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XL Capital Ltd. (NYSE:XL)

Q1 FY08 Earnings Call

April 23, 2008, 10:00 AM ET

Executives

Brian O'Hara - Acting Chairman, President and CEO

Henry C.V. Keeling - EVP and COO

Brian Nocco - EVP and CFO

Sarah E. Street - EVP and Chief Investment Officer

Michael S. McGavick - CEO-Designate

David Radulski - Director of IR

Analysts

Thomas Cholnoky - Goldman Sachs

Bob Glasspiegel - Langen McAlenney

Joshua Shankar - Citigroup

Josh Smith - TIAA Cref

Jay Gelb - Lehman Brothers

Alain Karaoglan - Banc of America

J. Paul Newsome - Sandler O'Neill

David Small - Bear Stearns

Vinay Misquith - Credit Suisse

Matthew Heimermann - JP Morgan

Brian Meredith - UBS

Jay Cohen - Merrill Lynch

William Wilt - Morgan Stanley

Operator

Ladies and gentlemen, thank you for standing buy and welcome to XL Capital's first quarter 2008 earnings conference call. I will now turn the call over to David Radulski, Director of Investor Relations. Please go ahead sir.

David Radulski - Director of Investor Relations

Thank you, Laurie. Good morning and welcome to XL Capital's first quarter 2008 earnings conference call. This call is being simultaneously webcast on XL's website, at www.xlcapital.com. Also on our website you will find last night's press release, our financial supplement and a webcast presentation.

On our call today, Brian O'Hara, XL Capital's President, CEO and Acting Chairman, will offer opening remarks. Brian Nocco, our CFO, will review our financial results, followed by Sarah Street, XL's Chief Investment Officer, will discuss results in our investment portfolio. Henry Keeling, our Chief Operating Officer, will review current market conditions.

We will open it up for your questions before returning to Brian O'Hara for closing remarks and for his introduction of XL's CEO-Designate, Mike McGavick. While Mike will be making some comments he will not be participating in Q&A. As you recall, it's not our practice to update guidance on a quarterly basis so nothing today should be construed as updating or reaffirming previously provided guidance.

Certain of the matters we will 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. Forward-looking statements are sensitive to many factors, including those identified in our most recent Annual Report on Form-10-K, our quarterly reports on Form-10-Q and other documents on file with the SEC that could cause actual results to differ materially from those contained in the forward-looking statements.

Forward-looking statements speak only as of the date on which they are made and we undertake no obligation publicly to revise any forward-looking statement in response to new information, future developments or otherwise. And with that, I will turn it over to Brian O'Hara.

Brian O'Hara - Acting Chairman, President and Chief Executive Officer

Thank you, David and good morning everyone. Before turning to our review of the first quarter, I would like to make a few comments of our management of the SCA situation. We remain intensely focused on the resolution of this issue. We have added to our strong team of advisors and have placed two XL nominated Directors on SCA's Board. Continuing our commit to transparency, on March 27 we posted to our website updated SCA related exposures and we have made no changes to our assessment of ultimate losses for our SCA related reinsurance or guarantees since the filing of our 10-K.

Many of the same forces driving market uncertainty regarding SCA have also impacted our investment portfolio and Sarah Street will be providing an update on the portfolio and related activities.

Turning to our underlying business; our dual platforms of insurance and reinsurance continue to demonstrate solid performance. The first quarter of 2008 was quite active, with global property loss events and individual risk losses totaling in excess of $10 billion. But thanks to our underwriting discipline, we expect the exposure to these events to be less than 1.5% of industry losses. We believe this to be a testament to our Property & Casualty Risk Management practices.

Finally we intend to publish our second annual Global Loss Triangle report during the week of May 4. As was the case with last year's Triangles, our intend is to provide continued transparency and we welcome your feedback. And now with Brian Nocco for a review of our financial results, Brian?

Brian Nocco - Executive Vice President and Chief Financial Officer

Thank you, Brian, and good morning everyone. Turning to our summary of financial results on slide four; operating income was $1.57 per share for the quarter, when annualized to our operating ROE to 12.9%, as compared to $3.01 and 22.3% respectively for the prior year quarter. Our Property & Casualty underwriting profit of $108 million reflect the generally softer market conditions and active quarter for property losses, Henry will talk about this further. Income from both Investment Fund and Investment Management Affiliates were down from last year's exceptionally high levels which Sarah will discuss.

Our total operating expenses of $264 million for the quarter were lower than last year's $281 million when SCA's expenses were included. On a like-for-liked basis, expenses were essentially flat with the prior year. We reported a foreign exchange loss of $68 million on our income statement. This was largely due to the weakening of the US dollar and sterling against other currencies. While we attempt to moderate FX income statement volatility, our primary focus continues to be on managing the economics. In this regard, FX had a positive impact of $30 million in capital in the quarter.

As Brian indicated, we have analyzed and posted updated and expanded SCA related data, and are committed to do continuing disclosure on transparency related to this exposure.

We have made no changes to our assessment of ultimate losses for our SCA related reinsurance for guarantee since the filing of our 10-K. Accordingly, the only entries in this regard have been for the accretion of the discount on loss reserves established at year end, for which we recorded a charge of $5 million in the quarter: We wrote-off our remaining investments in SCA and Primus at year end, and have included no share of earnings for either this quarter.

The paid to incurred ratio for our P&C operations is 110% for the current quarter. Excluding the impacts of the favorable year prior year development, paid losses related to the 2005 hurricanes and recoveries recorded related to the Lloyd's adverse development cover, the paid to incurred ratio is 92%.

Our fully diluted book value of $50.29 per share at year end declined to $46.11 per share as unrealized losses on our investment portfolio more than offset our net income. In these challenging conditions with extraordinarily thin market liquidity, we successfully raised $4 billion of cash from our fixed income portfolio to repay the muni-GIC liabilities trigged by SCA's rating down grades.

We have developed a contingency plan and executed with minimum financial impact on XL. The related asset sales resulted in a small gain during the quarter. We now have only have $11 million of muni-GIC liabilities outstanding. And now to our Chief Investment Officer, Sarah Street to review our investment portfolio and results.

Sarah E. Street - Executive Vice President and Chief Investment Officer

Thank you, Brian, and good morning. Today I am going to cover three areas. First I'll review the market for the quarter and its marked-to-market impact on our portfolio. Second, I'll discuss the asset sales that we made to pay down the muni-GIC liabilities and finally I'll review investment earnings for the quarter.

So to begin; the market turbulence of fourth quarter 2007 gained further momentum during the first quarter of 2008. It was a brutal period in the compartment triggered by increased concerns about the US economy, massive de-leveraging by financial institutions and an enormous flight to quality with sell off of risk assets without regards to economic value. While the overall tone of the market has improved somewhat in recent weeks, large [inaudible] of store remains with the capital markets due to ongoing recessionary and housing concerns.

On slide eight, we show the decline in the quarter of our net-unrealized position, before tax of $1.1 billion. Approximately $130 million of this decline in our unrealized position is due to the impact of the dollars declined which was included in the overall book value impact previously noted by Brian. Not surprisingly, given the asset price erosion that we witnessed across all credit sectors of fixed income, this was a significant decline.

Falling government rates in both the US and abroad positively impacted our net-unrealized position. However, what we've seen since mid 2007, these movements were more than offset by the impact of corporate and structured credit spreads. The main difference so far in 2008 has been that the spread widening in corporate and particularly the financials have had a much larger driver than in previous quarters.

