XL Group's (XL) CEO Mike McGavick on Q4 2015 Results - Earnings Call Transcript

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XL Group plc (NYSE:XL)

Q4 2015 Results Earnings Conference Call

February 04, 2016, 8:00 am ET


David Radulski - Director of Investor Relations

Mike McGavick - Chief Executive Officer, Director

Pete Porrino - Chief Financial Officer, Executive Vice President

Paul Brand - Chief Underwriting Officer, Insurance and Chair of the Insurance Leadership Team

Greg Hendrick - Executive Vice President and Chief Executive, Reinsurance Operations


Kai Pan - Morgan Stanley

Cliff Gallant - Nomura

Mike Nannizzi - Goldman Sachs

Paul Newsome - Sandler O'Neill

Vinay Misquith - Sterne, Agee

Meyer Shields - KBW

Dan Farrell - Piper Jaffray


Good morning and welcome to our conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Please be advised this conference is being recorded.

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

David Radulski

Thank you, Rita. Welcome to XL Group plc's fourth quarter and full-year 2015 earnings conference call. Our call today is being simultaneously webcast at www.xlcatlin.com and www.xlgroup.com. We have posted to our website several documents including our press release and quarterly financial supplement. We also refer you to the combined historical financial statements and 8-K referencing Q4 integration costs we have posted to our website on January 21, 2016.

On our call today Mike McGavick, XL Group's CEO, will offer opening remarks, Pete Porrino, XL's Chief Financial Officer, will review our financial results, followed by Paul Brand, our Chief Underwriting Officer and Chair of our Insurance Leadership Team and Greg Hendrick, our Chief Executive of Reinsurance Operations, who will review their segment results and market conditions and then we will open it up for questions.

Before we begin, I would like to remind you that certain of the matters we will discuss today are forward-looking statements. These statements are based on current plans, estimates and expectations all of which involve risk and uncertainty and a number of factors could cause actual results to differ materially from those contained in the forward-looking statements. Therefore, you should not place undue reliance on them.

Forward-looking statements are sensitive to many factors including those identified in our most recent reports on Form 10-Q and 10-K as well as 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 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 will turn it over to Mike McGavick.

Mike McGavick

Good morning and thank you for joining our call. Today we are pleased to discuss the fourth quarter and the full year 2015, a year in which we produced solid results, increased the relevance of the firm and built a strong position from which we intend to grow value in the years to come. Thinking about 2015, it's pretty fun now to reflect on what we have achieved, but it wasn't so much fun during the year, of course, because it was an incredibly intense year for the people of XL Catlin.

Bringing together two high-performing organizations would be difficult in any environment. It is particularly difficult in the context of the current pricing environment. As we view it, we are confident that the hard work of our people last year will be well rewarded by the market, because if we think about the totality of market conditions and some of the wild challenges that are going on and when we think about the work we have already done, we feel incredibly well positioned for that comes next. We believe there is a huge payoff for having gone first, for having carefully picked out our partner and for having done this work rapidly and efficiently.

So before getting into the quarter and full year in more detail, let me walk through some of what I think proves out what I have just said. When we set out to put these two firms together, our objective was to build a company for the future, because as risk keeps mutating we want to have the best underwriting minds in the lines of business most able to anticipate and respond to that change. This implies we would have to do a number of things.

First, we had to keep the book together, at least as far as we wanted to do so. Second, we had to keep our workforce together and energized by the prospect of being part of this future oriented company while creating a common culture. And third, we had to get our systems together so we could understand how the company is performing and begin applying our unique levels of insight to the needs of our clients. And finally, we had to do all of that while still delivering an acceptable result, because we said all along this was about both long-term strategy and a compelling financial rationale.

So how did we do against those goals? Number one, we kept the book of business together. In fact, we believe we lost less than half a point of premium. I will say that again, less than half a point of premium that both companies had went away because of the transaction. Now I should said parenthetically that this will go up a little bit more as we know of one program that will end during the second quarter of this year, but even when that is added, it will be about one point of premium loss. We are thrilled by that result and they are less than a tenth of what we had modeled going into the transaction.

Number two, we kept the workforce together. Our voluntary attrition rates this year were only slightly elevated from historical levels. Of course, because of the integration, there are certain key areas where you would expect higher turnover, including in underwriting. But let me put it in perspective. Of our more than 1,200 underwriters, there were literally just a couple of handfuls of voluntary departures that gave us pause. We are simply thrilled that the vast majority of our XL Catlin colleagues see the potential I had.

So we kept the book together and we kept the workforce together. And our third goal, we managed at the same time to bring all this key systems together. We were able to stop duplicative investments and products that no longer fit our needs and we are already mining the bigger dataset with which we can now work.

Now we have said that we should do all of those things and not lose sight of the fundamentals of trying to build a better business with better margins over time. One aspect of this, of course, is savings. You will recall that when we first announced the transaction in January of last year, it was certified that we could reach at least $200 million in synergies and then when we closed the deal in May, we came over the top of that and said that we could do at least $250 million in savings.

We have been wrestling with whether we could commit to a higher number. We never want to commit to a number until we are absolutely certain we can achieve it. So today, we can announce that we have identified not less than $300 million in synergy savings and that we are committed that we are absolutely committed to deliver and we are committed to searching for more.

Now you can ask, why? How did you find more money? Well, a number of reasons. Number one, the transaction continues to reveal additional savings opportunities. And when we see one that we are confident in, we grab it. Number two, in line with these challenging market conditions, we continue to increase internal expectations for savings. Our people are well aware that these are difficult times in the pricing environment and they have responded and come forward with additional identified opportunities for savings. And our hand will not come off the expense lever because the simple truth is that these markets continue to worsen and if we don't run the business as though we are accounting and we do not ever run the business as though we are expecting a turn in the cycle. We may hope for it. It may come. But we don't plan for it.

Additionally, throughout the year as we have become increasingly confident that we would meet our integration and synergy targets, we have resumed share repurchases, buying back over 12 million shares during 2015. I am also pleased to note that S&P recently announced that they have revised the outlook of our main FSR rating from stable to positive, which clearly reflected their review of our competitive position. Additionally, the ratings on several of the core Catlin subsidiaries were upgraded from A to A+, during the course of the year.

And then as I said, we hope to continue to improve the business throughout the year as well. In terms of the result in the fourth quarter, we produced a total P&C combined ratio of 92.3% and gross written premiums of $2.6 billion. We think that's a solid result for the quarter, but there are some mines in the quarter that do make it a bit messy. Pete will provide more detail in a moment, but I would like to note a couple of important items.

First, there was a fair amount of tax benefit in the quarter. For those who have been following along over the years, you can think of it as the book ends to the fourth quarter of 2011. You may remember that in the 2011 quarter, we had all of our losses happen in the wrong places and wound up with an unusually high tax rate. This quarter is the opposite, with our losses happening in places that yield tax benefit.

