XL Group PLC Earnings Call Nuggets: Share Buyback Potential and Operating Leverage
Share Buyback Potential
Jay Gelb – Barclays: Mike, on the share buyback potential I believe you mentioned more than $400 million is likely in 2013 given your return on equity goals, where do you feel the capital base needs to be sized to and how can the buybacks get you there?
Michael S. McGavick – CEO: The first thing I would emphasizes is that the capital leverage by virtue of buybacks is not the most powerful level we have on producing acceptable ROEs. By far the most powerful level we have is in expanding our operating margins and we are moving nicely towards that objective. So, that’s going to be our core focus. That said, as I emphasized, it is not our goal to expand our capital buffer at this time, we’d like to keep it level. And if we are successful through the year in expanding our margins to keep it level obviously that would imply that we would need to buyback a higher level than the 400 we committed to early last year. I am not ready to put a number around that, I think, it’s premature as we have a number of our capital management policies still to consider with the Board, but just the logic of keeping it level would suggest that we would be looking to do more over the course of this year if it plays out as we expect. But our focus in driving the better ROE comes from expanded operating margins, that’s what we are working toward and we believe we can continue to deliver that in 2013.
Peter R. Porrino – EVP and CFO: Jay, this is Pete. Just one point of clarification on the way you asked the question. We view our buybacks in ’12 was 500 because timing difference from Sandy and I think Mike’s comment that he made in his prepared remarks was that was where we were starting from.
Jay Gelb – Barclays: And then on the Insurance segment if we look at the ex-cat, ex prior year development baseline it went from 94.7% in 3Q, this is for the Insurance segment to 96.3% in 4Q. Previously, it had been improving every quarter on a link quarter basis and this ticked up a bit. It would be helpful to understand does this reflect some one-time items or some noise or should we expect that to continue to head back down in subsequent quarters?
Gregory S. Hendrick – EVP and CEO of Insurance Operations: Jay, it’s Greg. I’d say one note at the high level is that given the nature of the business we’re in, the upper middle market and large corporate space. The quarter is always going to have some variability to it. So, what I like to do is focus here on the accident year ex-cat loss ratio, which is the real, I think the really interesting piece. If you look at that, for the full year our accident loss ratio ex-cat was 66.6 and 6.5 points better than prior year. I put that improvement into four categories. First, our traditional short tail property lines performed better than prior year and accounted for about 2% of the full year improvement. This is our result of a lot of hard work at re-underwriting the portfolio particularly around driving rate, where we have had the highest rate increases in our North American property book and terms and conditions as well. The second piece is in our large property losses, which account for 3% of the improvement and there we used $10 million of the threshold for large losses and then accident year 2011 got $157 million of those large losses versus just $11 million in 2012. Now this is an area where it’s hard to attribute precisely between – how to attribute precisely between fortuity and skill. We are derisking the international profit portfolio but it’s really impossible to tell you precisely how much we have done that on skill and fortuity. The last two drivers are rate exceeding trends on the entire portfolio and that’s about 1.5 and change in business mix drive the other point. A full year over a full year and it should be at least half of that improvement to our underwriting actions and I know this is a subjective exercise, so you can’t put a pinpoint on it. So, I would just say any quarter-to-quarter there is going to be noise in it, but let’s really focus at that full year to full year result, that’s a little more time particularly because we can’t have lumpy books of business and activity in a particular quarter.
Jay Gelb – Barclays: Just to clarify that, that 90% combined ratio target in the insurance segment. That’s on a calendar year including cats and any prior year development?
James H. Veghte – EVP & Chief Executive XL Group’s Reinsurance Operations: Wouldn’t include prior year development.
Mike Zaremski – Credit Suisse: My first question, the expense ratio appears to have benefitted from operating leverage. Is that a trend you believe will continue in 2013? I guess that’s kind of a better way of asking about the growth outlook as well.
Michael S. McGavick – CEO: I would tell you that toward the end of the year and particularly in the fourth quarter. We did begin to see some lift from the relationship between expenses and top line for the first time, and that is because some of the investments that we’ve been making so heavily over the last couple of years are beginning to pay off and we expect that to be a more pronounced feature of how 2013 plays off. So, I think you are seeing the initial signs of that, but as we think about expenses relative to growth next year, we think that should be a trend that does continue.
Mike Zaremski – Credit Suisse: I guess in regards to the growth this quarter, I think higher retention is recited in the press release. What type of a component did that play in the growth?
Gregory S. Hendrick – EVP and CEO of Insurance Operations: This is Greg, in the Insurance segment. For the year, I’d break you roughly down new business both within existing businesses and then what I would call new operations like construction and E&S was about half the driver. Rate increases were about a quarter of the driver, and that increased retentions, a larger base of renewal, retentions were actually mix depending upon which segment you were in, but over the whole book, we’re up a little bit, but it was about 12% of that – rest of that change, and the rest is a lot of other noise that lots of small items.
Mike Zaremski – Credit Suisse: Just lastly, in regards, there’s a lot of different names for this type of business to the convergence initiative or do you expect to have that up and running by midyear and any other kind of details around what the plans are for that segment with the new hire of Craig Wenzel?
James H. Veghte – EVP & Chief Executive XL Group’s Reinsurance Operations: I’m not sure how you define up in running by midyear. Craig has already joined us.
Mike Zaremski – Credit Suisse: I guess the announcement of side cars or whatever you guys looking to do?
James H. Veghte – EVP & Chief Executive XL Group’s Reinsurance Operations: Well, we’re not certain and frankly, when we hire new underwriting teams, we don’t push them to put business on the books, because they’ve joined us. We hired Craig because he’s an expert in this area and one of the things we want him to spend a lot of time on in the first three to six months of his tenure is to figure out where we fit into this environment and what the best product would be for us to go out in the market around. So, even if we don’t have a structure in place by the end of the year. We won’t consider this is failure. This is something that we are planning for in the long-term. We think it’s part of the capital landscape of this industry for a long time, and we will put structures in place when they are appropriately sized and Craig’s going to spend a lot of time trying to figure out what the best way forward for us would be. So, we don’t have any current target date to put any structures in place.
Michael S. McGavick – CEO: The other thing I’d add to Jamie’s exactly correct answer is that, they can come in the market pretty quickly, and it’s not like we haven’t been looking at these kinds of deals over the last several years, it’s just that we’ve finally decided that we really did need to get into the space and wanted someone who is a market leader in thinking about it on our team as we did. So, it could be that we don’t do any next year, it could also be, it could happen relatively quickly, it depends on how we feel about the specific opportunities that are advanced and I really love the emphasis we feel we are under no pressure, we’ll be able to do the right thing as they come along.
James H. Veghte – EVP & Chief Executive XL Group’s Reinsurance Operations: I’d add one thing too. I do think we’re ideal candidates to attract interested members of the Investment Committee into the space. We’ve been in the property cat business for 20 years now based on our origins with Mid Ocean Re, our loss ratios in the mid-40s and I think there would be very, very few companies that could match that sort of track record.
A Closer Look: XL Group PLC Earnings Cheat Sheet>>