Our aggregate holdings and financials are $6.6 billion with an average rating of A+. We also saw further price decline in mortgage related assets. The deleveraging of financial institutions and hedge funds led to significant amounts of forced liquidations which had a real negative pricing impact. The Fed actions on Bear Stearns making the discount window available to brokerage firms certainly stabilized markets towards the ends of March. This was most transparent in the tightening that we saw in most credit and mortgage indices.

However cash markets have not reacted as quickly, given the lack of liquidity in those markets and spreads were still at their wide at the end of the quarter for many assets. We continue to be comfortable with the quality of our portfolio and watch [inaudible] and principally reflect a liquidity in the market, we do not believe our remaining impairments are permanent.

The second area I'll discuss which Brian previously mentioned is the repayment of $4 billion of muni-GICs during the quarter. The repayment of these obligations was funned by the sale of assets in both muni-GIC segregated portfolios as well as the general investment portfolio. Our approach was to avoid selling assets at the low intrinsic value, or those with excessive liquidity costs. As a result, we have retained many of the topical assets originally purchased for the muni-GIC facilities, and selling in today's markets which where pricing reflects poor sales with both un-economic and also inappropriate given the fact that we have the ability to hold them until markets stabilize.

As a number of the US assets have floating rate, by retaining these, our P&C general dollar portfolio duration declined which we feel will help protect book value if interest rates rise.

The trade-off was at the yield on this portfolio declined by ten to 15 basis points, although it will be more responsive to increases should rates rise. When we weighed the current yield give outs against the book value benefit of shorter duration in the US, shorter duration won.

You will see the changes in our portfolio mix in the financial supplement. Our overall credit sector allocation is relatively consistent after the impact of sales and Marked-to-markets. Most notable was a decline in our structured credit securities as we use many of these to fund the muni-GIC liabilities. Our average credit rating remains at AA.

Moving to our financial results, on slide nine, we have summarized the net losses... net realized losses on investments for $102 million which was driven by charges for other than temporary impairments for $115 million including $49 million related to Topical assets and $30 million of sales and for losses for asset sales we expect to make in the next couple of quarters to satisfy $900 million of maturing funding agreements.

Last May we announced that we would exit this business and these maturities marked good progress towards that goal.

On slide ten, you will see that our total net investment income for the quarter was $499 million. Of this net investment income from our primary P&C operation, excluding structured products was $308 million. This declined by $19 million relative to fourth quarter 2007, principally due to lower rates and the slightly lower asset base. Turning to slide 11, net income from investment fund affiliates was $12 million for the quarter and was principally driven by a flat return in our term sheet [ph] portfolio.

The markets during the quarter were and continue to be in March challenging for alternative strategies given the extreme volatility and the overall pull back of credit availability. Our fund results reflect December to February returns. We are pleased with our performance relative to equities and the results further reinforce the strong risk adjusted returns of this asset class.

Before I turnover to Henry to discuss our insurance and Reinsurance Operations, I'd like to emphasize the depth of analysis we've undertake to validate the quality of our portfolio and the appropriateness of our positions going forward. We have clearly felt the pain of the most credit markets in history. However we believe financial stability will ultimately return and when it does we are well-positioned. Henry?

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

Thank you, Sarah. The strength of XL's global franchise again exhibited itself in a quarter with cat activity and individual risk losses significantly higher than the seasonal average. Published losses list... publishes sources list 19 separate loss events that produced individual risk losses of greater than $100 million each, totaling over $5.5 billion. In addition there were various tornado losses in the US and another large winter storm loss in Europe known as Emma, making it the third year in a row that Europe has suffered a storm loss in excess of $2 billion. In total we are aware of 27 risk and/or cat events in Q1 exceeding $100 million per occurrence and $10 billion in the aggregate.

Due to disciplined and selective underwriting, our involvement was limited to just three of these accounts on the insurance side. Total estimated losses from both segments as Brian O'Hara mentioned earlier, are less than 1.5% of the industry estimated losses for these events.

The quarter source spending even more time with our customers and brokers, emphasizing our commitments to them through our customer service and communications efforts, which have been and will continue to be pillars of XL's business franchise. While there will undoubtedly be some impact to our writings, especially new business as we see the effects of rating agency actions on our business, but we see these as remaining very manageable as our customers and brokers understand the strength of our core business operations.

Turning to the insurance segment; gross premiums written increased by 3.1% year-over-year. The main drivers for this were positive foreign exchange movements, favorable customer retention and selective writing of new business. These were partially offset by the impact of declining market pricing and the run off of ICAP business. We saw an increase in long-term agreement premiums, largely in Europe, where we also achieved better than expected pricing on our January 1 renewal book. Net premiums earned were down 4.1%, primarily due to an increase in seeded premiums related to the purchase of an adverse development cover which closed out the open years of certain of our Lloyds operations.

The insurance segment loss ratio for the first quarter was seven-points higher than the previous year quarter after adjusting for prior year development in both quarters and benefit from the adverse development cover I just mentioned. Approximately four-point of this difference relates to an increase in natural peril property losses with the remainder primarily attributable to the impact of premium rate decreases and an anticipated increase in loss activity in professional lines that I will discuss later.

Favorable prior year development in the quarter was $17 million with $13 million counting from property and other short tail lines. The amount of net prior year reserve releases was consistent with Q1 2007.

Market conditions generally followed recent trends, with early indication showing insurance premium rates on renewals down on average by approximately 7%. We also saw strong renewal retention ratios of just over 90% across our core Property & Casualty lines reflective of the strong loyalty of our European client base of the January 1 renewals. And, of course, our insurance segment results do not included the results from ITAU XL, which we report in from affiliates. Our share of the premiums from this Brazilian joint venture was approximately $73 million for the quarter.

In reinsurance, the fact that we do not focus on our top line was particularly apparent this quarter. While we did take advantage of some new business opportunities, much of the reduction in gross premiums written resulted from selective non-renewal or un-attractive business. This was most notable in our U.S. casualty portfolio.

Another area impacted was our portfolio of quota share reinsurances of Lloyd Syndicates. This portfolio has performed very well in recent years, but given where we are in the cycle, we took a more conservative underwriting position and this together with some impact from the well publicized recent M&A activity in that market, resulted in $17 million of foregone gross premiums written.

We also saw premiums affected by the timing of renewals and we expect to bind approximately $15 million of business in the second quarter that was previously written in the first quarter of last year. Net premiums earned were substantially flat year over year as lower net premiums written in prior quarters were partially offset by the positive earned impact of cessions to Cyrus Re were reduced. The reinsurance current year loss ratio was 4.7 points lower than in Q1 2007 driven by lower cat losses with the segment's exposure to Emma being only $20 million compared to Kyrill's $45 million in the prior year quarter. Prior year development in Q1 2008 was $50 million versus $45 million in Q1 2007.

We discussed January renewal conditions on our last call. Since then, the only significant news is that rates on our nowadays small and selective portfolio of Japanese business renewing on April 1 remained generally flat, which given the very competitive nature of the Japanese market was in itself something of a victory for pricing.

Turning to our life operations, these contributed earnings of $27 million this quarter compared to $23 million in the previous year quarter. Our life operations segment continues its trends of growth in long-term regular premium business in both the U.K. and the U.S. though this growth is not immediately parents this quarter due to a single premium annuity contract having been written in the prior year quarter.

