XL Group Beats, Approves Buyback - Analyst Blog

XL Group (XL) reported third-quarter 2010 operating income of 52 cents per share, beating the Zacks Consensus Estimate of 60 cents by 8 cents.  Results were, however, much below third-quarter 2009 operating earnings of 85 cents. Operating income was $175.0 million, down 40.2% from $292.6 million in the prior-year quarter.

The year-over-year decline was due to lower income from investment affiliates, lower net investment income and a lower underwriting income from the insurance segment. However, higher underwriting income from the reinsurance segment was a partial offset.

Adjusted for net realized losses on investments of $71.9 million, net realized and unrealized gains on derivatives of $12.4 million and foreign exchange losses of $37.9 million, net income attributable to shareholders was $77.5 million in the quarter, reversing the loss of $11.4 million in the prior-year quarter. Net income was 23 cents per share in the quarter under review, compared with a loss of 3 cents in third-quarter 2009.

The year-earlier quarter included net realized losses on investments of $310.8 million, net realized and unrealized  losses on derivatives of $9.3 million, net realized and unrealized gains on investments and derivatives of the company's insurance company affiliates of $2.3 million and a foreign exchange gain of $13.8 million.

Total revenue in the quarter was $1.62 billion, up 9% year over year from $1.49 billion in the year-ago period. Results surpassed the Zacks Consensus Estimate of $1.57 billion.

Net investment income of $296.7 million was down 9% year over year as lower U.S. interest rates as well as the actions taken over the last couple of years to reposition the portfolio resulted in lower portfolio yields.

Operating expenses increased 0.9% year over year to $236.2 million from $234.1 million in the prior-year quarter.

P&C operations: Gross premiums written in the quarter were $1.5 billion, down 3.7% year over year largely due to lower insurance as well as reinsurance premiums written.

Net premiums earned were $1.27 billion, down 1.9% year over year largely attributable to lower-than-expected net premiums written.

The combined ratio was 94.9% in the quarter, up 170 basis points year over year.

Life operations: Gross premiums written were $103.9 million, down 33% year over year. Net premiums earned were $96.6 million, down 36% year over year.

Financial Position

Cash and cash equivalents of XL Group were $3.96 billion at the end of third-quarter 2010 compared with $3.90 billion at third-quarter 2009-end.

Notes payable and debt at third-quarter 2010-end were $2.47 billion compared with $2.45 billion at third-quarter 2009 end.

Book value per ordinary share as of September 30, 2010, was $29.56, up 24% from $23.84 as of September 30, 2010.

Return on equity (ROE) was 7.2% in the third-quarter 2010, substantially lower than 16.0% in third-quarter 2009. The lower ROE was largely due to an increase in total shareholders' equity.

Dividend and Share Repurchase

The Board of Directors of XL Group authorized a quarterly dividend of 10 cents per share to shareholders of record as of December 15, 2010. The dividend will be paid on December 31, 2010.

In the quarter, XL Group bought back 13.9 million shares. Subsequent to the end of the quarter the company bought back an additional 4.9 million shares. The company had spent $375.4 million to buy back 18.8 million shares at an average price of $19.95 per share.

The Board also approved a new share buyback program to repurchase up to $1 billion worth of shares.  The company expects to deploy cash on hand to buy back shares.

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.

However, the low interest rate environment keeps us on the sidelines in the meantime. We maintain our long-term Neutral recommendation on XL Group. The quantitative Zacks #2 Rank (short-term Buy rating) for the company indicates upward pressure on the stock over the near term.

 
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