XL Group Sees Long-Term Benefits from Strategic Initiatives - Analyst Blog
On Mar 17, 2015 we issued an updated research report on XL Group plc XL. With fourth-quarter earnings, the Zacks Rank #3 (Hold) property and casualty (P&C) insurer kept its surprise streak alive. Earnings per share surpassed the Zacks Consensus Estimate and year-ago number on solid underwriting performances. Its trailing four-quarter average beat is 19.8%.
The underwriting results were one of the best with underwriting profit improving more than 50% and combined ratio being the strongest in more than 15 years.
XL Group has always eyed strategic acquisitions to ramp up its operational results. Targeting a premier spot in global specialty insurance and reinsurance markets, XL Group will buy Catlin Group Limited. The acquisition will increase its alternative capital opportunities. Moreover, XL Group will significantly increase its business in the Lloyd's platform, where Catlin boasts a leading presence. Additionally, XL Group can straightaway expand quite a few lines of business in which it has lately made investments.
XL Group remains focused on its insurance and reinsurance business lines that provide the best return on capital over the pricing cycle. To refine its business mix, XL Group is deploying capital in businesses with lower loss ratios that in turn are expected to result in margin expansion. The company will be eyeing new businesses, emphasizing short-tail lines wherever available in its reinsurance operations, exit other businesses like casualty facultative, not renew certain insurance programs, and continue to reduce long-term agreements (within the insurance operations) in order to reap the benefits of improved pricing.
A strong capital and liquidity position enables XL Group Limited to enhance its shareholders’ value. The company bought back $800 million shares in 2014 and is left with $267.6 million under its authorization. Share buyback lowers the share count and hence boosts the bottom line of the company.
XL Group also has a record of hiking its dividend. Its present dividend payout of 16 cents per share yields 1.79%, better than the sector average of 1.75%. Given its ability to generate a healthy cash flow, we expect the company to indulge in more shareholder friendly moves, thereby instilling investor confidence in the stock.
Nonetheless, a still soft interest rate environment continues to weigh on investment results. Last year, weaker net investment income resulted in lower investment yields due to lower reinvestment rates. Also, $3.0 billion worth of P&C assets with an average gross book yield of 3% is expected to mature over the coming 12 months. This is also expected to put pressure on net investment income.
Being a P&C insurer, XL Group is always exposed to catastrophe events. In the event of such an unfavorable environment, underwriting results of the company will be adversely affected.
Stocks to Consider
Some better-ranked property and casualty insurers are Arch Capital Group Ltd. ACGL, AmTrust Financial Services, Inc. AFSI and Allied World Assurance Company Holdings, AG AWH. All these stocks sport a Zacks Rank #1 (Strong Buy).
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