XL Group Beats on Bottom Line (ACE) (XL)

Zacks

XL Group (XL) reported its second-quarter 2011 operating profit of 75 cents per share, surpassing the Zacks Consensus Estimate of 48 cents. Results compare favorably with 71 cents in the year ago quarter. Operating profit was $243 million, inching up 0.2% from $242 million in the prior-year quarter.

Select new business growth coupled with an increase in income from operating affiliates and positive prior year loss development, offset by larger natural catastrophe losses and other large individual losses incurred during the quarter drove the slight increase in the quarter.

Adjusted for net realized losses on investments of $9.4 million, net realized and unrealized losses on derivatives of $12.6 million, net realized and unrealized losses on investments and derivatives related to XL’s insurance company affiliates of $0.9 million and foreign exchange gains of $5.5 million, net income attributable to shareholders was $225.7 million in the quarter, compared with net income of $191.8 million in the prior-year quarter.

Net profit was 69 cents per share in the quarter under review, compared with 56 cents in second-quarter 2010.

The year-earlier quarter included net realized losses on investments of $57.9 million, net realized and unrealized losses on derivatives of $19.9 million, net realized and unrealized losses on investments and derivatives related to XL’s insurance company affiliates of $0.06 million and foreign exchange gains of $27.1 million.

Operational Performance

Total revenue in the quarter was $1.69 billion, up 9.2% year over year from $1.64 billion in the year-ago period. Higher premiums and fee income drove the overall climb.

Net premiums earned in the quarter increased 7.4% year over year to $1.31 billion.

Net investment income of $296.5 million was down 2% year over year largely due to lower U.S. interest rates and cash outflows from the invested portfolio.

Underwriting profit in the quarter was $67 million in the quarter, down 29% from the prior year quarter. Combined ratio in the second quarter deteriorated 270 basis point years over year to 94.9%.

Operating expenses increased 8.7% year over year to $266.1 million.

P&C operations: Gross premiums written in the quarter were $1.76 billion, up 16% year over year largely driven by new business initiatives.

Net premiums earned were $1.31 billion, up 17% year over year.

Life operations: Gross premiums written were $100.3 million, up 8% year over year.

Net premiums earned were $92.2 million, up 6.7% year over year.

Financial Position

Cash and cash equivalents of XL Group were $2.86 billion at quarter-end compared with $3.02 billion at 2010-end.

Debt at second-quarter 2011-end was $2.46 billion flat compared to 2010-end.

Book value per ordinary share as of June 30, 2011 was $30.87, up 6.3% from $29.03 as of March 31, 2011. The improvement was driven by better earnings coupled with the benefit of share buybacks and unrealized gains in investments.

Share Repurchase

In the second quarter, XL Group spent $92.3 million to buy back 4.3 million shares at an average price of $21.36. Subsequent to the second quarter, the company bought back another 7.3 million shares for $157.7 million. The company is left with $440.4 million under its authorization.

Peer Comparison

ACE Limited (ACE), which competes with XL Group, reported a second-quarter operating income of $2.01 per share, which was ahead of the Zacks Consensus Estimate by 33 cents. Better-than-expected results stemmed from higher premiums and investment income.

Our Take

Based on the company’s conservative underwriting practices and repositioned P&C portfolio, we expect XL Group to fare well going forward. The company is also taking initiatives to expand its operations and is aiming to tap the opportunities in the growing economy.

The company continues to enhance shareholders' value through share buybacks and dividend increases. The company also scores strongly with the credit rating agencies.

We maintain our Underperform recommendation on XL Group. The quantitative Zacks #5 Rank (short term Strong Sell rating) for the company indicates downward pressure on the stock over the near term.

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