We spent a fair amount of time on our call last quarter discussing the sub-prime issue and its impact on our insurance and reinsurance segments. We presented a snapshot analysis of our book of business and discussed our product and geographic diversification as well as underwriting related risk management. Since that basic profile doesn't change materially on a quarter to quarter basis, I would refer you to last quarter's comments for an overview of our operations and I will use the time this quarter to give you a quick update.

As this is an evolving issue, we regularly review our position in regard to sub-prime in both insurance and reinsurance. Specifically, we have updated our analysis of 2007 losses for the insurance professional lines portfolio. While there has been an increase in the number of notices for 2007 from 26 to 50, this increase is within that anticipated in our year end analysis and we continue to be comfortable with the adequacy of the inherent clash load and our overall loss pick for 2007.

With regard to the 2008 year, 27 notices have been received during the first quarter and we continue to track potential exposure associated with insurers that have been linked in the media to credit market related activity. In recognition of the potential for heightened loss activity in 2008, we have increased the clash provision in our 2008 loss ratio over 2007 for our major professional lines businesses by five points. We believe that this is prudent given the evolving and long-term nature of this issue from an insurance perspective, and we have done this despite the fact that at this early stage attritional losses continue to be favorable and in line with prior years.

Also general rate reductions this year have been less than expected and we see signs of price firming in portions of the market most impacted by sub-prime. In reinsurance, please recall that the potential sub-prime exposure in our assumed reinsurance portfolio is much more limited as our average treaty line size is in the $2 million to $3 million range and our experience here continues in line with our previously discussed analysis.

In summary, we continue to monitor our exposure to sub-prime very closely and remain comfortable with our reserve position for 2007 and feel that our loss picks for 2008 are currently appropriate. We do expect to pay claims related to the sub-prime issue, but that is our business, and we are comfortable with the idea now we have put up for those potential losses. I would also emphasize that based on our current loss picks we would expect both 2007 and 2008 years to be profitable and give us returns in excess of our long-term hurdle rates.

In closing, I'd like to also mention that strategic initiatives for organic and profitable expansion across our organization continue to bear fruits. Our insurance branch in Singapore has now been open for a full quarter and has already landed several key accounts in property, casualty, marine and professional. We have successfully integrated XL Gas, our recent engineering services acquisition, and this generated $11 million of additional insurance premiums through cross-selling.

And we recently announced that with the opening of the Brazilian reinsurance market, we have applied for both admitted and local reinsurance licenses and we expect to commence operations there as soon as possible. And with that we will open it up for Q&A.

Question and Answer

Operator

[Operator Instructions]. Your first question comes from the line of Tom Cholnoky of Goldman Sachs.

Thomas Cholnoky - Goldman Sachs

Yes, a couple of questions if I can. First, Sarah, on the unrealized losses recognizing that much of this was probably driven by ill liquidity in the marketplace, is there a time frame or a time threshold that you have to somehow potentially come up against whereby you might have to classify these as other than temporary impair, so if you can discuss how you treat that and what the tests are and then I will follow up?

Sarah E. Street - Executive Vice President and Chief Investment Officer.

Yeah, hi, good morning. We obviously have a robust process around our OTTI and this is not solely dependent upon the accounting rules and is based on the evaluation of securities and weather [inaudible] impairment has occurred. We do keep an eye on the time and also the degree in which the securities have been in the loss position and where we reach a conclusion that the impairment is other than temporary, we do take the OTTI charge and write it down to the current market value.

In accordance with GAAP even if we take the ultimate impairment is less than the current level we will continue this, and it is really very difficult to predict the level of OTTI that we might incur. I mean there are certain accounting rules like EITF 9920 that might mean that we will be required to take additional OTTI but really until we get to that quarter we don't know.

Thomas Cholnoky - Goldman Sachs

And where... I mean, what is that... I mean can you give us a time frame? Do you have the ability to go three, six, nine, 12 months on this or where, what point do you start getting some pressure?

Sarah E. Street - Executive Vice President and Chief Investment Officer.

We look at every asset irrespective of the time. We look at assets that are over 12 months in consecutive loss a lot more closely. And anything that has been in the loss and this is actually in our financial notes so that you could read it in detail. Anything above 25% in consecutive losses of more than 11 months we automatically take.

Thomas Cholnoky - Goldman Sachs

Okay. Great. And then, Sarah, also on the investment affiliates I think you've been targeting somewhere between, I don't know, 8% and 11% kind of returns. On roughly, what $1.5 million kind of portfolio, how should we think about that given the obviously very weak start to the year?

Sarah E. Street - Executive Vice President and Chief Investment Officer.

Tom, as you know we've been fairly consistent in terms of our long-term expectations for what we would generate off the alternative portfolio. It is now 1.7 billion.

Thomas Cholnoky - Goldman Sachs

1.7.

Sarah E. Street - Executive Vice President and Chief Investment Officer.

I think we are sticking with our 10 to 11% returns expectations and if you look back over our track record for the last six years that's actually what we've generated.

Thomas Cholnoky - Goldman Sachs

But those were clearly in periods that were a little bit more accommodating than the current one we're in.

Sarah E. Street - Executive Vice President and Chief Investment Officer.

Well, the last couple of years have clearly... we've been, I think last year the return was 17%. I think it is definitely more challenging, but I don't think you can measure a year off a quarter.

Thomas Cholnoky - Goldman Sachs

Okay. And sorry, Brian, just real quickly the tax rate seemed quite low in the quarter relative to where it might have been in previous once. Anything going on there?

Brian O'Hara - Acting Chairman, President and Chief Executive Officer

Nothing unusual. It's not really materially below.

Thomas Cholnoky - Goldman Sachs

Okay. I'll hop back in if I got anything else. Thank you.

Operator

Your next question comes from the line of Bob Glasspiegel of Langen McAlenney.

Bob Glasspiegel - Langen McAlenney

Good morning. I was wondering if you guys would help me out on just a technical question on SCA and that is if you chose to try to negotiate with them to buy out of the pre-deal IPO, is that legally possible? Is there, is that an avenue that possibly could be done for practical point of view? ?

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

Hi, Bob, it's Henry. I would say that we are in discussions with our advisors and with SCA around a wide range of possibilities and we are considering all aspects that we can look at but it would be premature to make any observations about where we think this is going to go because we are still in a discussion with them.

Bob Glasspiegel - Langen McAlenney

I was actually just asking a legal question, Henry, not a practical or which way you're negotiating. Is it possible to negotiate out of the pre-deal IPO cover?

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

Well, I think we discussed this on the previous call or when we discussed SCA on the previous call. This is a very complex situation as I'm sure you appreciate. The terms of the guarantee are unconditional, irrevocable, and obviously it's not just SCA that is involved with that, it's the bondholders themselves. So it's a much more complex thing to just say, can we negotiate out of it with SCA.

Bob Glasspiegel - Langen McAlenney

Okay, I got the answer. One other final answer, you are sort of in the sort of half pregnant stage of management leadership with Mike McGavick coming on board hopefully shortly. How much are you involving Mike in day-to-day important strategic decisions that have to be made that would clearly impact his leadership going forward?

Brian O'Hara - Acting Chairman, President and Chief Executive Officer

Bob, at the end of the call Mike is going to say a few words and he can answer that.

Bob Glasspiegel - Langen McAlenney

Okay. Look forward to hearing the answer. Thank you.

