The boss of XL Capital admitted that the company was "flying blind" when the problems were discovered at its US subsidiary XL Re ? but now they had investigated, acted and put the matter behind them and were looking forward to a good year in 2004.

XL Capital showed a loss in the fourth quarter of the year of $314.8 million after taking a pre-tax charge of $694 million mainly for potential North American reinsurance claims.

Brian O'Hara, chief executive officer and president of the Bermuda insurance giant, this week spoke frankly in an interview with The Royal Gazette about the company's recent problems with tort and malpractice claims and the reserves it needed to put in place to make its investors and the analysts happy.

"The way I am looking at it, and they (the analysts) are beginning to is the problem is over and now we are clear and free from past problems," he said, "So there is the really good news which is going on around here and it will start to come out unfettered so we have reaffirmed our annual projections in the $9.05 to $9.25 range (barring no major catastrophic events for 2004)."

And he said what XL had to now do was to produce the results, quarter by quarter, and he was confident that the company would be able to do this "now that we have this behind us".

He added: "It has been our only problem, everything else has gone really terrifically. But, I mean, it was quite a disappointing thing to have when so much, 98 percent, of everything else is going as planned or better. Now we can get back to that growth and see if we can build out on the strength of our fundamentals and the deeper customers penetration, and all that good stuff which will all lead to higher earnings going forward for the foreseeable future." Reserve problems for XL began in the third quarter of last year, when tort and malpractice claims started to affect XL Re. In October, XL took a $160 million after-tax charge against third-quarter earnings to pay for potential claims in its North American business for medical malpractice and professional liability.

Then XL made the announcement that it was to take a further hit on January 13 after reviewing contracts sold between 1997 and 2001 by NAC Re Corp., an American reinsurance company XL bought for $1 billion in 1999.

Claims against North American reinsurance contracts written in the late 1990s have mounted recently, forcing reinsurers such as XL to pay out more than they had expected, and since November Mr. O'Hara has been dealing with the problems, trying to make sure that his company would come out as unscathed as it could from the troubles.

"It is an unfortunate thing from a past acquisition that was exposed in probably the worst areas legally in the US and a couple of very large treaty participations where the terms and conditions really had deteriorated in the late 1990s, well beyond anybody's understanding until we go into the heart of the matter and found it," he said.

When asked how involved he got in uncovering what went on, he said while he was not involved in the field audits, he was in weekly meeting about the issue and on top of it for months and said that he was "consumed" by the affair from November 2003 onwards.

"I was in weekly meetings with all the teams doing it, so that I could fully understand all the details and the drivers, implications and what kind of actuarial viewpoint we had to take as we uncovered all the information," he said. "What we were dealing with was an anomaly from many previous actuarial reporting patterns driven mostly by a sharp increase in the size of legal awards in the malpractice and professional liability area which led to and changed the reporting pattern because the ceding companies had liberalised terms dramatically to where they gave very long, extended reporting patterns.

"It is a little technical, but most of the policies were claims made, where you would expect you would know the information pretty timely but the companies that were reinsured gave very long, extended reporting periods which almost turned claims made policies into occurrence policies.

"And that was more open ended from an exposure stand point which changed all the historical reporting patterns until we really got into more detailed audit reviews to find that out. And we were flying blind.

"So that was what led to the unusually deep and detailed audit review that we did on the claims that were underlying the reinsurance treaties. Anyway we feel rather positive since I did get close to the whole analysis, and the actuarial view that we took that we are prepared for the worst. We reserved for the worst, so it can only get better from my stand point."

But Mr. O'Hara said that he was now glad to get back into the normal swing of things after putting the matter behind him and the company. And he said that he was sure that things in the US could not stand as they were and there would have to be tort reform, but when it would happen in an election year was anyone's guess.

"Class action tort reform is likely to happen," he said, adding that he had made a fact finding trip to Washington to find out just how likely it was that something would be passed.

"I saw one of the top people at the US Chamber of Commerce who had been active in lobbying for it and they still feel the votes are there, but being an election year, you never know.

"Senator Frist (Senate Majority Leader Bill Frist, Republican from Tennessee) wants to put malpractice reform back on the table. He is a doctor and it is a crisis.

"But the votes are not lined up the way they are for class action. Malpractice is a more fundamental issue for the broad majority of trial lawyers and so there is complete support among democratic senators in the the senate against malpractice reform, whereas class action is a small segment of the trial lawyers."

He went on to say that the trial lawyers contributed huge amounts to the democrats coffers along with the union, so the issue would be high on the democrat's agenda.

"So they don't enjoy as broad a support among the democratic senators as malpractice," he said.

And he said that asbestos reform was even more complicated because you had trial lawyers, unions, insurance companies and the insureds.

"So you have four constituents which makes it very complicated," he said. "They are making progress, but it is painstaking. We don't really have any real stake in asbestos, although it is kind of motherhood, because it is somewhat connected to the whole problem that the legal liabilities situation in the US presents. But the bottom line is we need more tort reform, we need class action and we also need more conservative judges being appointed which has a big impact over time."

He said that trial judges made decisions on the technical issues during trial, which, if liberalised, ultimately would end up in more awards and higher awards.

"It gets pretty technical from a legal stand point, but liberal judges are appointed by democrats and conservative judges are appointed by republicans, I mean it is that simple, " he said. "You find that the longer you have a republican or a democrat as president, the more judges they appoint, the more influence it has on the judicial system and you can see a pattern or cycle that goes up and down.

"It is a pendulum that swings back and forth and when it gets to excess, Congress reacts and it sends it back the other way, or the cumulative appointment of judges has that effect, of a combination of the two. It is an interesting dynamic to watch. But what I have come to learn is that everything is cyclical."

And Mr. O'Hara is looking forward to 2004 as a good year for his company that can put the issue of reserving behind it.

He said that reports that the market was flattening out was not bad news for XL and it would suit them, so long as prices did not nose-dive.

"I have high expectations for 2004," he said. "The market has changed dramatically in the last two years for the better. Nothing goes up forever or down forever, and I think that if it were flat for a few years would be just fine.

"We really like our market position and we could do really well in a plateauing environment. What would be upsetting would be a deterioration of pricing and terms and conditions.

"But we see terms and conditions holding very strongly. The outlook for interest rates continues low, which also is a driver for a profitable underwriting market or a continued disciplined underwriting market because you can't really make the earnings without the underwriting profit, investment income won't help you very much."