The CEO said in the press release that the $830 million hit is a demonstration of the efficacy of the company's reserving policy. Gosh! I can't wait to see what else will come out short.
Deepvalue2003 has a good point about missing the mark so badly. You can't lay the blame exclusively at the feet of the former CFO (moron though he was). Current management has a lot more experience in P&C industry.
Despite BMO's assertion, another XL acquisition flames out.
The could not do that legally. They had a contract that said they would recover, dollar for dollar, all adverse development. Putting up less recoverable than they were booking for development would bring in the SEC for other charges. You have no point. You clearly do not know the facts of the deal.
You're missing my point. They should have had the same gross (although the independent actuaries sure did not buy their analysis) and booked a smaller recoverable and therefore a higher net instead of reporting earnings they never had. Had management properly estimated the likely recoverables (same gross) it would have booked the proper/higher net reserves back when it saw the adverse development, would not have confidently assumed a total victory in arbitration and would have taken no hit/smaller hit today to the balance sheet. It's management that's trying to get it both ways. Win the arbitatration, we win; lose the arbitration, we explain that we were right anyway. Has management explained how it failed to convince the independent actuaries that it's "better" estimate should be used. Missing by that much in baseball-type arbitration is in itself a major f-up. The whole point of baseball arbitration is to be right, otherwise the other guy wins. That's hardly a demonstration of XL's reserving skills, or maybe I'm afraid it is.
You want it both ways. The company "overstated" reserves and the coresponding recoverable, giving you the opportunity to criticize management for missing the recoverable number. Had management "correctly" pegged the recoverable number (thereby putting up a smaller reserve number) you would be only too happy to criticize management if there was subsequent further adverse development to the Winterthur reserves.
I would offer that the major criticism to be offered in this particular instance lies with the company's inability to convey to the independent actuary its more conservative views on the reserves. But going back further, it is fair to criticize the company for its lack of due diligence in properly evaluating the reserves held by its acquisition targets, Winterthur and NAC Re, in the first place. Of course, the responsibility for both was in the hands of the previous CFO and he is gone.
You missed the point completely.
XL has stated that the reserves showed advers development of (using very round numbers) $1.4 billion. That is the result of XL Capital's analysis. The other side said "No, the adverse development was only $0.6 billion." The arbitrator agreed with the other side. XL, having already established the reserve (and the reinsurance recoverable) is in a box -- it has to write down the recoverable but cannot responsibly back off on the reserves it put up, even though the independent actuary agrees with a different number.
Remember that reserves are calculated in a range, and it is the acountants that require a single point estimate. There is plenty to criticize XL and its chairman for, but the point made about the reserving process overall is fair. In this case, the company did not come up short on reserves, it came up short on reinsurance recoverables.
You missed the point totally. Only net reserves matter at the end and assuming $830 million of recoverables that don't show up when needed is negligent underreserving. It's easy to reserve gross losses if you assume none is net, they cost you nothing.
"Donedoodit"'s post is correct, in my opinion. However, what I find absurd in XL's press release is O'Hara's argument that the Winterthur Risk Management (WRR)transaction was a good one, after having to take an $830-million hit in 4Q05. (Keep in mind, we still don't know what Hurricane Wilma is going to cost this underwriter.) I would argue that the odds that XL has gotten WRR's loss reserves "right" is small, given the company's track record. Its my view that the WRR purchase will be life the NAC Re acquisition.