Operator

Your next question comes from the line of Josh Shankar of city.

Joshua Shankar - Citigroup

Good morning, following up on Tom's question; I'm curious to know first of all given the experience this quarter with the marked-to-market and last's quarters OTTI, Marks, whether a, in regards... whether you feel there's any chance of recovery from the fourth quarter OTTI marks and, two, if you go into a little bit more depth on the process by which you thought those fourth once were impaired permanently potentially in these current losses are just merely going to reverse at some point. A little more depth would be much appreciated.

Sarah E. Street - Executive Vice President and Chief Investment Officer.

Okay, Josh, I'll have a go at it. When we went through the OTTI impairment analysis in the fourth quarter, what came out of that was really a recognition of losses associated with many of our topical assets that where we felt there really was permanent impairment. I mean given the deterioration in the housing market and where cumulative losses are moving on those, we felt that when we did the analysis and did the stress on the individual securities, we had real losses there, so it was appropriate to take them. This quarter when you actually look at where the change in the unrealized had come from, it's pretty evenly split between corporate credit and structured credit. Corporate credit definitely experienced dramatic spread widening during the quarter and particularly financials which is as I mentioned in the prepared remarks, we do have $6 billion of holdings.

But we very much feel that that is a reflection of the market turmoil in March that culminated in the bail out of Bear Stearns and that, what you are seeing recovery along to the credit default swap spreads of many of the financials, the cash markets have reacted more slowly. So the recovery is taking a bit more time. But we feel pretty good about our financial portfolio exposure. I mean if you look at our top ten names in terms of financial supplement, they are all extremely familiar names which I certainly feel extremely comfortable about in terms of the portfolio being money good. The other $0.5 billion change in the portfolio did come in the structured credits. And if you go through the financial supplement that we, the credit supplement that we posted on the website last night, you'll actually see that most of the losses in terms of the change in the unrealized actually came in the AAA and AA portions of the portfolio. And this wasn't really a surprise given a lot of the forced liquidations that took place during the quarter particularly in alternative A, Alt-A portfolio which just put significant pressure on those asset prices in March and in fact were are already starting to see those recover in the cash markets quite nicely.

So it's a combination of all of that. When we looked at the difference between the fourth quarter and the first quarter, the fourth quarter was recognizing the real impairment that we had taken as a result of the housing market decline while this quarter the marked-to-market was a liquidity that's happened in the investment portfolio which we do not believe is permanent.

Joshua Shankar - Citigroup

So that being said and not that you would do this but, I hear from a lot of your peers that if we could by assets at the same level that we are being forced, to quote them at a marked-to-market loss, we would be buyers at these levels. I see you have other capital issues but does that jive with your opinion about your own portfolio?

Sarah E. Street - Executive Vice President and Chief Investment Officer.

Absolutely; we spent a lot of time looking at our portfolio and if you go and talk to... as you know we work with XL and the managers, if you go and talk to the managers today about, if you gave them a new portfolio and what would they buy? They would be buying a lot of what we already own, and particularly financials.

Joshua Shankar - Citigroup

Okay. Well, thank you for the disclosure. Appreciate it.

Operator

Your next question comes from the line of Josh Smith [ph] of TIAA Cref.

Josh Smith - TIAA Cref

Hi, thanks for taking the call. A couple of questions, following up on Josh's question on the unrealized losses. Page eight you showed that you had, I see the OTTI losses of $400 million or so sequential change. I see you had a benefit from the drop in the treasury and I see the corporate credit spreads widening. What is that other bucket that brands [ph] structured credits spreads, if it is not OTTI, what does it apply to?

Sarah E. Street - Executive Vice President and Chief Investment Officer.

Well, none of this is OTTI. This is --

Josh Smith - TIAA Cref

I'm sorry, I meant topical.

Sarah E. Street - Executive Vice President and Chief Investment Officer.

Change in the unrealized. This is a combination of commercial mortgage backed securities which had a roller coaster quarter in terms of prices in the marketplace. As you know our portfolio from our... we've disclosed is 98% AAA but definitely road that roller coaster in terms of price.

Josh Smith - TIAA Cref

Yeah but I thought that would have been, sorry, the topical, if you add up all the topical pieces which you do give a great amount of detail in the structured data credit supplement. All of those change quarter-to-quarter is about $400 million which looks like --

Sarah E. Street - Executive Vice President and Chief Investment Officer.

Right, we've always defined topical as being sub-prime, Alt A, and asset backed CDOs.

Josh Smith - TIAA Cref

Okay.

Sarah E. Street - Executive Vice President and Chief Investment Officer.

Which has been our definition of topical which we haven't changed.

Josh Smith - TIAA Cref

Fair enough.

Sarah E. Street - Executive Vice President and Chief Investment Officer.

It's a CMBS and it's our core CDO portfolio, which would be the other area which definitely felt the knock on impact from the price volatility that we saw in the leveraged loan market during the fourth to first quarter as many of the bank's thought to reduce their inventories and sold very large amounts of leveraged loans into secondary markets that caused real pricing pressure there.

Josh Smith - TIAA Cref

So it's just coincidence, all of those numbers were closed. They would have to add the gray, the background and offset some portion of the light blue to get there. Okay. I got it.

Sarah E. Street - Executive Vice President and Chief Investment Officer.

Correct. And that's like net to 1.1 net.

Josh Smith - TIAA Cref

Right. On the Forex impact, could some one explain briefly why you had a Forex loss and we think that you have... intuitively I would think if you have foreign operations where you are collecting in Euros or pound and you are converting back to dollars that a drop in the dollar in the quarter would help you? You took a Forex Gain.

Brian Nocco - Executive Vice President and Chief Financial Officer

We have operations around the world and a lot of this has to do with holding nonfunctional currency assets and liabilities in different places around the world. So an example would be in the UK which is a pound functional currency if we have US dollar assets and liabilities. Revaluing of those go in different places in the financials, revaluing the liabilities goes through the income statement assets through the CTA or the currency translation adjustment line directly to the balance sheet. So part of this is GAAP convention. Part of it also is, there were significant movements in certain currencies, and particularly the Swiss franc during the quarter which had a negative impact on us. But I think the important thing to keep in mind is while we try to damp down the P&L volatility, we try to... we certainly manage first and foremost the economics of FX. And so what we gave up on the income statement Juan we gave up in the marked-to-market in the portfolio, which is $130 million roughly of the $1.1 billion that Sarah referred to, we picked up an equivalent amount in the currency translation adjustments plus another 30. So net on the balance sheet we picked up 30 for the quarter.

Josh Smith - TIAA Cref

Okay. Thank you. And final question on the cat's large losses, I thought I heard you say that annual was 20 million hit but you didn't really say if there were any other cats and then you talk about having 1.5% of... less than 1.5% of industry losses. I thought you referenced $10 billion in loss, but then you said, you were exposed on three out of 27 so is it 1.5% of the loss on 3 out of 27 out of the 10 billion? It was kind of confusing?

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

Hi, Josh, it's Henry here. Sorry if it was confusing for you. On the reinsurance segment as you're correct we said we had $20 million of losses from winter storm Emma. The total estimated losses from natural peril cat... natural peril cat losses was in total for the cat and risk losses impacted by natural perils, $50 million in insurance and $26 million in reinsurance. And that compares to $10 million in insurance and $61 million in reinsurance for the prior year. Now the point you are raising on the 10 billion as I mentioned there were 19 individual risk losses that we tracked during the quarter totalling $5.5 billion and in total there were 27 risk and cat impacted losses over $100 million totalling nearly $10 billion. We only had three of those risk accounts in the insurance segment.