Second, it is noteworthy that we have had pretty solid PYD releases and I am sure that was particularly comforting to you given the questions that were raised during the third quarter and it reflects the continued prudence of our approach.

And third, I would like to note that we beat our expense targets in real savings during the year and we are very pleased about that.

And then to the all-important insurance ex-CAT accident year loss ratio. While not ending up where we want to, we should note that from the market commentary that there have been a number of large non-CAT losses. You heard that from around the market. We have experienced some of those as well. But our ex-CAT accident year loss ratio insurance did improve both year-over-year and improved sequentially from the third to the fourth quarter. If we can make this improvement in the conditions of last year with all that was going on, we can and believe we will do it in the year ahead.

I should note that our underwriters actually began optimizing our books about halfway through this past year. They threw out the growth plans that both legacy had realizing that market conditions have worsened more than were predicted back at the time they were planned and are already hard at work walking away from either wildly underpriced businesses or accounts that simply don't meet our performance standards. That's why we did not grow much in this past year. And we are certainly telling our underwriters the past year that this year growth is not the objective. The books are assembled. Let's begin to optimize them. The underwriters are keeping their wits about them, especially through this complicated market.

So all-in-all, we produced, what I would call, an acceptable quarter and a solid full year effort, particularly when we consider the potential for distraction throughout the year that simply didn't emerge. This is no market in which to be chasing premium. But I remain confident that given our geographic positions in our broadened product lines we will find isolated spots where there is profitable opportunity for growth.

Last and I have emphasized this before, we still firmly believe that the strategy in and of itself is great, but it doesn't mean anything until is married to the right people and the right culture. We have made leaps and bounds of progress in getting our teams together. They are think about XL Catlin and not just how it used to be and by knowing that they are part of one of the most powerful forces in the insurance sector, they really believe they are doing special work and I agree.

As I have said, this is true every day. Our leadership team functions and so it's has been working together for years. We make decisions together quickly and efficiently. We even have a sense of humor about it and we worked damn hard because we believe that we have a common goal that is worthwhile.

Now I know that if progress doesn't show up in the numbers, it isn't real. So let me be clear. We did a lot in 2015, but this wasn't the year the financial progress would show. All you will be able to see are the indicators. I like the indicators. Our loss ratios, despite this pricing environment continue to come down and we believe that will continue. Our expense ratio is coming down. We kept the book together. We kept this incredible group of colleagues together and we have energized them around a common future. That's the company we were trying to build. We are pretty happy about where we are.

I would note, we are a bit glad that last year is more of a memory now. We are really excited to take on this difficult year because it is now about the progress we can and will make together.


Pete Porrino

Thanks Mike and good morning. Operating net income for the fourth quarter was $195 million or $0.65 per share on a fully diluted basis compared to $294 million in 2014 or $1.12 per share. Operating net income for the full year was $706 million or $2.43 per share. As we indicated during our previous calls, we have excluded direct transaction cost from operating income, but included integration costs.

During the fourth quarter, we incurred $73 million in deal related integration costs and $2 million in deal related transaction costs. The previously disclose $35 million loss associated with the 100% reinsurance of our U.S. term life business has also been excluded from operating income.

Our net income attributable to ordinary shareholders for the quarter was $229 million or $0.76 per share on a fully diluted basis compared the $139 million or $0.53 per share for the same quarter in 2014 and $1.2 billion or $4.15 per share for the full year, compared to $188.3 million or $0.69 per share in the prior year. As we previously discussed, our net income numbers are impacted by the mark-to-market movement of the derivatives that transfer the economics of the assets backing our second quarter 2014 life reinsurance sale transaction. We continue to show that relationship in the summary consolidated financial data included with the press release. And as always, it has no impact on comprehensive income or operating results.

Our property and casualty combined ratio for the quarter was 92.3% or 7.8 points higher than the same quarter last year and the full year's 92% was 3.8 points higher than the prior year. Our combined ratio, excluding prior year development for the quarter was 97.4%, six points higher than the fourth quarter of 2014 while the full year's 95.8% with higher by 3.2 points.

Our natural catastrophe losses totaled the $108 million or 4.6 loss ratio points for the quarter compared to $32 million or 2.3 loss ratio points in the same quarter of 2014. Our natural catastrophe losses for the full year of 2015 were $213 million or 2.6 loss ratio points. By comparison, net losses from natural catastrophes in 2014 totaled $113 million or 2.1 loss ratio points. Paul and Greg will discuss our underwriting results in further detail.

As we indicated on our previous earnings call, our fourth quarter ground-up reserve review included the alignment of reserving assumptions across the two legacy portfolios. The results of this exercise led to modest strengthening of the legacy Catlin portfolio, which is included in our overall favorable development of $121 million or 5.1 loss ratio points for the quarter compared to net favorable $97 million or 6.9 loss ratio points for the same quarter in 2014. This reflects favorable development of $28 million in the insurance segment and favorable development of $93 million in the reinsurance segment.

For the full year development was a net favorable $307 million or 3.7 loss ratio points compared to $255 million or 4.5 loss ratio points in the prior year. As was indicated previously our normal purchase GAAP accounting adjustments will amortize through income over the next number of quarters. Overall the impact in the quarter is relatively small. However, certain line items can be distorted each quarter and to the extent, these are meaningful, they will be noted by Paul and Greg.

Operating expenses have increased in the quarter as result of the combination with Catlin. Overall, however, the run rate operating expense level of the company continues to decline towards the now higher level of expected transaction synergies and excluding integration costs are significantly lower than the combined historic levels of the legacy companies. We continue to believe that these will be achieved in full by the end of 2017 and we continue to view the overall relationship between the one-time cost to achieve integration and the ongoing synergies to be approximately 1.25:1.

You can see from our fourth quarter expense levels that we have already made material progress achieving the synergies. In fact, compared to the combined starting point we had guided you to of $2.3 million back in May, based on these fourth quarter expenses we have already achieved over $300 million of run rate savings. However, that would be somewhat misleading as we have had some benefit from foreign exchange rates reducing these costs. We remain committed to driving real expense leverage from this integration and will only report to you though savings when we are sure they are real and not a function of market movements.

Looking towards 2016, we expect that additional synergies will exceed normal course growth driven by compensation inflation and additional cost from added businesses. And as a result, we expect to improve our overall operational leverage.

The large tax benefit in the quarter and overall tax rate for the year was heavily impacted by both the absence of catastrophes in lower tax rate jurisdictions and higher proportion of large risk losses in higher tax locations. For the full year, this combined with the benefit we realized following our ability to utilize legacy Catlin U.S. net operating losses resulted in annual operating tax rate of a negative 2.8%.

Turning to the investment portfolio. Net investment income excluding the life funds withheld assets were $172 million, in line with the same quarter last year notwithstanding the addition of the Catlin investments. Changes in foreign-exchange rates resulted in approximately $5 million reduction compared to prior year. The gross book yield of the portfolio at the end of December was 2.3%.

