XL
#Thanks, Mike, and good evening
Consistent with recent quarters, we posted an earnings presentation on our website to accompany our prepared remarks
Our net loss in the quarter was $1.04 billion or $4.06 per share compared to net income of $70.6 million or $0.25 a share in the third quarter of last year
Our operating net loss in the quarter was $1.03 billion or $4 per share compared to operating income of $122.5 million or $0.44 per share in the prior year
Our results in the quarter were driven largely by the pretax net loss of $1.48 billion associated with the third quarter natural catastrophes
Our results were also, however, impacted by the benefit of lower operating expenses and increased returns from our investment portfolio compared to last year
Our year-to-date annualized operating ROE, excluding AOCI and integration costs, was negative 8% year-to-date compared to positive 6.1% in the same period last year
Excluding catastrophe losses, our underwriting profitability improved in the quarter compared to the third quarter of last year
Our accident year, ex cat P&C combined ratio decreased from 91.3% to 89.8%
Greg will discuss our underwriting performance by segment and in more detail in his prepared remarks
Turning to the third quarter catastrophes
Consistent with our preannouncement, our total pretax net catastrophe losses in the third quarter were $1.48 billion, including $1.33 billion for hurricanes Harvey, Irma, and Maria
Total catastrophe losses represented 58.8 loss ratio points in the current quarter compared to 4.1 loss ratio points in the third quarter of 2016. The consolidated total net loss of $1.52 billion you will see in our financials is different from the $1.48 billion I just mentioned because of our majority ownership in New Ocean Capital Management
We are required to consolidate their full results and then show the minority interest separately, which was approximately $34 million
In our slide deck on Page 8, you will see that we disclosed gross and net losses by event and in the aggregate
As Mike mentioned, we expect to recover approximately 44% of our gross losses, a ratio that is favorable when compared to the combined recoveries related to natural catastrophes in previous years
The breakdown of net catastrophe losses by segment in the quarter was approximately 48% Insurance and 52% Reinsurance
The breakdown by geography was approximately 51% related to mainland U.S
losses, 41% in the Caribbean and 8% related to other international events
The distribution of losses to segment and business components as well as the manner in which the reinsurance protections responded were significantly impacted by some of the unique features of these series of events, including the higher levels of flooding following Harvey and the geographic concentration in the Caribbean from Maria and Irma
These characteristics more significantly impacted business written in line with wholesale market, including Lloyd's, and the large commercial property lines
Turning to prior year development
As a reminder, our normal practice during the first and third quarters of our reserving process is based on the review of actual versus expected losses
Our semiannual full actuarial review will be included in next quarter's results
In the third quarter, we had net favorable development of $30.9 million or 1.1 loss ratio points compared to $53.6 million or 2.3 loss ratio points in the prior year quarter
This reflects favorable development of $8.8 million in the Insurance segment and $22.1 million in the Reinsurance segment
Insurance releases were largely attributable to better-than-expected attrition losses in aerospace, and Reinsurance releases were mainly attributable to better-than-expected experience primarily in short tail lines, including property catastrophe and specialty lines, with lesser contribution from certain casualty reserve adjustments
We also have beneficial development of approximately $15 million related to the structured reinsurance reserves within our deposit liability balances
The benefit of these developments is recorded in the income statement as negative interest expense in the quarter
Operating expenses were $409.4 million in the quarter, a 19.5% or $99.1 million favorable comparison to the prior year quarter
In the third quarter of this year, there were no integration costs compared to $54.5 million in the prior year quarter
Other significant drivers included the impact of losses on our variable compensation and favorable foreign exchange rate movements
We continue to focus on operating efficiencies through establishing a culture of continuous improvement, and we expect to drive additional operating leverage going forward as we've discussed in previous calls
For the full year 2017, we anticipate operating expenses, excluding integration costs, to be at or likely below the low end of our previously guided range, which is approximately $1.77 billion, assuming that FX rates stay roughly as they are today