In other words, we through selective underwriting essentially we saw and declined the vast majority of the other once or we excluded it through terms and conditions. And in total across all of those risk and cat events aggregating up to $10 billion, our total exposure was less than 1.5%, i.e. less than $150 million.

Josh Smith - TIAA Cref

Total exposure.

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

Yeah, total losses.

Josh Smith - TIAA Cref

Total losses.

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

And I think you might want to put that in context that, for example, our large risk property portfolio in the U.S. we reckon we probably have a 2 to 3% market share and in Europe it's more like 6 to 8%. So I think that's a pretty good outcome from an underwriting processes to have such a low percentage of the total losses.

Josh Smith - TIAA Cref

Okay. Thank you.

Operator

Your next question comes from the line of Jay Gelb of Lehman Brothers.

Jay Gelb - Lehman Brothers

Thanks. Good morning. I was hoping you could touch base within the insurance segment, I believe there was a reference to long-term agreements. Are those multi-year deals and can you talk about how much that may have accelerated book premium in the current quarter?

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

Sure, Jay. We have long-term agreements of totalling $220 million this quarter, which was $60 million more than we had in the previous year quarter at $160 million. Now bear in mind that a very large proportion of our European portfolio renews at January 1. It's about 85% of our European book renews at January 1 and by far the largest proportion of that LTA business comes out of Europe where this is very standard practice, and they are typically three year transactions and we still see good opportunities there and it also speaks to the customer loyalty whereby doing these long-term agreements the average rate reduction on our European portfolio through these LTAs was about 3% as opposed to about 7% on the whole portfolio. So at the moment and once we keep a very close eye on this obviously bearing in mind where market conditions are, we still see this as a very good tool particularly bearing, working together with our very loyal European customer base.

Jay Gelb - Lehman Brothers

To what extent are you seeing demands for that sort of spill-over to the U.S. like we saw in the last market?

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

We don't see a lot of demand for it and we are very cautious about it in the U.S.

Jay Gelb - Lehman Brothers

Okay. Then on a separate issue on the professional liability on the sub-prime related issues, is the right premium base to think about this the $1.5 billion of casualty professional lines that was written for the full year '07? Is that the premium base we should be thinking about that?

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

Well, that would actually include all of our design and select professional, et cetera. The actual written premium for professional line in the first quarter was $304 million on insurance and was $83 million on reinsurance.

Jay Gelb - Lehman Brothers

Right. But of that $1.5 billion a year ago how much is related to the topical issues?

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

Well, our core D&O book which would be relevant to that discussion is about $1 billion for professional lines.

Jay Gelb - Lehman Brothers

I was also thinking, I mean, it seems like we should almost look at this issue in terms of gross limits exposed like you would on property & casualty if there is going to be a class issue and some of these could be limit losses, would you ever consider providing that level of disclosure as opposed to claim counts and advertise limits, just to give us a better sense of kind of worse case exposure here?

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

We went through a discussion on this last quarter if you recall, Jay, and we actually look at this in terms of what has happened on the average because a lot of the business is exposed to side A only. We have reinsurance only. Some claims don't materialize at all. Some claims are purely expense related. Some claims can be full limits losses. But typically on large clash events like this in the past when we've looked at the previous market events it absolutely isn't a full limits loss across the portfolio.

Jay Gelb - Lehman Brothers

Okay. Thank you very much.

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

Okay. Thank you.

Operator

Your next question comes from the line of Alain Karaoglan of Banc of America.

Alain Karaoglan - Banc of America

Good morning. I have a few questions, Henry, you mentioned that you moved the loss ratio out by five-point on the professional liability this quarter. Does that change your views of what the insurance can achieve in 2008 in terms of a result? Is that worse than what you would have anticipated at the beginning of the year?

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

Well, we moved it up by five points, which is approximately one percentage point on the... in fact it's slight less than one percentage point on the incurred loss ratio for this quarter. I don't think we would be into re-forecasting our guidance or anything like that. But it's as I said it's less than one point and it's about 12 to $13 million of incurred losses in the quarter.

Alain Karaoglan - Banc of America

Okay. Then the second question is on the life operation. Are you considering whether you should be in that business given the volatility that it may add to your book value? And I'm just looking at the change in net asset value in the supplement going from 800 and some change to $500 million. Could you give me... give us your thoughts on that?

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

I think on the life business and obviously people who are a looking at this as a life specifically as a life business, one of the reasons why we split out the balance sheet for the life business is this is long duration business, the investments are very much held matching the liabilities and we would see these movements working their way through over time. And I think typically people look through movements in the short term relative to the long-term nature of that business.

Alain Karaoglan - Banc of America

The next question is on the capital position maybe for Brian, how do you feel about your capital position of the company, your conversation with the rating agencies and how comfortable you feel with it generally?

Brian Nocco - Executive Vice President and Chief Financial Officer

We communicate regularly with the rating agencies. I think we've got good open communication and transparency. Our capital levels as we indicated last quarter were very strong and in fact supportive of ratings at a level higher than our current ratings when we look at our capital today and compare those to our own economic capital model as well as the capital models from the rating agencies, it's still very solidly supports our risks and our book of business.

Alain Karaoglan - Banc of America

And then the last two questions, Henry, maybe if you can comment on the Florida catastrophe fund situation or other opportunities that may occur in Florida? There was some thought that demand may increase in Florida? And then the second question related to SCA, if you could, when you give the disclosure in the first quarter around $10.9 billion is disclosed as other CDOs, could you give us the details on that? If you can't give it on the conference call when you give us the next update, could you break that down into more detail? And if you think that it's not a big issue in terms of potential losses maybe tell us why is that and why we don't need the detail?

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

Okay. On Florida, as you know it looks as though the $3 billion layer, the hurricane fund, the tickle layer is going out of the market and then it depends really what is going to happen relative to citizens and what they buy. We could see and we do expect to see increased demand from Florida generally through that. In fact, we think that could be in the order of $500 million of additional reinsurance premium becoming available to the reinsurance marketplace. So we think there will be increased demand there. Having said that we think there is enough capacity to take that up as well.

The second thing is the 12 billion other CDO bucket, it's made up of CDOs, which are essentially comprised of CLOs, CDOs of investment grade corporate debt, CDOs of CMBS and we don't put those into the same sort of topical risk category as the residential mortgage-backed CDOs.

Alain Karaoglan - Banc of America

Could I ask if you could consider breaking it down in detail on when you give us your next update?

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

Alain, as ever, thank you for the input, and obviously we'll look at that and see if we can provide the information.

Alain Karaoglan - Banc of America

Great. Thank you very much.

Brian O'Hara - Acting Chairman, President and Chief Executive Officer

Thank you, Alain. Appreciate it.

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

And actually just on the guarantee thing I may have left people with the impression that whilst this is a very difficult situation, of course, we are looking at every possibility to remove this overhang from us. So, I wouldn't want anybody to believe that this is something that we're not focused on trying to resolve. As Brian said at the beginning, we want to resolve this issue, and clearly, resolving the matter of the guarantee is very high on our agenda.

Operator

You next question comes from the line of Paul Newsome of Sandler O'Neill.

