On Sep 8, we issued an update research report on XL Group plc (XL).
XL Group reported solid second-quarter results with operating net income of $1.02 per share exceeding the Zacks Consensus Estimate by 22.9% and improving 36% year over year. The outperformance came largely on the back of solid underwriting results. This Zacks Rank #2 (Buy) property and casualty insurer delivered three straight quarters of positive earnings surprise, with an average beat of 20.6%.
XL Group focuses on its insurance and reinsurance business lines that provide the best return on capital over the pricing cycle. It also eyes opportunities in the growing economy. In order to capitalize on rising demand for cyber insurance in the U.S. and Canada, the company’s global and professional unit formed the North America Cyber & Technology Risk business unit this June. Recently, this Cyber and Technology business in North America launched an insurance policy.
Also, to focus on the property and casualty business, XL Insurance (Bermuda) Ltd divested its wholly owned subsidiary, XL Life Reinsurance (SAC) Ltd. This in turn will improve the risk profile and provide additional flexibility to pursue capital management initiatives.
With respect to enhancing shareholders’ value, XL Group engages in share buybacks as well as increases dividend. In the first half, the company spent $350 million in share repurchase and is left with $171.6 million under its $1 billion repurchase program. XL Group expects to buy back $300 million shares in 2014 from additional capital flexibility generated from divestitures. In addition, its dividend currently yields 1.9%.
Nonetheless, the insurer has been witnessing declining net investment income due to lower reinvestment rates. Also, cash provided by operating activities has been fluctuating keeping us cautious about its ability to meet debt and liquidity needs as well as working capital requirements.
Being a property and casualty insurer, XL Group is exposed to catastrophic ("cat") events. Exposure to cat activities will always be a concern because of the uncertainty of their occurrence and the magnitude of impact on underwriting performance.
Though XL Group incurred lower expenses in the quarter, it expects operating expenses in 2014 to be higher by mid-single digits than 2013.
Riding on the positives, the Zacks Consensus Estimate witnessed upward revisions in the last 60 days. It rose 9.4% to $3.27 as 8 of 9 estimates moved north while the same for 2015 increased 4.4% as 4 of 9 estimates moved up. The expected long-term growth rate is currently pegged at 2.3%
Other Stocks to Consider
Investors interested in the property and casualty industry may consider Endurance Specialty Holdings Ltd. (ENH), AmTrust Financial Services, Inc. (AFSI) and Global Indemnity plc (GBLI). All these stocks sport a Zacks Rank #1 (Strong Buy).
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