XL Capital, Ltd., announced last night that it would boost net reserves in its North American reinsurance operations almost $200 million, with nearly 30 percent of the total coming from a single cedent's workers' compensation business.
The total reserve boost is $191 million before taxes. In addition to workers' comp, the overall charge includes increases related to several other casualty lines and will adversely impact second-quarter results, the Hamilton, Bermuda, company said.
The after-tax charge is $183 million, or $1.31 per ordinary share.
The pre-tax reserve charge breaks down as follows:
o An increase of $64.7 million for workers' comp
o An increase of $76.0 million for 1997-2001 underwriting years for lines other than workers' comp
o An increase of $15.6 million for underwriting years prior to 1997 for lines other than workers' comp
o An increase of $34.3 million for underwriting years after 2001 for lines other than workers' comp
In a statement, Brian O'Hara, president and chief executive officer of XL, called the reserve strengthening "extremely disappointing."
"With respect to the reserve increase in workers' compensation, I do not believe this represents a broader issue for this line of business for XL given the unique nature of the program with the single cedent," he said.
According to XL, roughly 90 percent of the comp hike related to an XL Reinsurance America Inc. working layer program written across multiple underwriting years for a single cedent. The program was not renewed at the end of 2001, and the company did not write a significant amount of working layer comp business beyond this program.
Mr. O'Hara said the reserve addition for workers' comp represented 0.5 percent of XL's total net loss reserves as of March 31, and the non-comp portion represented only 1 percent.
"In my judgment, the recent claims reporting activity reflects cedents having to recognize losses on their books with greater transparency and timeliness," he added.
Describing the reserve increases for other lines, XL said that the boost for the 1997-2001 underwriting years was principally driven by recently reported claims in umbrella liability, errors & omissions, and directors & officers lines, indicating that the professional lines claims activity arose from "a limited number of cedents"
For pre-1997 underwriting years, other liability and E&O claims drove the increase, while post-2001 activity related to large individual claims in surety, umbrella and E&O.
"The post-2001 underwriting year reserve additions do not alter XL's view of the continuing strong profitability in these lines of business in these years," Mr. O'Hara stated.
XL said the overall property-casualty increase resulted from XL's scheduled semi-annual reserve review. While substantially completed, the company said there is an ongoing review relating to policy benefit reserves for certain blocks of U.S.-based term life mortality reinsurance business. XL expects to complete that review by the time it issues its earnings release on July 27.
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