J. Paul Newsome - Sandler O'Neill

Good morning. I have a question about how the investments are managed, in particular. And I guess one of the things I'm curious about is whether or not you're managing your investments in buckets, corporate separate from mortgage backs, because it does seem like, and maybe this is just erroneous view, but it does seem like you've got credit exposure across all different sorts of asset classes but it doesn't seem like you're kind of looking at it at a holistic perspective. Do you have essentially managers that are sort of looking independently on each of these asset classes?

Sarah E. Street - Executive Vice President and Chief Investment Officer

Hi, this is Sarah. I mean, we use a combination of both core managers who have the ability to take credit, but also credit specialist managers as well. We have tended to use credit specialist managers for lower rated credit because we think that they can have more resources available to them to be really focusing on the underlying credit analysis of individual securities.

Having said that, even our core managers we are comfortable have very robust credit processes. But, no, we absolutely look at our core credit across the overall portfolio in a way that we've allocated the money out doesn't really drive that. We are looking at what our total credit exposure is.

Now, we're probably overweight credit relative to many of our peers and that has come from being in a number of the spread businesses, which, as you know, we are exiting, but it will take us time to do that and also by being in the life business. We have a long duration in UK and Euro portfolio for our life operations. And given the fact that it's a long duration, it is more sensitive to changes in credit spreads. And that's what we've seen in this quarter.

J. Paul Newsome - Sandler O'Neill

As a broader question, does the investment book take into account the risk that you're taking in other businesses? And if it doesn't… it doesn't look like it does, why not? Because I think one of the things that investor are struggling with is that you've got essentially the same risk in a very long number of different pots whether it be a variety of investment portfolios, the insurance operations, and then, of course, the off balance sheet SCA stuff. Why isn't there some offset of… you recognize you have a big credit exposure for the SCA, so therefore you adjust the investment portfolio to have lower than average credit exposure?

Brian O'Hara - Acting Chairman, President and Chief Executive Officer

Well, as you will recall, well over a year ago we decided and agreed with our Board that we would exit the financial services strategy that we embarked on 10 years ago. And unfortunately, it's not a switch you can just turn off but we're selling down our SCA position as you know. We were exiting the muni-GIC business. And we're mindful of these accumulations and why we were exiting as soon as possible.

However, events caught up with us before we could fully execute it. So, we will… as we mentioned before, we are out of the muni-GIC business now, and we're committed to exiting all the rest as we've stated in our Investor Day a year ago May.

J. Paul Newsome - Sandler O'Neill

Great. Thank you very much.

Operator

Your next question comes from the line of David Small of Bear Stearns.

David Small - Bear Stearns

Good morning. There's been a lot of press about the Merrill Lynch case against SCA. Could you just help us understand how the outcome of that case would impact XL?

Brian Nocco - Executive Vice President and Chief Financial Officer

I think, to be honest, David, you would need to speak with SCA about how that impact… what that would have impact on them. SCA posted their case reserves at the quarter end of the year, which included exposures from those CDOs as we understand it, but you'd really have to discuss that situation with SCA.

David Small - Bear Stearns

Okay.

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

And if I can add on, it really… if SCA wins the case in any degree, it's upside for them and for us derivatively. All of the credits in question are post-IPO credits as well.

Brian Nocco - Executive Vice President and Chief Financial Officer

But also, David, you should be aware, of course, we are not privy to the merits of this case one way or the other.

David Small - Bear Stearns

Okay. And then, just on the D&O issue, I mean how many more… how should we be thinking about this? You said you went from 26 to 50 claims and you are comfortable with the reserves that you've put up. I mean, how many we should be thinking about this, and if you get on next quarter and that's gone up to 75, should we be thinking, well, that's not within what you were expecting? I guess, maybe put some more color on that.

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

Well, 2007 in terms of notifications because this is on a report year basis is essentially done in terms of number of cases. Obviously 2008, we've seen 27 cases. We actually saw a slowdown in the number of cases reported in March, but I wouldn't say that one month is going to change our view on this. But it's an interesting data point. But we continue to monitor cases in the press through published sources, et cetera, et cetera, and keep a close eye on what's happening.

Brian Nocco - Executive Vice President and Chief Financial Officer

And if I may add, not all notices are created equal. I mean some obviously are generated by a real problem or lawsuit. Others are excess of caution by the insured to make sure that they've got coverage.

David Small - Bear Stearns

And so, you look at your 50 cases how would you break them down between those buckets?

Brian Nocco - Executive Vice President and Chief Financial Officer

Well, I'm not sure that we at hand have that kind of information. But keep that in mind in future analysis.

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

And David, please keep in mind that was 50 in 2007. We have 27 in 2008.

David Small - Bear Stearns

Okay, great. Okay. Thank you very much.

Operator

Your next question comes from the line of Vinay Misquith of Credit Suisse.

Vinay Misquith - Credit Suisse

Hi. Good morning. Could you comment on your client retention ability? You said that it was in the 90% range and how that has been trending?

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

This is on our core Property and Casualty business and it's been pretty consistent. In fact, in Europe for January 1, it was slightly higher this year than it was last year. So we are very pleased with that. But it's been pretty consistent over the last two, three years. We did see a slight drop-off towards the backend of last year, but as I say, in fact, January 1 in Europe compared to January 1 last year we were slightly better.

Vinay Misquith - Credit Suisse

And the US, have you seen anything in the US?

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

Well, US for January 1 is not a big renewal season.

Vinay Misquith - Credit Suisse

Okay. That's fair enough. And the second question was a follow-up to Alain's question. On the $10 billion of other CDO as a guarantee for SCA, how would you compare the credit quality of that as compared to your own core CDOs of $931 million that you have in your own books?

Sarah E. Street - Executive Vice President and Chief Investment Officer

I think I believe SCA's exposure is principally at the AAA rated level and our portfolio and the detail in this in our credit supplement that we posted on the website is more weighted in the AA and the BBB. We still continue to feel very good about that portfolio. I mean, there's a very big difference between collateralized loan obligations and the asset-backed CDOs that we've had the issues in. I mean it's an asset class that has been tested before in a credit metal down and refinements were made by the rating agencies to make those structures even more robust than they were, and we still feel very good about our CDO exposure in the investment portfolio.

Vinay Misquith - Credit Suisse

All right. Fair enough. Thank you.

Operator

Your next question comes from the line of Matthew Heimermann of JP Morgan.

Matthew Heimermann - JP Morgan

Hi. Good morning, everyone. I'll try to make things quick. On the adverse loss development cover at Lloyds you said it covered open years. Could you just remind us what years those are specifically, and I guess, I'm curious as to whether or not this gives you any protection on D&O potentially?

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

It closed out the 2001 open year on Syndicate 1209, Matt.

Matthew Heimermann - JP Morgan

Okay. So, it's a very, very old action.

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

Yes. It cleared up an outstanding item, if I can put it like that, puts it behind us.

Matthew Heimermann - JP Morgan

The other question I had was on the long-term agreements, I would assume that even though you enter into these long-term agreements and you're bounds to the three years that the clients can cancel if they so choose? Is that correct?

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

The answers is that this becomes something of a dance in reality. I would say that this is very normal practice in Europe and essentially what it really does for you is it gives you first right of refusal at renewal and you have a discussion where you agree to, what the basis is going to be going forward. There's often a lot of changes in the client's portfolio and so you need to discuss that. But it's not ironclad in both directions but it does become a relationship and we... but the experience of these has been very good and our pricing experience has also been very good.