During the quarter, our average new money rate was 1.3%. Given current yields, net investment income will continue to remain under pressure as we have approximately $3.7 billion of assets with book yields of 2.3% rolling off over the next 12 months. In the current volatile market conditions, we will continue to manage the portfolio for long term benefit of our shareholders. We have already taken steps in the quarter to reduce our exposure to asset-backed securities and high yield bonds and we will continue to take such action as we deem necessary to protect the value of the portfolio even if this has an adverse impact on reported net investment income in future periods.

Total affiliate income was $15 million for the quarter compared to $34 million in the prior year quarter, primarily due through our operating affiliates or our investment manager affiliates as expected experience losses across the board driven by tough third quarter market conditions. Investment fund affiliates were $10 million lower than the prior quarter driven by our hedge fund affiliates where many of our event driven funds performed poorly on an absolute basis due to the impact of continuing market volatility. Despite these disappointing absolute returns, our hedge fund portfolio continued to outperformance benchmark and we continue to believe that a modest allocation to this asset class improves the risk-adjusted returns we earn on the overall portfolio.

Net realized gains, excluding derivatives were $11 million for the quarter, down $2 million from the prior year. Our unrealized gain position declined by $203 million during the quarter driven primarily by increasing rates offset by tightening spreads and an increase in unrealized gains on our equity portfolio of $59 million. Unrealized net gains were $544 million at the end of the quarter, including other investments.

On a performance basis, the total return on investments was 0.2% for the quarter excluding FX and on a year-to-date basis, the total return on investments was 1.38%. The duration of the total portfolio was 3.3 years at the end of the quarter, which was broadly unchanged from the prior quarter.

With respect to capital management, we continue to execute share buybacks during the fourth quarter where we purchased 4.7 million shares, leaving $703 million available for purchase under our share buyback program. We continue to view these buybacks as an efficient capital management tool and continued purchasing in line with the philosophy we discussed with you in May. As we continue our share buyback program, we will remain focused on ensuring that our overall financial leverage move towards our target levels over the next few years. And as previously indicated, we have called and canceled all former Catlin subordinated notes assumed in conjunction with the transaction. These notes were called at par value of $90 million.

Now I will turn it over to Paul to discuss our insurance segment results.

Paul Brand

Thanks, Pete. This morning I will cover the results for the segment, provide an update on integration progress and finish with remarks on current market conditions.

First, the results. The fourth quarter marked our twelfth consecutive quarter profitability, with the segment producing a calendar quarter combined ratio of 98.2% compared to 93.8% in the same quarter last year with a full year combined ratio of 96.9% versus 94.4% in 2014. More than half the Q4 deterioration is due to higher CAT experience of $68 million compared to $18 million in Q4 2014 with the majority of the balance due to lower prior year reserve releases of $28 million compared to releases of $35 million in the same quarter last year.

The remaining variance is a result of higher acquisition expense offset by an improvement in our operating expense ratio and a lower accident year ex-CAT loss ratio. We had an accident quarter ex-CAT basis combined ratio was 95.7% compared to 95.4% in Q4 2014. For the full year it was 95.4% similar to the 95.2% we reported in 2014, again, demonstrating that we can absorb exceptional losses such as Tianjin without jeopardizing profitability.

For Q4 we reported an acquisition ratio of 13.9%, which was 4.8 points higher than Q4 2014. As mentioned last quarter, this is because of legacy Catlin business included a larger share of wholesale specialty business where the acquisition costs are higher than the legacy XL business, which was largely retail. This is offset by a lower Q4 operating expense ratio of 19.5% which was 3.3 points lower than Q4 2014 and by a lower net accident year ex-CAT loss ratio of 62.3% which was 1.2 points lower than Q4 2014.

Insurance gross premiums written in Q4 increased by 59% or $859 million year-over-year, about $2.4 billion or 41% for the full year, driven largely from the Catlin acquisition. This growth occurred in all four of our underwriting divisions. When we look at both legacy organizations and normalize the foreign-exchange, our actual year-over-year growth was still positive in Q4 and up nearly 3% year-to-date, reflecting our success in maintaining the two legacy portfolios. This is something we continue to be very pleased with particularly given current market conditions.

Shifting to progress and integration, let me share a few highlights from an insurance segment perspective. Firstly, the market response to XL Catlin continues to be very favorable. As mentioned in last quarter's Q&A, we have established a robust process to track loss business emanating from the deal and throughout 2015 this metric has consistently been tracking at less than 1%. Business protections that continues to track well with historical trends and most importantly, our new business opportunities also continue to be strong despite market conditions.

Second, with our new leadership teams and underwriting organizations fully in place, we have exceeded our 2015 synergy targets for the segment, as we have been able to streamline our underwriting capabilities across divisions and regions.

And third, with regard to our longer term and state plans, we continue our efforts to consolidate pricing methodologies, operating model and legal entity structures. And our progress is on plan and most likely ahead of plan. As Mike mentioned earlier, we are also developing plans to pull our synergy lever ever harder in 2016 through further efficiencies. We will continue to share progress in future quarters.

Turning to market conditions. The headwinds which strengthened throughout the year have continued. Pricing was negative across most lines of business as the overall rate change for the segment was down 2% in the quarter and year-to-date. The most significant decreases were once again in our short tail lines. We saw broadly flat rates in our long tail lines and we continue to see some rate increases, most notably in cyber and environmental North America.

Overall, our casualty lines are down just 1% and professional businesses were flat. Our specialty business was down 3% reflecting continued competitive conditions in the aviation lines as evidenced by the December airline renewals and our energy, property and construction businesses were once again most severely impacted led by reductions in the energy book of approximately 10% and reductions in our international and North American property books of 5%.

Despite these market headwinds, we continue to focus on margin as we transition from retaining the business to turning the business. Clearly expense management, as Mike mentioned earlier, will remain a very important lever in 2016 as will improving our mix of business, leveraging analytics into underwriting actions and increasing our reinsurance efficiency. By pulling all of these levers, we firmly believe that there are opportunities for further underwriting improvements and given our greater market presence, we are confident in our ability to expand margins despite the difficult market conditions.

In summary, we delivered another quarter of underwriting profitability, continued to grow the book and made significant progress on our integration and we fully expect this to continue into 2016.

And now to Greg to discuss the reinsurance results.

Greg Hendrick

Thanks, Paul. Today I will discuss results for the quarter and provide a summary of the January 1 renewals.

Beginning with the results, the reinsurance segment produced solid underwriting performance with a calendar quarter combined ratio of 79.1% and underwriting profit of $154 million compared with 61.2% and $156 million, respectively for the fourth quarter of last year. The result for the quarter continued to benefit from favorable prior year development, modest catastrophe losses offset by a higher accident year ex-CAT loss ratio.

