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XL Group Retains Neutral Rec

Zacks Equity Research

We retain our Neutral recommendation on XL Group plc (XL) due to mixed third quarter results. The property and casualty insurer currently carries a Zacks Rank #3 (Hold).

Why reiterate?

XL Group’s third-quarter 2013 operating net income of 53 cents per share missed the Zacks Consensus Estimate and also lagged the prior-year quarter earnings. Higher natural catastrophe losses and higher levels of losses in Insurance were attributed to the year-over-year decline. Nonetheless, revenue fared better on both counts.

The Zacks Consensus Estimate for 2013 is currently pegged at $3.03, down 1.3% over the last 30 days, while the same for 2014 rose 0.7% to $3.04 over the same time frame.

Counting on the positives, with a strong international exposure and a diversified suit of product offerings, we believe XL Group is well positioned to write higher premiums fueling top-line growth, going forward.

The company continues to make share repurchases. It is currently left with $425 million worth of shares available for purchase under its recent authorization. With a strong balance sheet and ability to generate healthy cash flow, we expect the company to indulge in more buybacks going forward, thereby sharing more profit with shareholders.

XL Group also scores strongly with credit rating agencies. In October, A.M. Best reiterated the financial strength rating (:FSR) of A (Excellent) and ICRs of “a” of the property/casualty subsidiaries of XL Group. The outlook for ICR was upgraded to positive from stable. The rating agency also reiterated the ICRs of “bbb” of XL and XLIT Ltd. and upgraded the outlook to positive from stable.

On the tepid side, XL has substantial exposure to losses resulting from natural and man-made disasters and other catastrophic events. Net investment income at XL Group has been on a declining trend for the past few years, and the second quarter was no exception. With performance closely linked to credit markets, the exposure to these assets can further cause volatility in investment earnings.

Additionally, XL Group’s operating expenses have been on a rising trend over the last few years.

Other stocks to Consider

Some better-ranked stocks include Alleghany Corporation (Y), Aspen Insurance Holdings Ltd. (AHL) and Cincinnati Financial Corp. (CINF). All these stocks carry a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on XL
Read the Full Research Report on CINF
Read the Full Research Report on Y
Read the Full Research Report on AHL

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