Matthew Heimermann - JP Morgan

Okay, can you give us a sense, is the right question, what percentage of the 220 you wrote this year reflects deals last year that were renewed differently?

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

The vast majority were renewals.

Matthew Heimermann - JP Morgan

Okay. So, three-year deals a year ago that are now three-year deals a year later?

David Radulski - Director of Investor Relations

No, they are three-year deals that have come up as a new three-year deal.

Matthew Heimermann - JP Morgan

Okay. All right. Perfect. Thank you.

David Radulski - Director of Investor Relations

Thank you.

Operator

Your next question comes from the line of Brian Meredith of UBS. Mr. Meredith, please state your question. Hello?

Brian Meredith - UBS

Hello.

Operator

Yes, sir, please go ahead.

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

Brian, we can hear you. No, we can't hear you. I'm sorry.

Operator

That question has been withdrawn. Your next question comes from the line of Jay Cohen of Merrill Lynch .

Brian Nocco - Executive Vice President and Chief Financial Officer

Jay, are you there?

David Radulski - Director of Investor Relations

Lori, is there an issue with the dial in line?

Operator

Mr. Cohen, please state your question.

Jay Cohen - Merrill Lynch

Hi, can you guys here me?

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

Yes, we've got you.

Jay Cohen - Merrill Lynch

Good. Sarah, you had mentioned that within the corporate that you guys own, about $6 billion related to financials. I'm just adding it up, I am on page 16 of your supplement, it looks like total corporate between US and non US is 13 billion suggesting almost half of that is financials. Is that right and is that typical or are you kind of overweight financials?

Sarah E. Street - Executive Vice President and Chief Investment Officer

Jay, your numbers are correct and we are slightly overweight on financials.

Jay Cohen - Merrill Lynch

Has that been a historical thing or is that relatively new?

Sarah E. Street - Executive Vice President and Chief Investment Officer

No, that's been historical.

Jay Cohen - Merrill Lynch

Thank you, next question is for you, Sarah, as well. Since quarter end, what have you seen happen with the spreads in your key asset classes?

Sarah E. Street - Executive Vice President and Chief Investment Officer

Well, as I mentioned I think the tone of the markets have improved. The best transparency to see that is obviously in a lot of the indices out there and if you look at where the CDX has tightened, it's tightened very significantly since about March 10. You are starting to see that on the corporate credit flow through on the cash side. I think the ABX indices at this point are up about 5% or 7% for the quarter from end of March. I think the cash markets recovery will lag on that. They lagged on the way down. I expect them to lag on the way up. But I think generally, and CNBS has improved. I think there's concerns around the financial stability have decreased, I wouldn't say gone away yet by any stretch of the imagination. That is starting to be reflected in portfolios.

Jay Cohen - Merrill Lynch

Thank you. Next question, the muni-GIC side, you have liquidated I guess $4 billion of securities to funds these payments. Is there any additional liquidity needs coming up where you will have to sell more securities?

Sarah E. Street - Executive Vice President and Chief Investment Officer

As I mentioned in the prepared script, the only thing that we've got is $900 million of funding agreements that mature over the next two quarters and we have taken some OTTI in advance... because we know we are not going to hold those maturities until maturity, or until recovery; we have already taken the unrealized or realized that we would expect to credit on funding those obligations and repaying.

Jay Cohen - Merrill Lynch

And the last question, I guess still with you, Sarah; the current credit market and the types of hits you're taking to your balance sheet from a Marks standpoint what are the chances of this happening? What I'm saying is, on the CAT side you look, you model these things out and you say it's a one in 100 year event and one in 50-year event, what kind of event is the current credit crisis that we're seeing?

Sarah E. Street - Executive Vice President and Chief Investment Officer

I'd have to think about that because we've obviously had a number of different components on top of it happening at the same. In our filings in the 10-Q and the Ks, we go through our bar [ph] results and our Stress Test Results and what we've seen over the last nine months in terms of potential marked-to-market that we expected could occur in certain stressful events, it's pretty much in line with that. So, I mean, it is within our expectations. And it's really, I mean it's, it's pretty fare standard deviation but it varies very much depending on which asset class you look at. So, I'm not sure I can answer it in a total simple response.

Jay Cohen - Merrill Lynch

The reason I'm asking is just because you do take risk on your insurance side. Maybe it is what Paul Newsome was asking, but just seems... you lost about 12%, 13% of your shareholder's equity in one quarter. If that happened on the CAT side; that would be a very sizeable event and it could happen later this year. It just seems that it was kind of outsized hit on the balance sheet given that you do take risk elsewhere. That was my only sort of comment.

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

This is Henry and since you are asking about CAT maybe I can look at it from a slightly different perspective. Of course a CAT event of whatever size it is absolute destruction to the balance sheet. This in the investment portfolio A; the Mark could have been a positive and in this instance it's a negative and B; it's only a Mark and we anticipated over time it will come back. So, yes, it is a big percentage of the shareholders equity but I wouldn't characterize it in the same way that you would pure catastrophe losses.

Jay Cohen - Merrill Lynch

That's a fair point, Henry. Thanks.

Operator

Your final question comes from the line of Bill Wilt of Morgan Stanley.

William Wilt - Morgan Stanley

The question I'll be quick. I guess first one for Sarah, I'm looking at the core CDOs of $931 million. Does the unrealized loss provision, I guess totaling $254 million; does that represent the totality of the losses you've taken against that portfolio or were there previously... whether OTTI or realized losses on those that if I was trying to get at a cumulative loss position on that portfolio?

Sarah E. Street - Executive Vice President and Chief Investment Officer

Bill, that is pretty much it. The only OTTI that we have taken on that portfolio in the last 12 months was the $7 million that we took this quarter and there were just a couple of CDOs that we saw deterioration on that we felt appropriate but the rest of the portfolio which are cash flow CLOs are in pretty good shape I should say.

William Wilt - Morgan Stanley

So, you are using the $254 million against the $931 million segregated by rating category would give a reasonable approximation for the current marked-to-market, I guess?

Sarah E. Street - Executive Vice President and Chief Investment Officer

Absolutely.

William Wilt - Morgan Stanley

Thank you for that. And then Henry, on the insurance portfolio, the D&O discussion of increasing the run rate loss ratio by five points; just to confirm, what's the right basis to which that should be... premium base to which that should be applied? Or is it the $1 billion core D&O portfolio that, core meaning it pertains to financial institutions or is it some other premium base against which that five point run rate increase is being applied?

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

I think you circled that question very well for yourself, Bill. It's five points on roughly the $1 billion for the full year. It's about $250 million for Q1 and it's $12 million to $13 million in this quarter. So hopefully that gives you enough points.

William Wilt - Morgan Stanley

That's great. Thanks very much.

Operator

Your final question comes from the line of Brian Meredith of UBS.

Brian Meredith - UBS

Hello, can you hear me now?

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

Yes, we can Brian. Welcome --

Brian Meredith - UBS

All right. Fantastic, sorry about that. A couple quick questions here. First, Henry, if I look at the other specialty line in insurance, a big increase, is that related to these European long-term contracts or is that the E&S business that you're growing.

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

On a specialty line, no, what you're looking at is an increase in the gross written by 14%.

Brian Meredith - UBS

$239 million of gross versus 162 in the first quarter '07.

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

It's probably in our aviation and also some growth in the E&S business.

