Hurricane Battered XL Earnings Down 77%

Michael Ha

NU Online News Service, Nov. 2, 3:10 p.m.EST?XL Capital Ltd. is the latest insurance company toannounce weakened third-quarter earnings results battered by theunprecedented fearsome foursome of hurricanes that devastated partsof the Southeastern United States.[@@]

In today's earnings conference call, XL Chief Executive BrianO'Hara noted that excluding hurricane losses, his company had infact posted very solid results. Mr. O'Hara also commented oncurrent property-casualty price conditions, which he called"attractive" overall, and he offered an update on the subpoenaserved up by New York Attorney General Eliot Spitzer, saying XL iscooperating fully with the investigation.

The Bermuda-based insurer XL reported that its 2004third-quarter net income dropped to $22.5 million, down 77 percentfrom the $99 million it reported during the year-ago quarter in2003. The carrier said this year's third-quarter results included atotal net charge of $420.1 million related to hurricane activitiesduring the quarter.

Excluding net realized gains and losses, XL posted a net loss of$15.4 million, down from the net income of $124.1 million reportedduring the year-ago quarter. XL's net premiums written from generaloperations for the third quarter fell 9 percent to $1.4 billion,compared to one year ago.

Mr. O'Hara said that the third quarter witnessed "anunprecedented series of natural catastrophes" with four of thetop-10 most damaging hurricanes ever recorded, which made thisyear's hurricane season, thus far, the most costly in history forthe industry?the hurricane season has still got four more weeks togo, ending on Nov. 30.

Even in this environment, Mr. O'Hara noted, "despite taking a$420 million after-tax charge related to hurricanes, we deliveredsolid underlying results."

Mr. O'Hara said XL's combined ratio from general operations forthe third quarter was 110.6 percent, but excludinghurricane-related losses, the ratio was a solid 86.7 percent, hepointed out. This solid combined ratio, he said, shows the strengthof XL's underwriting discipline and the generally healthy marketconditions.

"The combination of our global presence, diversified productexpertise and ratings strength allows us to continue to seeattractive market opportunities," Mr. O'Hara said. At the sametime, XL has selectively reduced writings in certain lines whereprice competition has become too aggressive and does not meet XL'sown risk-reward equation.

The P-C price conditions remain attractive overall, Mr. O'Haraobserved. Generally, pricing is "flat to down," he said, with"low-double-digit price falls" in property and professional lines,which are partially offset by "low-to-mid, single-digit" increasesin other casualty and some specialty lines.

But this hurricane season, along with storms of another kindbrought up by New York Attorney General Eliot Spitzer, could changesome of the pricing environment. "We could expect the largeproperty losses in the quarter as well as increasingdirectors-and-officers activities to have a moderating impact onfurther price decline," Mr. O'Hara said.

XL has also been involved in the ongoing investigation of theNew York attorney general, having received a subpoena from Mr.Spitzer's office. Mr. O'Hara said during the conference call thatXL is cooperating fully and that the company has already announcedits decision to end Placement Service Agreements with brokers. Mr.O'Hara assured industry observers that XL has always upheld thehighest ethical standard in its business practices.

In regard to Placement Service Agreements, XL has nowdiscontinued all such arrangements, Mr. O'Hara emphasized. Toprovide some context, he disclosed that through Sept. 30, 2004, XLhad net total estimated PSAs with brokers of $47 million, of which$29 million was related to Marsh Inc. Of this amount, less than $2million was related to their U.S.-placed excess-casualtybusiness.

"As we reported late last week, our subsidiary, XL America Inc.,was subpoenaed by New York's attorney general. The request wasgeneral in scope and it sought information on the sales practicesof brokers," Mr. O'Hara said. "We take these issues seriously andare cooperating fully with the investigation. I would like toemphasize that XL has always been committed to maintaining thehighest standard of ethical conduct."

Mr. O'Hara added that as a matter of prudence, after learningabout the civil suit against Marsh & McLennan Companies Inc.two weeks ago, XL commenced an internal review of the issues raisedin the New York attorney general's complaint. "This review is inprogress and it would be premature to make any comment at thispoint," he said.