During the quarter, we recognized net income tax benefits of $60.1 million
Our operating effective tax rate was 5% for the quarter, and that compares to negative 1.6% in the prior year quarter
In accordance with the applicable accounting principles, the net tax benefit associated with the catastrophe losses generated in the quarter will be recognized over the full year of 2017 and not exclusively in the third quarter
As such, we recognized a partial benefit in the third quarter, and we expect the remainder of the benefit will be available to offset tax expense in the fourth quarter
So for the full year, we expect the operating tax rate to be in the range of 4% to 6% as a result of the impact of third quarter losses on the overall distribution of income by jurisdiction
Fully diluted book value per common share decreased by $3.88 from the end of the prior quarter to $38.27 driven by catastrophe losses
Fully diluted tangible book value per common share also decreased by $4.01 from the end of the prior quarter to $29.70. Turning to the Investment Portfolio
My comments, as always, will exclude the Life Funds Withheld Assets
Net investment income increased by $1 million to $172 million compared to the prior year quarter and decreased by $5 million compared to the second quarter of 2017, which was somewhat elevated due to a few nonrecurring factors we mentioned last call
During the third quarter, our average new money rate was 2.6% compared to 1.9% in the third quarter of last year and 2.1% in the second quarter
The increase in new money rates for the quarter was attributable to targeted portfolio rebalancing in the fixed income portfolio, which led to a rise in the total gross book yield of the portfolio to 2.6% at the end of September 2017. Excluding these rebalancing activities over the last few quarters, the forward new money rate remains below the book yield, continuing to pressure net investment income prospectively
Portfolio activity in the quarter resulted in a slight increase in duration by 0.2 years to 3.7 years, slightly long relative to our liability-based benchmark duration
Net income from affiliates was $63 million for the quarter compared to $25 million in the prior year third quarter primarily due to rebalancing the portfolio, better individual fund returns and a more benign markets for hedge fund strategies in the quarter
Unrealized gains were $657 million at the end of the quarter, and the total mark-to-market return from the Investment Portfolio was 1% in the quarter in original currencies
Turning to capital
Early in the third quarter, we repurchased approximately 2.7 million common shares at an average price of $44 per share or $121 million
Year-to-date, ending September 30, we bought back approximately 13.8 million common shares at an average price of $41.36 per share or $572 million
At quarter end, we had $520 million of common shares available for purchase under our share buyback program
However, at this time, we do not anticipate repurchasing additional shares for the remainder of the year
As mentioned last quarter, and as a result of our tender offer and other buybacks of certain of our preferred shares, we reported a book value net gain through noncontrolling interest as a result of securities purchased below their carrying value
Overall, the company continues to retain surplus capital relative to its binding constraints at any time
Those constraints, as always, include those imposed by our regulators, rating agencies as well as our own internal capital model
Our financial leverage at the end of the third quarter was approximately 31.8% compared to 29.5% pro forma leverage at the end of the second quarter
You may recall that due to the timing overlap of our new debt issuance at the end of June and the tender offer completion in early July, our financial leverage at June ticked up temporarily
This overlap impact self-corrected in the third quarter when the impact of the tender was recorded, but was then offset by the impact of third quarter losses
We maintain our previously stated long-term goal of leverage levels in the mid- to low 20s, and we believe we have the flexibility and tools to move leverage below 30% in the next year
We anticipate in the next week or so we will announce the normal course renewal of our Form S-3 shelf registration
This is a part of our typical process and is not related to any particular need for capital activity
With that, I will turn the call over to Greg and look forward to your questions
That will impact the expense ratio as well
Sorry, the $7.9 million on expenses is on expenses
FX impacts premiums, and I think Greg gave the adjusted growth in premiums adjusting for FX
So the 4% to 6% range will be for the entire year
That will give a benefit to the fourth quarter
I wouldn't want to tell you it's exactly 0, but we should be approaching that
