XL Group (XL) reported fourth-quarter 2011 operating loss of 25 cents per share, compared with the Zacks Consensus Estimate of 18 cents. Results were far behind operating profit of 74 cents earned in the year-ago quarter. Operating loss was $79.6 million, compared with a profit of $242.4 million in the prior-year quarter.
The company delivered lower numbers largely due to higher catastrophe losses, lower levels of positive prior-year loss development and higher tax expenses.
Adjusted for impairment of goodwill of $417.6 million, net realized losses on investments of $46.1 million, net realized and unrealized gains on derivatives of $26.6 million, net realized and unrealized gain on investments and derivatives related to XL’s insurance company affiliates of $0.3 million and foreign exchange loss of $0.5 million, net loss attributable to shareholders was $515.5 million in the quarter, compared with a net income of $188.1 million in the prior-year quarter.
Net loss was $1.62 per share in the quarter under review, compared with a profit of 57 cents in fourth-quarter 2010.
The year-earlier quarter included net realized losses on investments of $99.3 million, net realized and unrealized gains on derivatives of $7.5 million, net realized and unrealized gain on investments and derivatives related to XL’s insurance company affiliates of $51.6 million and foreign exchange gain of $1 million.
Full year operating profit came in at 28 cents per share, below the Zacks Consensus Estimate of 74 cents and plummeting from $2.40 per share in 2010.
Net loss attributable to shareholders was $1.52 per share compared with a profit of $1.73 per share in 2010.
Operational Performance
Total revenue in the quarter was $1.7 billion, up 8.8% year over year. Full year revenue grossed $6.7 billion, up 4.7% over 2010.
Net premiums earned in the quarter increased 8.1% year over year to $1.39 billion. Full year net premiums earned increased 5.9% over 2010.
Net investment income of $270.9 million in the quarter was down 6.7% year over year largely due to lower investment rates and cash flows from the investment portfolio. Full year net investment income declined 5% over 2010.
XL Group incurred an underwriting loss of $114 million in the quarter compared with underwriting gains of $109.8 million in the year-ago quarter. Full year underwriting loss was $397.3 million compared with gains of $262.5 million in 2010.
The combined ratio in the fourth quarter deteriorated 1,680 basis point year over year to 108.2%. Full year combined ratio was 107.5%, climbing 1,270 basis point over 2010.
Operating expenses escalated 18% year over year to $308.9 million, primarily attributable to the build-out of previously announced initiatives, partially offset by lower compensation costs. Full year operating expenses increased 11.5% over 2010.
P&C operations: Gross premiums written in the quarter decreased 3.5% while full year gross premiums written increased 10.2%, both year over year.
Net premiums earned improved 8.1% year over year in the quarter under review while full year net premiums earned increased 5.9% over 2010.
Life operations: Gross premiums written declined 6.1% year over year in the fourth quarter. Full year gross premiums written declined 4.2% over 2010.
Net premiums earned written in the quarter decreased 4.9% while full year net premiums earned decreased 5.2%, both year over year.
Financial Position
XL Group exited 2011 with cash and cash equivalents of $3.83 billion compared with $3.02 billion at 2010 end.
Notes payable and debt at 2011 end were $2.28 billion compared with $2.46 billion at 2010 end.
Book value per ordinary share as of September 30, 2011, was $29.64, down 3.8% from $30.80 as of September 30, 2011. The decline was driven by partial goodwill impairment coupled with net losses and dividends, partially offset by the benefit of share buybacks and unrealized gains on investments.
Share Repurchase
In the fourth quarter, XL Group spent $99.9 million to buy back 4.9 million shares at an average price of $20.21. For full year, the company spent $665.5 million to buy back 31.7 million shares at an average price of $21.03.
The company is left with $190.5 million under its authorization.
Peer Comparison
ACE Limited (ACE), which competes with XL Group, reported fourth-quarter 2011 operating income of $1.94 per share, which came in ahead of the Zacks Consensus Estimate by 13 cents. Earnings declined 5% from $2.05 per share earned in the year-ago quarter.
The quarter suffered huge catastrophe losses of $155 million, which jumped more than three-fold. However, premiums increased on the back of acquisitions, global accident and health insurance business, and property and casualty business in Asia and Latin America. Net investment income also experienced an uptick.
Full year operating earnings came in at $6.97 per share, striding ahead of the Zacks Consensus Estimate of $6.83. Results compare unfavorably with $7.79 earned in 2010.
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 emerging economies.
XL Group has received final approval to establish a Brazilian insurance operation.
The company continues to enhance shareholder value through share buybacks and dividends. Also, the company scores strongly with credit rating agencies.
However, significant exposure to catastrophe losses continues to weigh upon 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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XL GROUP PLC (XL): Free Stock Analysis Report
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