Reserve releases in the quarter totaled $93 million compared to $62 million a year ago, lowering the combined ratio by 12.6 and 50.4 points, respectively. In the current quarter, all five regions experienced releases, driven primarily by the property catastrophe and casualty treaty lines of business. As Pete noted, we continued the process of harmonizing the reserving methodology across the segment and our reserving process continues to recognize values quickly and allows potential good news to become credible.

Catastrophe losses totaled $39 million net of reinstatement premiums during the quarter compared to $40 million in the fourth quarter of last year. The major contributors to CAT activity during the quarter was the U.K. December storms, Indian floods and Australian hail and bush fire events. While our combined disaster portfolio is better diversified, this quarter's CAT activity is indicative of a book that is likely to incur loss at lower industry loss levels relative to the XL portfolio.

Segment produced an accident quarter ex-CAT loss ratio of 50.2% which compares to the 39.9% produced in the fourth quarter of 2014. The increase is driven primarily by a property facultative large loss, loss activity on our worldwide agriculture portfolio and the impact of recent rate decreases.

The expense ratio increased 2.9 points to 35.8% in the fourth quarter compared to 32.9% for the fourth quarter of 2014. This increase is primarily driven by a purchase accounting adjustment of $18 million or 2.4 points.

Turning to topline. Gross written premium for the quarter was $206 million, up from $158 million in the fourth quarter of 2014. The increase was driven primarily by the Catlin acquisition and was partially offset by the time of a large quarter share renewal, which moved to January 1 inception.

Given the light activity in the fourth quarter, the full year for the combined XL Catlin is more indicative of how our portfolio changed and the segment's gross written premium fell 8% year-over-year. This reduction was driven by foreign-exchange, lower multiyear premium and adjustments to estimated premium. After adjusting for these three factors, our topline was essentially flat year-over-year. Less than 0.5% or $10 million, part of the 8% drop resulted from client concerns about the XL Catlin combination. And even in these difficult market conditions, we were able to write $372 million of new business in 2015.

Turning to January 1 renewals. The market generally renewed in an orderly fashion and we continued to experience deteriorating rates across most lines and regions resulting in a low single-digit decrease. We saw increased demand from a number of clients that have increased retentions over past renewals and broadly speaking terms across the book remain as expiring.

Expanding on rates, our global property catastrophe portfolio fell 6% with the U.S. market down roughly 5% and the rest of the world down 7% to 8%. Contrary to press coverage, while some clients achieved double-digit decreases, we did not see that as a broader trend across the international catastrophe market.

The non-catastrophe property treaty portfolio fell 4% between declining rates and some clients achieving ceding commission increases. On a positive note, our casualty treaty portfolio across the world renewed essentially flat. Overall this renewal reinforced our view that rate decreases are decelerating across the reinsurance marketplace.

In summary, the fourth quarter and full year results were solid for the reinsurance segment. Despite the challenging market conditions and the rapid integration with Catlin, our underwriting teams did an excellent job retaining a profitable business and finding new opportunities while maintaining underwriting discipline. As we head into 2016, we are well-positioned for continued success as our momentum the market remains strong and we have broad support from our clients and brokers.

I will now turn it back to David.

David Radulski

Rita, can you please open the lines for questions?

Question-and-Answer Session


[Operator Instructions]. Our first question comes from Kai Pan from Morgan Stanley. Your line is now open.

David Radulski

Hello Kai.

Kai Pan

In fact, how much of the contribute of those are above normal levels or because last year reinsurance segments, the exiting the loss ratio is abnormally low. I just wondered, these are new normal level or above your average?

David Radulski

Kai, this is David. Sorry, the first part of your question was cut off. So hate to ask you, but could you repeat that please?

Kai Pan

Sure. The first question is for Greg. The question is on the large losses, non-CAT losses as well as agriculture losses. I just wonder, are those losses above normal levels or it just returned to normal levels from the low levels of 4Q 2014?

Greg Hendrick

Sure, Kai. If you took the 10 point delta year-over-year, 3% of it is from a single large back loss. It's a risk that both XL and Catlin wrote through the combination. We renewed it. We looked at the loss. We write the risk again. It was just an abnormally large loss for us on our faculty of portfolio. Both faculty of portfolios have run very well over the years. So that's one piece that's out of the norm.

The second is the crop. This is partly a testament to where I talked earlier about reflecting bad news fast. We had in our U.S. global ag business a particular crop that underperformed relative to some conditions that are needed to be successful. And so we took all of that bad news of roughly about $8 million in this quarter. The remainder of the crop may go well. In fact the freeze coverage is the remaining risk left and it's going very well so far, I am touching wood, in California which is our major exposure. The remainder of it was abnormal activity, somewhat weather related around the world.

So the six points there, that I would say, are well outside the norm. The remainder of it is a lot of little moving things. Part of it is what we talked about in terms of harmonizing reserve. That's just a reflection of that in the fourth quarter. In the current accident year, we would have made some higher picks. We would have taken the entire impact of the full year in the fourth quarter and some of it, a little bit of it is mix.

But in the end, it is also a little bit due to rate. It is impossible to expect flat accident years, year-over-year, with what we have been going through the rate environment. But I would put that in the one or two point range out of that whole 10. So by and large, a lot of it is unusual activity, a little bit of it as it reflects the current market conditions.

Kai Pan

Okay. Great. Well, then I follow-up o the reserve. You mentioned, Pete, on the modest strengthening in the Catlin book. In the past, Catlin has been sort of steady release reserves. I am wondering if could you talk a little bit detail about that? Is that just reserving philosophy change or process change? And what's the outlook over there?

Pete Porrino

Hi, Kai. It's Pete. So we had, obviously talked about this during last quarter's call as well about the harmonization process and we did put the legacy Catlin reserves through our semiannual process in the fourth quarter here. And just to be clear, in the in the fourth quarter and for the year, we recorded about $33 million of adverse prior year development on those reserves. And what we mean when said the harmonization, well we harmonize assumptions at the reserve profile level.

So very, very detailed and that included assumptions, such as initial expected loss ratios, reporting and payment patterns, ground-up loss estimates, the natural cat perils as well as major events. I would say, while this harmonization is largely complete, the ongoing alignment to our process of reacting more slowly to potential good news will take a little bit time to fully implement. And as Greg just noted, I also wanted to mention that we did harmonize the accident year picks as well in 2015, which did cause a true-up in the fourth quarter.

Kai Pan

How long process could last? A few more quarters?

Pete Porrino

No. The harmonization process is done.

Kai Pan

Okay. So you are on the same process right now.

Pete Porrino

We are on the same process now.

Kai Pan

Okay. That's great. Then my last question for Mike is really, given standing back, if you can look at your expense savings target to $300 million or more, at the same time, you experience some CAT losses, large non-CAT losses as well as the pricing pressure. I just wonder is that expense savings will be enough to offset these headwinds? And will you be able to still achieve underlying combined ratio improvements going forward?

