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XL Group Beats Q2 Earnings on Solid Underwriting Results

Zacks Equity Research

XL Group plc (XL) reported second-quarter 2014 operating net income of $1.02 per share, which beat the Zacks Consensus Estimate by 22.9%. It also marked three straight quarters of positive earnings surprise by the company. Earnings improved 36% year over year. The outperformance came largely on the back of solid underwriting results.

Shares of XL Group gained about 1.48% in the after-market session following a solid quarterly release.

However, the property and casualty insurer reported loss of $1.03 per share against 93 cents per share earned in the year-ago quarter largely due to loss on life reinsurance subsidiary divestiture amounting $621 million. Other non-recurring items for the quarter included net realized gains on investments of $69 million; net realized and unrealized gains on derivatives of nearly $11.6 million; net realized and unrealized losses on investments and derivatives related to XL Group’s insurance company affiliates of $1.2 million; foreign exchange losses of $18.5 million; net investment income -  Life Funds Withheld Assets of $19 million and net realized and unrealized gains on life retrocession embedded derivatives of $17.5 million.

Quarterly Operational Performance

Total revenue of XL Group in the quarter was $1.7 billion, which declined 5.3% year over year. Revenues surpassed the Zacks Consensus Estimate of $1.66 billion.

Net premiums earned decreased nearly 4.2% year over year to $1.49 billion.

Net investment income of $213 million was down 8.1% year over year.

XL Group’s underwriting profit was $168 million, up 82% year over year. The combined ratio in the quarter improved 550 basis points (bps) year over year to 88.3%.

Pre-tax cat losses, net of reinsurance and reinstatement premiums, came in at $34.6 million, much lower than $134.1 million in the year-ago quarter.

Total expense of XL Group decreased 9.3% year over year to $1.47 billion attributable to lower claims and policy benefits in Life operations, net losses and loss expenses incurred in P&C operations, acquisition costs and interest expense.

In the release, the company stated that it expects 2014 operating expense to be higher than the 2013 level, indicating a mid single-digit increase.

P&C Operations: Gross premiums written in the quarter increased 8.6% year over year. The upside was attributable to a 9.9% increase in Insurance premium and 4.5% higher Reinsurance premium.
Insurance premium improved on the back of new business in International Primary Casualty, Political Risk and Crisis Management lines and higher renewed premiums in International Financial Lines and North American Excess Casualty and Construction lines.  Reinsurance premium improved on new aviation business in Europe, growth in agricultural premiums and timing of casualty treaty renewals in North America.

Net premiums earned increased 40% year over year.

Combined ratio (excluding prior-year development and the impact of natural catastrophe losses) improved 90 bps to 91.8% in the reported quarter.

Financial Update

XL Group exited the quarter with cash and cash equivalents of $3.1 billion, up 70.6% from $1.80 billion at the end of 2013.

Notes payable and debt at quarter end were $2.26 billion, a tad lower than the 2013-end level.

Book value of XL Group as of Jun 30, 2014 was $35.09 per share, up 3.6% from $33.86 as of Dec 31, 2013.

Share Repurchase Update

In the reported quarter, XL Group spent $175 million to buy back 5.5 million shares. The company was left with $717.6 million under its authorization at Jun 30.

Divestiture Update

As previously announced, subsidiary XL Insurance (Bermuda) Ltd closed the divestiture of XL Life Reinsurance (“XLLR”) to GreyCastle Holdings Ltd. for a cash consideration of $570 million.

The divestiture improves the risk profile, cushioning it with additional flexibility to pursue capital management initiatives. This includes buying back additional $300 million of shares in 2014.

Nonetheless, XLLR will reinsure the majority of XL's life reinsurance business through 100% quota share reinsurance.  XL will also retain about $438 million of reserves related to disability, accident and health policies and U.S. term assurance in its Life operations segment. XL will continue to own $5.5 billion of assets backing the retroceded business.

Performance of Other Property and Casualty Insurers

While ACE Limited (ACE) outperformed the Zacks Consensus Estimate on solid underwriting performances coupled with improved investment results, RLI Corporation’s (RLI) earnings were in line with the Zacks Consensus Estimate. However, The Travelers Companies Inc. (TRV) missed the Zacks Consensus Estimate on higher-than-expected catastrophe losses.

Zacks Rank

XL Group presently carries a Zacks Rank #3 (Hold).

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