XL Group (XL) reported its third-quarter 2011 operating profit of 28 cents per share, lagging the Zacks Consensus Estimate by 6 cents. Results plummeted 46% from 52 cents earned in the year ago quarter. Operating profit was $88.1 million, dipping 49% from $175 million in the prior-year quarter.
The company delivered lower numbers largely due to higher catastrophe losses and lower levels of positive prior year loss development. However, an increase in income from operating affiliates was a partial offset.
Adjusted for net realized losses on investments of $59.6 million, net realized and unrealized losses on derivatives of $23.1 million, net realized and unrealized gain on investments and derivatives related to XL’s insurance company affiliates of $0.1 million and foreign exchange gains of $36.2 million, net income attributable to shareholders was $42.4 million in the quarter, compared with a net income of $77.5 million in the prior-year quarter.
Net profit was 14 cents per share in the quarter under review, compared with 23 cents in third-quarter 2010.
The year-earlier quarter included net realized losses on investments of $77.9 million, net realized and unrealized gains on derivatives of $12.4 million, and foreign exchange losses of $37.9 million.
Operational Performance
Total revenue in the quarter was $1.66 billion, up 2.3% year over year from $1.62 billion in the year-ago period. Higher premiums aided the overall climb. Top line also surpassed the Zacks Consensus Estimate of $1.62 billion.
Net premiums earned in the quarter increased 7.4% year over year to $1.36 billion.
Net investment income of $290.1 million was down 2.2% year over year largely due to lower U.S. interest rates and cash outflows from the invested portfolio.
XL Group incurred an underwriting loss of $22.2 million in the quarter compared to underwriting gains of $64.7 million in the year ago quarter. Combined ratio in the third quarter deteriorated 670 basis point year over year to 101.6%.
Operating expenses increased 4.5% year over year to $246.9 million, primarily attributable to the build-out of previously announced initiatives, partially offset by lower compensation costs.
P&C operations: Gross premiums written in the quarter were $1.78 billion, up 16.4%.
Net premiums earned were $1.36 billion, up 7.4% year over year.
Life operations: Gross premiums written were $100.6 million, down 3.3% year over year.
Net premiums earned were $90.8 million, up 6% year over year.
Financial Position
XL Group exited the third quarter with cash and cash equivalents of $3.18 billion compared with $3.02 billion at 2010-end.
Notes payable and debt at third-quarter 2011-end were $2.28 billion compared to $2.46 billion at 2010-end.
Book value per ordinary share as of September 30, 2011 was $30.80, down 0.2% from $30.87 as of June 30, 2011. The decline was driven by the settlement of the forward purchase contracts associated with the equity security units, partially offset by the benefit of share buybacks and unrealized gains on investments.
Share Repurchase
In the third quarter, XL Group spent $307.7 million to buy back 15.1 million shares at an average price of $20.33. The company is left with $290.4 million under its authorization.
Dividend
The board of directors of XL Group declared a quarterly dividend 11 cents per share to be payable on December 30, 2011 to shareholders of record as of December 15, 2011.
Peer Comparison
ACE Limited (ACE), which competes with XL Group, reported a third-quarter 2011 operating income of $2.22 per share, which came in ahead of the Zacks Consensus Estimate by a substantial 43 cents. Earnings improved 10% from $2.01 per share earned in the year-ago quarter.
Better-than-expected results stemmed from higher premiums and investment income. The quarter experienced solid current accident year underwriting results benefiting from both underwriting discipline and risk management. Acquisitions also contributed to the better results.
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.
XL Group has also received prior approval to establish a Brazilian insurance operation.
The company continues to enhance shareholders' value through share buybacks and dividends. Also the company scores strongly with the credit rating agencies.
However, significant exposure to catastrophe losses continues to weigh on the results of the company.
We maintain our Neutral recommendation on XL Group. The quantitative Zacks #3 Rank (short term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.
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