Mike McGavick

Kai, thank you. The answer is yes, we do expect to achieve continued combined ratio improvement period, but not just because of the expense lever. While we are pulling it hard and in fact harder now than we were at the beginning because of market conditions, we do not mean that we think expense and rate pressure are simply offsetting and will leave it at that. Our belief is that this book of business has plenty of room to improve and that's the underwriter's task for this year.

I think Pete said something that I really want to underscore. In the fourth quarter, you have seen not only the harmonization of the reserves come through, but you have seen the harmonization of the loss ratio picks come through. So I do not believe that the fourth quarter ex for example, in insurance. I do not believe that the fourth quarter, for example in insurance, I do not believe that the fourth quarter ex-CAT accident year loss ratio, you are looking at this quarter of 62.3%,

I do not believe that that's the run rate for next year, because we have had things that were harmonized during the year when the catch-up was largely in the fourth quarter. So that would have elevated that loss ratio beyond what we actually believe the book is running at. And that doesn't account for the underwriting actions that began, as I mentioned in my remarks, midway through last year and the will start paying off during the course of this year.

So we don't accept that we -- probably could offset rate with expense ratio, but we don't believe that's the game. The game is a stronger and more profitable book of business and we believe were in the process of creating exactly that.

Kai Pan

That's great. Well, thank you so much for the answers.


And our next question comes from Mr. Cliff Gallant with Nomura.. Sir, your line is open.

Cliff Gallant

Thank you. Great quarter, great year. My first question is on the additional $50 million of savings. Could you just give us some sort of tangible examples of what drove that? Is it real estate? Is it people? And in terms it hitting the bottom line, where will we see it? Will it be in the corporate expense line or the operating expense line?

Mike McGavick

It's mainly going to be in the operating expense line, a little bit of that comes down over the corporate but we are focused on that operating expense line. So that is the driver. And it's across the place. I mean, when you get past the easy and obvious, it starts to be more of a grind around processes that yield greater efficiency. So you shift from the real estate stuff or shutting down an investment or kind of obvious duplicated efforts and now you are into making the whole place work in a more efficient way from beginning to end of our dealings with clients from seeking them to serving them. And that's the work that now comes to the fore.

So by definition that has more meaning in terms of the headcount than other kinds of expenses. And by the way, as Pete mentioned when he walked through the numbers, we can already see that it against what we forecast our expense levels to be, although a little bit helped by FX, I don't want to overstate that, it's just a little bit, we are already at a run rate of $300 million already today. So we wouldn't use a number like that if we weren't highly confident, but it isn't like you are going to see some big new thing and the people that are affected are largely already informed.

Now it's not to say that everybody who may be affected by it has yet been informed because there is continuing work to make it better and better across each process. But in my experience with this, which goes back to Safeco days is that once you get this in motion and you get the right mindset in motion, more and more reveals itself because people strain themselves to imagine it to be better and they can do that. So I am sorry, I can't point to this or that process, I do think the one area that I am highly focused on beginning of this year is some duplication that crept into reinsurance or insurance organization management levels that we are focused on. So there are pieces we are working on right now and they will be dealt with quickly.

Cliff Gallant

Okay. And as a follow-up question on the tax rate, I appreciate that quarter-to-quarter, it seems like there is going to be a lot of volatility to that. How should we think about it long-term though? It maybe an annual rate or even just longer, like what is XL Catlin's tax rate?

Pete Porrino

Well, that is every quarter and every year, you are right, Cliff, this is Pete, that that will change. What we have talked about in the past would continue to be true. What happened this quarter, I don't think is something that would get us to change our overall view in what we have been saying over time that we thought it would be in the low double-digit rate. I think we have talked in the past of sort of in the 11%, 12% range.

Cliff Gallant

Okay. That's great. Thank you very much.

Mike McGavick

I just want to add that your question gets to a larger issue. We know and understand and sympathize with the frustration of getting to kind of clear baseline for the long-term future. We are working hard to make it as clear as we can but that's just the reality of transactions. I mean I have to say, we could not be more delighted with the way this transaction is going. We agree that it creates some appearances of volatility or opaqueness that we are not used to having and we promise as things become clear, we will share them with you in the clearest possible way we can so we can get back to the orderly review of the business and not this constant of what's the new norm. We get that. We are frustrated by it too.

But we would remind you, these two businesses have now been operating together for nine months. I mean, a period of rapid reorganization and when I think of what our competitors are going through, when I think of the combinations that have been announced, but not yet completed we would rather be us than anybody in terms of being through the hardest part of our hard work and ready to compete in what are difficult conditions, but difficult conditions that I would rather have our hand to play. So I just want to say, I empathize with the frustration on getting to the new normal and we promise to do everything we can to help you get there along the way.

David Radulski

Next, operator?


All right. And our next question comes from Mr. Mike Nannizzi from Goldman Sachs. Sir, your line is now open.

Mike Nannizzi

Thanks. Mike, maybe picking up on the commentary around the expense ratio. It looks like you are trading off a higher acquisition cost for a lower operating expense ratio, but that trade-off is not quite balanced out compared to pre the acquisition. So first off, how should we think about how that sort of moves forward? And from your comments, it sounds like you would expect once synergies and everything else is fully baked in that we should be better than we were before the acquisition? And I would think that would sort of need to happen in order for it to begin to trade-off against loss ratio deterioration from pricing. But can you give me some idea, because just looking at what we have seen sp far this year versus the comments, I am having trouble seeing where we start to crossover here?

Mike McGavick

You are right. I understand the question. So a couple of pieces, Mike. First of all, I just want to note something that I note with some pride, in this quarter, when you take out the cost of synergies and just look at the rate of operating expenses, we overachieved on absolute dollars delivered to shareholders in this year alone and in fact this is the first quarter in two years that our operating expense ratio is below 20%. I mean our insurance operations. So I was delighted to see that. And all I would say, tell you is we view that as a preview of events to come and not the resting point.

Number two, there is an elevation in acquisition expense for reasons Paul mentions, that there is a different mix and there is more program business in the Catlin book. But we also believe there is levers to drive that down as well. So we don't accept it's at the long run level. Between those two taken together, yes, you will see absolute improvement. There is expected to be between those two absolute improvement in the expenses of the company taken together across the acquisition expense.

That's the first thing. Second thing, you did slip in a comment of expected accident year loss ratio deterioration because you are right, we don't accept that. We believe this book, even in this environment, can continue to produce through mix exchange and the reunderwriting already going on, improvement over the course of next year in the accident year loss ratio. So I don't -- I am sorry to note that, but I don't accept the observation.

Mike Nannizzi

Okay. Thanks for that clarification. And then maybe can we talk a little bit about within the insurance segment you had some unusual loss activity. It sounds like some large loss frequency events. Can we quantify that at all? I realize it's a business you write and you will probably write again next year, but it sounds like there is a little bit more than expected. So if we can just get some boundary around what that was?

