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By JACK ROBERTS, editor in chief of Risk & Insurance®

In between the recent earnings headlines and seemingly weekly reports about the big problems at major insurance companies, XL Capital released its first-quarter earnings report last week, and the property/casualty insurer looks to be positioned for a comeback.

The profits came despite a substantial drop in both net and gross premiums written, which the company largely attributed to factors related to the current economic slowdown.

That's in some contrast to the first-quarter report at The Hartford, which posted a $1.2 billion loss along with lower earnings in its property/casualty operations. Earlier reports had Hartford looking to sell its core property/casualty business in an effort to stem losses in its annuity business. Last week, Hartford said it would be exiting the annuity business in Japan and Europe.

Meanwhile, another large troubled insurer, American International Group Inc., won't release its much anticipated first-quarter earnings until later this week.

Of course, XL's financial snapshot wasn't all champagne and roses, but the company reports it's on track in its plan to recover from its past problems.

XL was one of the first insurers to be hit by the repercussions from the subprime mortgage debacle, posting substantial losses at former subsidiary Security Capital Assurance. SCA was caught up in the subprime mortgage problems with its investments in collateralized debt obligations.

Now those issues, however, are largely behind the company, according to XL Capital CEO Michael McGavick, who spoke with Risk & Insurance® at the annual Risk and Insurance Management Society convention last month.

McGavick pointed out that XL had largely finished repositioning its investment portfolio, reducing its vulnerability to future losses though a program of "de-risking" the portfolio. For example, in the first-quarter report, XL had $17.0 billion of its $30.5 billion fixed-income portfolio in cash, government and government-related securities, adding additional liquidity to its portfolio.

WELL FOR THE FUTURE

McGavick, who will celebrate his first year on the job this month, said that "good signs are on the horizon" and that XL is prepared to weather the current economic crisis and now better positioned to grow the business. With the SCA issues behind the company, and a far more liquid financial position, McGavick has also aggressively increased the corporate focus on enterprise risk to help identify and protect against possible future losses before they develop.

"The fact is, these changes set us up well for the future," McGavick said. Also, the company's combined ratio declined compared with the first quarter of 2008, showing increased underwriting profitability despite a decline in premiums written.

Because the company's problems generally pre-date the current economic turndown, XL went to the capital markets relatively early last year, McGavick explained, and now has a relatively large amount of capital, positioning it for future growth.

The emphasis continues to be on profitable underwriting. Meanwhile, the company is focused on its core businesses--primary insurance and reinsurance.

The company reported that, in the first quarter, net written premiums dropped from $2.1 billion in first quarter 2008 to $1.5 billion during first quarter 2009. In the earnings conference call, McGavick said that drop reflects both market conditions and the fact that XL has maintained its underwriting discipline, refusing to cut prices to the extent that it would be unprofitable and deciding to not write business if it didn't meet its price and underwriting standards.

McGavick also pointed out that the company has been able to retain its key underwriting personnel despite the challenges it has faced during the past year. Staff levels remain strong with little voluntary turnover rates compared with 2008, he said. The company continues to reduce expenses.

May 5, 2009

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