Brian Meredith - UBS

Okay. So you have some growth in the E&S business.

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

It's principally growth in the E&S business, I'm sorry.

Brian Meredith - UBS

Next question, you mentioned that you expected some impact on new business from rating agency down grades. Is that a change from what you thought at the end of the fourth quarter on the fourth quarter conference call?

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

Well, I think what we should say here is that during the first quarter obviously January 1 business was not impacted by this because of the rating actions occurred later. We spent a lot of time with our customers and our brokers and they've been very supportive of opposition. Obviously we do have very detailed discussions with them and we come under pressure from our competitors. So I don't think our view is really any changed. We have to fight every day out there for business and on new business particularly it can be a bit more difficult. But we are working very closely with our customers and brokers and they've been very supportive of us.

Brian Meredith - UBS

Great. And then lastly on SCA, last quarter obviously when the 10-K filed, you had full information from SCA to increase your loss provision, did you have the ability to actually go in and look at the development of the book this quarter when you reported your results or could there be subsequent information that comes out where you will have to actually increase your reserves when they report?

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

We don't have any information at this point that we can analyze to comment one way or the other.

Brian O'Hara - Acting Chairman, President and Chief Executive Officer

Well, let me just add on that. We are really talking about reinsurance contracts, the excess of loss reinsurance agreement and facultative contracts, we would react to claim notices that we receive relative to those. We received no new claim notices from SCA, which would cause us to reassess or re-value those reserves.

Brian Meredith - UBS

But if they increased their reserve positions for any of the contracts that you've done in the facultative side, I assume that would impact your reserve position, right?

Henry C.V. Keeling - Executive Vice President and Chief Operating Officer

Yes. Of course, if they increase their reserves on facultative, we would [inaudible].

Brian O'Hara - Acting Chairman, President and Chief Executive Officer

And as you'll recall we already took a full limit loss on a present value basis on the XRL [ph].

Brian Meredith - UBS

Right. It's more of the facultative, I understand it. Okay. Thank you. That's all.

Operator

At this time there are no further questions, I will now return the call over to Brian O'Hara for final remarks.

Brian O'Hara - Acting Chairman, President and Chief Executive Officer

Thank you. As I move from XL's CEO to Chairman of the Board, I do so with confidence that our organization is well positioned to building our fundamental strengths. I have appreciated the immense support of our customers and brokers over the years and I thank all the XL family worldwide who have made my career such an outstanding experience. Although this will be my last investors' conference call after participating in 66 quarterly earnings calls since 1991, I hope to have the opportunity to see many of you again in my new role. But in the meantime thank you for your steadfast support, your belief in our great franchise and for affording me the privilege of leading this company.

Before I sign off, I would like to say how pleased I am to have Mike McGavick, XL's CEO-designate here with us. As you know, Mike is an experience insurance executive and a proven leader and he has dedicated to the underwriting discipline and high ethical standards that have been XL's hallmark since our founding. Mike's official start date is May 1st. But he along with all of our senior management have been working hard to ensure that he will be up to speed on day one.

Now I'd like to invite Mike to say a few words. Mike?

Michael S. McGavick - Chief Executive Officer-Designate

Thank you very much, Brian. And I did hear an awful lot of familiar names on this call to those of you who I already know, greetings; to those of you who I don't know I look forward to working with you. I'm eager to get to work. I'm here in Bermuda as a result of the board meetings this week and have taken the opportunity to continue my preparation for this job. I'm particularly because I am even more confident these days later than I was the day I signed that this is one of the great insurance franchises in the world and that by working our way through the issues that confront us now many of which have been discussed at great length today, we can get back to focusing on the great insurance and reinsurance operations this company possesses.

In addition to the ordinary transition preparation meeting people, reviewing plans and evaluating them, finding the bathrooms, all the rest of the stuff, I've also been asked by the board and Brian to become intensely involved in the SCA matter which I have been doing. I can't add anything to the comments that were made earlier, but I can attest to the truth of what Brian said when he says that the focus and resources and intensity and urgency are present that are necessary to I think over time resolve this issue. This has made the transition much less restful than one might assume it would be given the level of travel and what not. I can only say that I am very grateful for the many kindnesses and support that I've received from Brian, Henry and the entire XL crew throughout this transition. It's been very much appreciated.

One of these people was so kind as to observe that since I'm not yet being paid, this may be the period of greatest value that I have ever added to this company. I thought that was very funny. My wife thought it was less so. A couple of thing at the very highest level my priorities are pretty obvious. Get SCA behind us as fast as fully can be done rationally.

Second, through additionally urgency to a process already underway here at XL, to do all I can to lead an end to the current and unpleasant pattern of having our very strong earnings in core reinsurance and insurance operations lost through one-offs every couple of years. This simply has to end. We all know that. There are tools we can use to do so, and I'm intent on bringing that fully to bear.

By doing so, I think we can bring a real focus on strengthening the view of others of our capital strength. I would focus particularly there on our A.M. Best rating. These things take time. That's been discussed before, but I feel a sense of urgency around that entire process.

Through all of these actions, these three particularly, I hope to be able to get us all back to… when I say all, I mean shareholders, my colleagues here at XL, our customers and partners around the world, to get all of us back to focusing on these core and great franchises. And I think that is particularly important at a time when underwriters, and particularly great underwriting organizations like this one, can show their real relative strength as the insurance marketplace globally enters choppier waters. So getting back to that focus and having the confidence to do it right is exactly what we all need to be doing, and it's my job to do all I can to quickly clear the decks so that that can again be the focus.

In terms of activities, obviously, that means I've got to get around this vast organization, get to know its people, our partners, our customers and get to understand each of those businesses at a granular level, so that we can make the kinds of decisions that enable them to be successful as quickly as possible. But you can guess that some of that work is already engaged. And then, I would add that you can expect a meeting sometime early in my tenure… exactly when, I can't yet say… where I can describe to you directly what I've learned and can describe the actions we collectively and the leadership of XL intend to take based on those learnings.

So that's just a little bit of what I've been thinking about and what I've been working on, and in preparation for taking over for Brian on May 1. I will tell you I find these extremely big and frightening shoes to take on. I've known Brian a long time. We went to the same high school perversely out in Seattle a decade apart. And so I am well aware of what this job entails and well aware of what a marvelous person I will stand in for, and I am honored to do so.

At last, I'll end with one completely unrelated comment. But I'm keenly aware that there's an enormous irony to being on this call on the day that Safeco's announcement with Liberty was announced. And I would say, number one, and I know if we had a question period I would get questions on it, so I will take care of it anyway. Number one, I've learned long ago to never second guess a person who has succeeded you, so I have no judgment on the transaction whatsoever. That's the current leaderships business.

I will say that on a personal level given my objectives when I went there were, number one, to rebuild that great franchise, which clearly we did, and number two, to remain independent. I can say this is personally very saddening. And I would just say to Ted Kelly and his friends at Liberty both congratulations, but most important, I'm confident that he knows and will appreciate the simply wonderful group of people that are acquired through this acquisition.

So after that, I just look forward to working with you all in the future.

Brian O'Hara - Acting Chairman, President and Chief Executive Officer

Thank you, Mike, and thank you everyone for joining us today.

Operator

Ladies and gentlemen, thank you for participating in XL Capital's first quarter 2008 earnings conference call. You may now disconnect.

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Source: XL Capital Ltd. Q1 2008 Earnings Call Transcript

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