Mike McGavick

Yes. I am going to ask Paul to get into some of the detail, but let me observe two phenomenon that are really important that we have underscored a couple of times. Number one, we did have within year loss ratio pick harmonization. So that process is now complete. And we go off on a common footing for next year. And that would have been mainly toward the end of the year. There was a little bit in the third quarter and cleaned up in the fourth quarter. So you would have seen some elevation that doesn't reflect these larger losses that have been discussed.

Second, you also would have seen some larger losses from the first half of the year develop into the second half of the year and you did see that across the market, particularly in the marine and energy books, which I think had tough years across the market, not just in our company.

So those are two categories that don't fit the theme of simply elevated loss activity. But Paul?

Paul Brand

Yes. As you look at losses, say about $10 million, there is four or five of them made in this quarter adding up to around $50 million. So that's a little over 3% on the loss ratio. If you compare that to the last year, there is about 1% difference in loss ratio, say maybe just over 2% for last year.

Mike Nannizzi

Great. Thank you. And then just a couple number ones, if I could Pete, any thoughts on alternatives for the first quarter just given where we are?

Pete Porrino

Yes, Mike. The only one that you could really talk about right now would be the investment manager affiliates, right. Because as you know that's done on a three month lag. I think on the last call I had indicated that we would likely have a loss in the fourth quarter which is what we did. Right now, as we said, we haven't finished the numbers but I would expect that to be a small positive.

Mike Nannizzi

Okay. And then last one. Pete, could you provide, I mean there are obviously lot of moving parts here, the operating tax and pretax operating income, just so we can have that?

Pete Porrino

Sure, let me step back, because I have heard there are a few questions about the tax rate and what the $39 million meant? So let me spend a minute if I could and try and help people think through that. The first thing I would say is, the $39 million that we disclosed, at XL almost all the tax is on operating almost all the time because the nonoperating things, the realized gains and losses, sales outcomes, that kind of stuff typically have very little tax impact on those. And so the operating tax impact would have been $41 million gain rather than the $39 million that we disclosed in total.

To put that in context, okay. So the question of, okay, so you recorded on operating income a $41 million gain, how do I think about that? And if you look at what the operating income was before tax, you ask about that number, it was $153 million. I had guided everyone just now to 11%, 12% tax rate. If you use 12%, you would have had an expected tax in the quarter of about $18 million, just working the math, but we had, as I said, a $41 million benefit. So a delta or a difference of $59 million, right.

And as was in my comments, you really got to think about two things, the actual tax rate for the year, given the distribution of income around the world and the second one is, I refer to our ability to use the legacy Catlin net operating loss carry forwards in the U.S. So in the third quarter, right, we had adjusted our expected tax rate down to 10% was what I disclosed. So now in the third quarter, I need to adjust that again for what the annual expected tax rate is. It turned out for the year to be about 3.5%. So that difference times the nine month's income is about $35 million. So that's the first benefit.

The second one is the fourth quarter itself, 3.5% versus 12%. That's about a $13 million benefit.

And the last one is this quarter's use of the legacy Catlin NOLs. That was about $11 million or $12 million benefit and that gets you to the $59 million. So I am just trying to transparent here on why the numbers are so different from what you might have expected. So I hope that answers your question, Mike.

Mike Nannizzi

That's great. And then if I could sneak one last quick one in here. What should the life segment look like from here, now that you have completed this reinsurance transaction with the remaining term life block?

Pete Porrino

Yes. So Mike, it's Pete again. I would expect to be, in essence, breakeven. There is virtually nothing left of those in the disability business.

Mike Nannizzi

Okay. Great. Thank you.

Mike McGavick

And just to add, this is Mike. You will recall, that was long ago promised that if we got the right pricing, we would get rid of that last term life block. So I was pleased to get that cleaned up.

Mike Nannizzi

Okay. Thanks.


And our next question comes from Mr. Paul Newsome from Sandler O'Neill. Sir, your line is now open.

Paul Newsome

Good morning. Thanks for the call. I wanted to ask kind of a little bit of a broader picture question here, in that I think insurance companies are valued in part due to their complexity. More complex is bad and less is more valued. Your company, to-date, is one of the more difficult ones to model in the U.S. listed because you have things like affiliates, this runoff life business that's still running through your income statements, the mergers obviously, the tax stuff we just discussed, currency risk. I think I can probably go on. So my question is, forget about next quarter, what are these big pieces are going to be less complex two years from now, besides hopefully the merger piece? And is that an effort you are thinking about, because you obviously sympathize with our difficulty with the complexity, but I think it's evaluation concern as well.

Mike McGavick

So I think that always, one of those I feel is something that we have already adjusted to, in the most part and that's the complexity of the life transaction. And what we should remember, it does introduce complexity, but it's a pretty simple complexity. It goes in, it backs out. And you can fairly easily and we transparently show you how to do that every quarter, that isn't going to go away. So to me that's just a matter of patience. You just recognize that that thing has nothing to do with understanding the earnings performance or potential of the company. And you get used to it. My observation would be, Paul, that it becomes more annoying when the underlying results aren't clear and it becomes less annoying when the underlying results are strong.

So I am guessing we all get simply used to that and what we need to be reminded of perhaps from time-to-time is that the benefit of that transaction was to take enormous volatility and risk off of our balance sheet when before we had done that for some of those and certainly you would remember this, Paul, we used to trade something like a European bond, reacting our stock price, reacting every time Europe got edgy. I would note, Europe's edgy again right now and I just assumed trade for what we produce in terms of insurance operating earnings than whether our life exposures credit portfolio that creates a lot of noise every time Europe has a hiccup.

So I think it's easier to remember to back in or back out as we clearly delineate every quarter than to have that noise driving the share price. So that one, it will be around for a while. I don't have any plans to cure it. And it's just something I believe, we all get used to and I think we do normally. But when it gets noisy, I think we get irritated.

The second thing I would point out is, most of the noise that has gone on in the third quarter and in the fourth quarter has been transaction related. And I think we are all going to have to work together quickly to get to kind of a new normal of understanding of what the component parts are, of how to analyze profitability. But the core to it all is, do we believe that this firm is better positioned to generate improved earnings? And my answer to that is yes and it has been ever since the transaction.

Number one, because we believe we can optimize this book of business to more profitable levels. We have more levers to pull than we ever have. We have a more diversified book of business by both geography and lines of business and that simply gives us more to play with in order to create a better result.

We, second, are able to optimize the expenses and this was a drag on both companies' prior performance. It was certainly an issue of concern for analysts over time and we are demonstrating with real effort and I think real passion that we can create a very efficient expense platform for this business going forward.

And then third, we believe that it is about underwriters who have the real ability to make a difference for clients in a changing risk environment. And there, the level of creativity, the continued innovation that we are able to bring into the marketplace will be a source, we believe, of long-term competitive advantage.

