us.

Unknown Analyst

I guess, the one final follow-up I'd ask related to that is, if you just look back at the last quarter, I think you said it was HI after adjusting, I think it was 5% growth rate, if I have that correctly. Do you still have a sense of how much of that is sort of the new initiatives taking off? Or again, sort of just getting more price on your same book?

Michael S. McGavick

In the fourth quarter, specifically, across the whole insurance portfolio, that number would've been driven more by some of the new initiatives than the rate. We have pockets of rate, but it wouldn’t, if I had to guess, 20% would be rate and 80% would be new initiatives. That's not a percentage of calculation.

Michael S. McGavick

Sorry to have you even more, but you've noticed in this whole call, we're trying to be very granular because we knew there'd be questions, and we really like our story, and we felt it was important to get very granular, so you would understand why we are pleased. The bottom line on that last comment, where we talked about -- so much of our business is in U.S. D& O. So when you have this negative rate trend during the year last year, it was undoing the positive rate we were achieving everywhere else, and the rate, the positive rate improvement that we're starting to see in U.S. D&O, is a 1 1 phenomena, not a fourth quarter phenomena. So you haven't seen that start to change it, and contribute to better rate picture overall. So just a nuance that I thought I' d make sure you understood.

Operator

At this time, I'm showing no further questions.

Michael S. McGavick

Well, I just want to close by thanking everyone. We know we stayed over our ordinary time on the call. But then we expected to given the way the quarter played out. We continue to focus on the long-term health of this franchise. We continue to be very disciplined about how we build a very solid book of business. And we believe that this quarter, in a strange way, the quarter actually confirmed the places that we have been putting our energy into as opportunities for improving XL, both in terms of where we're growing, and in terms of where we have these intense, re-underwriting activities taking place. And we are certainly looking forward to quarters in the future, when we can increasingly describe that those events that have taken place, as we have indicated to you tonight, we will. We thank you for the extra time and attention, and look forward to our visits throughout the year next year.

Operator

Thank you. And this does conclude today's conference. We thank you for your participation. At this time, you may disconnect your lines.

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