Key drivers of the fourth-quarter 2008 result were two accounting charges--a goodwill impairment charge of $990 million and a $400 million charge to account for restructuring the company's investment portfolio.

Chief Executive Officer Michael McGavick explained during a conference call this morning that XL continues to de-risk its investment portfolio as part of a strategy outlined last year, and that fourth-quarter restructuring charge allows the company to accelerate the portfolio's repositioning.

The non-cash goodwill charge, he said, primarily relates to XL's 1998 acquisition of MidOcean Re. "This is a great business [and] XL is the better for having bought it," but generally accepted accounting principles "require that we recognize current market conditions in how we carry the goodwill that came with MidOcean," he said, noting that reinsurance franchises like MidOcean "were valued more highly in days gone by."

(Goodwill generally refers to the value of intangible assets in an acquisition, typically accounted for initially as the amount paid for a target company over book value.)

Mr. McGavick said the job cuts at XL are a consequence of meaningful reductions in premium being planned for 2009, although he said the cuts would not be to underwriting talent. They will be "focused on corporate and functional support areas overwhelmingly," he said.

"Obviously, if you're going to see top lines come down, you're going to have to do real work on your expenses to meet returns expected by shareholders," he said, noting that some $100-to-$120 million in annual expense savings are expected from the staff cuts for 2010 and beyond.

Explaining the premium reductions, he said they reflect management's decision to "concentrate firepower" on those businesses that deliver appropriate returns. "We must focus XL's resources in those places where we compete best in the marketplace, on those places [where] in this particular [set of] global conditions we can deliver the best results," he said.

He said XL's near-term emphasis will be on shorter-tail lines and that the company is reducing long-term insurance agreements in order to capture benefits of hardening market. While actions to reduce premiums will mean some areas are de-emphasized, the company is not exiting any property-casualty insurance or reinsurance businesses it's currently in, he said.

Mr. McGavick said the premium reductions also "to a lesser extent, reflect rating agency reality," referring to rating agency actions last year to push the financial strength ratings of XL's operating companies down to "A" from "A-plus."

When A.M. Best made the move in January of last year, several analysts noted that the drop might put XL at a competitive disadvantage in writing primary long-tailed casualty and professional and management liability lines for large companies.

Mr. McGavick reported this morning that the actions to cut expenses have been reviewed with rating agencies, also reporting that A.M. Best will not go to committee to review the ratings again. A.M. Best's last action on the ratings was an affirmation in mid-October 2008.

As Mr. McGavick spoke today, Standard & Poor's, which had lowered XL from "A-plus" to "A" on Dec. 15, released a statement announcing a rating affirmation but maintaining a negative outlook.

"If, in the next two years, XL continues to develop its ERM [enterprise risk management], there are no additional investment losses that more than offset operating income, and no negative surprises arise that dampen consolidated results, we could revise the outlook to stable," the New York-based rating agency said.

Mr. McGavick, responding to questions about XL's workforce, countered reports of an "exodus" of employees leaving to join other firms, noting that turnover last year was slightly below historical norms.

"We have done some work with some of our more high-profile people to make sure they have incentives to stay," he added.

Recognizing that some current and potential employees may still wonder what they should do next given "all the tumult going on at XL," he advised, "I'd rather be at a firm that's already got [the] tough work done behind it, then a firm that has yet to recognize how difficult this economic crisis is," referring specifically to actions to de-risk the investment portfolio and strengthen the company.

Mr. McGavick noted that the fourth-quarter combined ratio of 89.4 was 4 points better than fourth-quarter 2007 and that the full-year combined ratio of 95.7 indicated an underwriting profit.

Underwriting results benefited from favorable prior-period development of $268 million, according to financial schedules released by XL.

(Susanne Sclafane can be reached at [email protected], 201-526-1246)