So these are difficult times in the sectors we are in, both specialty, particularly in London and reinsurance have been under some pressure. But that's never a permanent condition. We don't believe it is at all and we like our competitive position in both businesses. Being the leader at Lloyd's gives us a greater ability to influence the market than anybody else has. And being one of the largest writers in reinsurance gives us more both more intellect and more capital and more position with which to influence the direction of that market and to take a leading role in the changes coming about in that market.

So when I think about the cause of most of the noise that frustrates, it is to do with the recency of the transaction. That resolves itself over time and I don't mean over forever. I mean over pretty soon. And I think the earnings power of the firm due to the expense actions and the speed with which they have been taken and the positioning of the company in the markets we play in, I think comes out over the course of next year, in large part and certainly with great clarity in 2017.

So I get what you are saying. We view it very differently. We view the core has always been straightforward. Where is the accident year ex-CAT loss ratio going? Are we in line when CAT's do appear? And can we create a more profitable expense platform from which to grow? I think the answer to all of those are yes?

Greg Hendrick

So Paul, just a quick follow-up on the on the life reinsurance transaction that Mike talked about, over time the volatility on that will reduce, as GreyCastle, the owner of those assets and liabilities turn that investment portfolio over, that's accelerated recently, so about 25% of those investments have been turned over are now in our trading account rather than available for sale and that will reduce the volatility going forward.

Paul Newsome

Great. Thank you guys. I appreciate it.

Mike McGavick

Thanks Paul. I appreciate it and I know that these are well understood. And I know I apprised that a bit more aggressive than I would like. But I have seen some analysis out there that I get why it resonates with people but I don't agree with it. Because people are buying into this notion that because specialty and reinsurance are tough places, notably tough, that somehow no one could ever manage to improve a book of business when it's in this condition.

Just think about the past that faced an underwriter last year and the past the faced that same underwriter this year. Last year, let's say you are coming, you have got two people, one from each company who are running these books of business. We pick the leader between the two. By definition, if it's a Catlin person that's picked, by definition 60% of the book they are looking at they have not seen before and if it's on XL leader, by definition 40% of what they are looking at they haven't seen before.

I mean crudely put. And so now, you give them the task, keep that book together if you can, remember that we are writing to profit. If someone tries to jam you during this crazy market, let it go and so on. So you have this huge task of learning the book, assembling the book. It is a confusing difficult year, but never did we tell them, keep the book at any price. So they have got a mandate to still find a profitable way through it.

This year, the books assembled. They have got one job to do, optimize this book. We are now willing to accept that if you have a prejudice against a segment of that book and you are the leader that book, act on it. Last year, we would have told you, why don't you test it out first before you decide that the other guy was dumb. This is a clearer year for every person in our company around the globe. And at the same time, we tell them never give up the hunt for profitable opportunity or the opportunity to innovate, to do something different for the client now that we more information and not that we have more capability.

So we are excited about what that unleashes into the market that maybe difficult market conditions but we are going to be whistling while we work. This is fun stuff.

Paul Newsome

Thanks, Mike.

David Radulski

And Rita next to the queue please.


And our next question comes from Vinay Misquith from Sterne, Agee. Your line is now open.

Vinay Misquith

Hi. Thanks. Good morning. So first is a really simple numbers question and if you could answer this, this would be really helpful. How much of the $300 million in expense saves should flow to earnings in 2016 and 2017? In other words, how much have you already taken versus how much is still left to come in?

Pete Porrino

So Vinay, this is Pete. I would say that in 2016, my guess is that $300 million, there would be the majority of it would come in and the rest in 2017.

Vinay Misquith

Well, actually my question was, how much have you already taken in 2015? So last quarter, I believe you mentioned you have already taken $75 million of the $215 million to earnings. So how much is further left to flow into earnings?

Pete Porrino

So what I had talked about was a run rate, right, of a reasonable amount of money that you can see the savings. The actual amount that came in 2015 would have been certainly less than half of that $300 million. If you would like, give me a couple of minutes and I will come up with a little better quantification of those.

Vinay Misquith

Sure. So what we struggle with is, how much further is left to flow through the earnings in 2016 and 2017. So that's -- okay. The second point is, I just wanted to clarify upon the large losses affecting both the reinsurance and the primary insurance. I believe reinsurance had six points of higher large losses and the primary about one point of higher losses? I just wanted to just clarify that.

Greg Hendrick

Yes. On the reinsurance, this is Greg, there is 3% from a single loss and there is 3% from a collection of losses in our worldwide agriculture book. So 6% in total.

Vinay Misquith

Sure. And on the primary book?

Pete Porrino

Yes. And that was the right number, roughly 1% delta as you look at losses about $10 million.

Vinay Misquith

Okay. That's helpful. And then Mike, I just wanted to clarify. You mentioned that through remixing of the business, you can alleviate problems with pricing in the large market and in specialty lines. Is that what I heard?

Mike McGavick

Yes. We believe we can overcome rate deterioration through remixing and combined ratio improvement through that continued loss ratio improvement and the continued synergy expense savings and also getting down, to some degree, the elevated level of commission. So we have all three levels working.

Pete Porrino

So Vinay, this is Pete. So giving you those round numbers on the $300 million, I would say in 2015, there is a little bit over $100 million in there. In 2016, we would expect that number to go up a little bit more, call it $120 million to $130 million range and then the rest would come in 2017.

Vinay Misquith

Okay. That's helpful. Thank you so much.


And our next question comes from Meyer Shields from KBW. Sir, your line is now open.

Meyer Shields

Thanks. Good morning. I appreciate your patience. One quick question just on the increased savings. I don't mean to decry it. Obviously it's good news. But does that mean higher integration expenses in 2016 than at the $250 million run rate?

Mike McGavick

First, I will give you two general points and let Pete answer the specific question. Number one, we do expect that at this point, the costs to achieve synergy have peaked and will be coming down from here, number one. Number two, I have always been willing to spend to save as long as the saving is permitted, the spending temporary and as long as the ratio we have described of 1.25:1 holds. At this point, we are beating that ratio, we are raising the level of permanent savings and I would always grab more savings if I thought that it was a permanent restructuring is creating more efficient platform. But we peaked and we expect that to come down and now the expense savings, as Pete described, kind of $100 million-ish already realized this year, add $120 million that will be saved in addition next year. So kind of $220 million by the end of next year. And then the balance of the $300 comes through with great clarity in 2017.

Pete says I gave the whole answer, sorry.

Meyer Shields

No. That's okay. I am happy to get it from either of you. This is a modeling question. So there was a true-up of the Catlin accident year 2015 loss ratio in the fourth quarter. Does that mean that in the first, let's say half of 2016, we shouldn't expect that much year-over-year improvement because the prior year quarters were reported on the basis of this lower initial loss pick?

