On Nov 28, we issued an updated research report on XL Group plc (XL).
XL Group’s third-quarter earnings as well as revenues outperformed the Zacks Consensus Estimate. The stellar results came on the back of solid underwriting results in both Insurance and Reinsurance segments driven by a favorable catastrophic environment, despite pricing and renewal pressure.
XL Group has been aiming to tap opportunities in the growing economies. With the view to further expand business globally, the company has been expanding its coverage to upper and middle market businesses in North America. Additionally, XL Group formed a new unit within its International Reinsurance business group in order to consolidate its operations and serve clients in a better way.
XL Group is focused on sharing more profits with it shareholders. Based on the strength of its financial position, the company’s board of directors approved a 14% dividend hike in Feb 2014. It also engages in share buyback and has repurchased 19.5 million shares worth $625 million in the first nine months of 2014. With a strong balance sheet and its ability to generate healthy cash flow, the company is expected to indulge in more buybacks going forward, thereby sharing more profits with shareholders.
However, being a property and casualty insurer, XL Group has substantial exposure to losses resulting from natural and man-made disasters and other catastrophic events. If the company incurs huge cat loss, its underwriting results and combined ratio will be hugely affected.
Due to the persistent low interest rate environment XL Group’s net investment income has been following a declining trend over the past few years. It has also experienced lower investment yields due to lower reinvestment rates. The third quarter was affected by decreasing government rates along with narrowing spreads resulting in low investment portfolio return.
XL Group’s operating expenses has been rising over the last few years, restricting operating margin expansion. Additionally, the company’s operating cash has been fluctuating over the past few years, which makes us skeptical about its ability to meet debt and liquidity needs as well as working capital requirements.
Currently, XL Group carries Zacks Rank #3 (Hold).
Other Stocks to Consider
Investors interested in the same sector can also consider stocks like AmTrust Financial Services, Inc. (AFSI), Arch Capital Group Ltd. (ACGL) and Navigators Group Inc. (NAVG). All these stocks sport a Zacks Rank #1 (Strong Buy).
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