Pete Porrino

Meyer, this is Pete. This gets and I apologize, it's a tad complicated So in the prior year quarters that would be legacy XL only and so they would not have had those true-ups and certainly in the first quarter and for the majority of the second quarter as well. So as you are modeling, you will probably need to take that into account. The accident year loss ratio adjustments obviously were only for the legacy Catlin portfolio.

Meyer Shields

Right. Understood. I meant on the numbers that we had for Catlin for the first half of last year.

Pete Porrino

For the numbers that you have for legacy Catlin for the first half of last year. Yes, there would be a small change in the accident year loss ratio pick.

Meyer Shields

Okay. And then one bigger picture question, if I can, I guess for Mike. How long does it take from the time, obviously AIG is starting to pull back in some lines of business where it's not earning a profit. How long does it take from them notifying people that they are out of certain product lines before XL Catlin starts seeing the opportunities to generate profitable growth?

Mike McGavick

It's hard to say exactly what they will do and how they will handle it. So it's not as simple as they announced that and the next day new stuff starts flowing around. You must remember we are in a very difficult pricing environment and while there are some positive signs here and there that there is a different attitude emerging, we are certainly not calling a bottom.

We can still see competitive behavior. And usually when you start to have players change their positioning in the market, at the initial wave of change, it is not necessary positive. A bunch of underpriced business gets released. That group still thinks we are in a soft market and expects the same or even more attractive pricing. And the rest, when you get a turn coming, is when that starts to happen and people don't do it in the same way.

They say, well that's interesting, but that's going to cost a lot more to insure. And we aren't to that point. I do not think so. The initial wave of these kinds of movements, I don't think creates some kind of a turn or some kind of a huge growth opportunity. It's a very, very selective process at the beginning. You have got to look for the really good accounts that got thrown out, baby with the bathwater.

That's what you are hunting for. And those ones you do want to pick up and grow. So our underwriters are going to be on high alert that this is pretty dangerous time and there's lot of underpriced businesses going to flood into the market and you would want to look through that and pick through that and find your spots. And I would say there is a number of companies who are engaged in that process, not just the one you mentioned. And to some extent, we will be.

We continue to do some underwriting and maybe I will ask Paul to elaborate a little bit but we have been certainly through and been picking and starting to push some stuff out. But I have seen some commentary in the market that, boy, is that going to be a great opportunity for us. I don't think that's quite the right mindset for the underwriters. This is a highly selective moment in time.

But what you want to be positioned with is, we have gotten our hard work out of the way, you know your underwriter, they are ready to go, you know their quality, you know their capabilities, you know their appetite. You want to be clear in how that is all functioning and we have got that hard work done last year. So that our odds are, we are totally ready for shifts in the market, totally ready to go through this highly intense and very selective process.

Paul Brand

Yes. And I think just to reiterate what Mike said, I think the stability that we offer is very attractive potentially to clients and the right, proper clients. So clearly some of the dislocation will create opportunities, but we need to be very thoughtful about how we go about executing on those. Coming back to underwriting actions and clearly hard work that can be undertaken in 2016. But again, just to reiterate what Mike said, we did start as soon as we brought the businesses together, whether it was exiting the ITV motor binder or the emphasis of public entities and some accountants business and professional lines, reunderwriting of the New York Contractors book and I could go on and on about the underwriting actions that we took place early in 2015 and those actions will start to have positive benefits as we earn through in 2016.

Meyer Shields

Okay. That was very helpful. Thank you so much.

Mike McGavick

I am sorry. I neglected that one point, it's important. The broker conversations aren't changing. When the brokers see some of the more radical actions that others are now being forced to take, they get nervous that their best clients are going to face disruption. And the conversation they have with us as someone who has gotten the hard work behind them and is ready to go and has all that capability at that very global level and the global program, all the risk that's in our toolkit, the conversation doesn't start like it was, say, two years ago or a year ago, hey, let's start with off 10% and go from there. The conversation starts, I have got a gem of a client here. I am nervous about what's going on the market. Show me what you can do for this client. That's a very different conversation than the ones we were having and those have broken out all around the world. So it is not the same. As difficult as we keep describing this market is, it's not the same.

Meyer Shields

Okay. Thank you.


And our final question comes from Dan Farrell from Piper Jaffray. Sir, your line is now open.

Dan Farrell

Thank you and good morning. Just a quick question. Where do you think you stand with regard to your management volatility? There were some large losses in the quarter in the past that some larger loss activity. How far along are you in managing that risk? And how much more of a lever do you think that is going forward, given that you really haven't been a combined company with Catlin for very long? And apologies for the voice.

Mike McGavick

No problem. I hope you are feeling well. The number one thing is, if I think about this last half of the year, Dan, while there is some noise in there and we have talked about it, I am still very impressed with the resilience of our profitability. The back half of this year saw a changing that's more than a point on the loss ratio. And many companies threw that in the CAT bucket, we didn't and we were still able to deliver profitability with a -- what is that?

That's the largest man-made loss in Asia's history and one of the largest Marine losses in history and we were able to absorb that and still deliver profit and have these other smaller losses come through that Paul has described as well and true-up the first half of the year and still deliver a profit. So this book is more resilient and less subject to kind of wild spikiness that you would have seen with those kinds of events going back two, maybe now three years ago, you would have seen wild volatility in our quarterly results. You saw a deterioration, but you didn't see wild spikes that took us out of profitability. That is the book performing better.

Now is it optimized? Are we really where we would like to be? No. And there is work we can do both on limits management, on understanding the flow of volatility of the book, on that we are doing in reinsurance, all of which are being done with fresh eyes to the whole book. So can it get even better from here? Yes, but would I say this is a quarter that shows wild volatility. I would actually say, it's a quarter that shows a real absorption. And I was kind of pleased with that result, but I will turn the mic to my colleagues in case you want to add something.

Paul Brand

Yes, I think the reinsurance points have been interesting. One that clearly, as we go around centralizing and redividing how we purchase the reinsurance program, which was, a little progress was made on one. One of the goals of that is to, both increase the value of the reinsurance program and also to reduce volatility. And that's something that we think we are achieving against.

Dan Farrell

That's helpful Thank you.

Mike McGavick

That was the question, I listen, I know that this is a very busy day of earnings and many of your racing off to other calls, I hope we have spoken clearly. And I want to be clear about something, our purpose is always to make sure we clearly communicate how we view it. We know that you have difficult judgments to make all the time. But we wanted you to know, particularly given the third and fourth quarter, we want you to know very, very clearly that we are on exactly what we think matters and all the things we said would come about as a result of this transaction, they are coming about. And we have very high confidence in our ability to continue to improve the loss ratio and to continue to improve our combined ratios given the December book that we are looking at so closely. So we are excited about this year and looking forward to showing that in the numbers and not just in our words. Hope you have a good day.


Thank you. And that concludes today's conference. Thank you all for participating. You may now disconnect.

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