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XL Group plc’s (XL - Analyst Report) second-quarter 2013 net operating net income of 75 cents per share breezed past the Zacks Consensus Estimate of 64 cents. Earnings improved 5.6% year over year. Operating net income of $221 million was almost flat with the year-ago level.

Increase in affiliate earnings was offset by higher level of catastrophe losses inducing flat year-over-year comparison. However, the bottom line increased year over year due to lower share count.

Including net realized gains on investments of $44.5 million, net realized and unrealized losses on derivatives of $5.1 million, and foreign exchange gains of $11.6 million, XL Group reported net income of $272.6 million or 93 cents per share. The result compared favorably with $221.5 million or 71 cents per share in the year-ago quarter.

Quarterly Operational Performance

Total revenue of XL Group in the quarter was $1.89 billion, up nearly 8% year over year. Revenues were higher than the Zacks Consensus Estimate of $1.815 billion.

Net premiums earned in the quarter increased 4.7% year over year to $1.56 billion.

Net investment income of $232.5 million in the quarter was down 11.5% year over year, largely due to lower investment rates inducing lower yields.

XL Group’s underwriting profit was $92.1 million, declining 28.8% year over year.

The combined ratio in the second quarter deteriorated 300 basis points year over year to 93.8%. The downside resulted from catastrophe losses, which included flooding in Europe, Argentina and Canada, and tornadoes and hailstorms in the United States.

Pre-tax cat losses, net of reinsurance and reinstatement premiums, were $134.1 million, more than doubled year-over-year.

Operating expenses of XL Group increased 1.4% year over year to $303.1 million, attributable to additional headcount due to expansion in the underlying business.

P&C Operations: Gross premiums written in the quarter were $1.9 billion, up 10.2% year over year. The upside was driven by a 10.3% increase in insurance premium.

Net premiums earned improved 6.2% year over year in the quarter under review.

Combined ratio (excluding prior-year development and the impact of natural catastrophe losses) improved 100 basis points to 92.7% in the quarter.

Life Operations: Gross premiums written declined 12.5% year over year to $81 million in the quarter.

Net premiums earned fell 13.7% to $73.9 million.

Financial Position

XL Group exited the quarter with cash and cash equivalents of $2.42 billion, down 7.6% from $2.62 billion at the end of 2012.

Notes payable and debt at the end of the reported quarter were $1.67 billion, 0.1% below the 2012-end level.

Book value of XL Group as of Jun 30, 2013 was $32.45 per share, down 2.7% from $33.35 as on Dec 31, 2012.

Annualized operating return on equity was 9.7% in the reported quarter, down from 9.9% in the year-ago quarter.

Share Repurchase Update

In the reported quarter, XL Group spent $150 million to buy back 4.8 million shares.  The company, as on Jun 30, was left with $575 million under its $850 million authorization approved in February this year.

Performance of other Property and Casualty Insurers

The Travelers Companies Inc. (TRV - Analyst Report) reported operating net earnings of $2.13 per share in the second quarter of 2013, surpassing the Zacks Consensus Estimate of $1.58 per share. Moreover, results surged 69% from $1.23 per share in the year-ago quarter.

The outperformance was driven by lower catastrophe losses along with sustained improvement in underlying underwriting margins across all segments. However, the upside was partially offset by lower net investment income and lower net favorable prior-year reserve development.

ACE Limited (ACE - Analyst Report) reported second-quarter 2013 operating net income of $2.29 per share, up 19.3% from the Zacks Consensus Estimate of $1.92. Results improved 5.5% from $2.17 earned in the year-ago quarter. Solid underwriting performances aided the better-than-expected results.

Both the U.S. and international business operations experienced growth and better margins. ACE Limited also benefited from improved commercial property & casualty (P&C) pricing environment.

Everest Re Group Ltd. (RE - Analyst Report) reported second quarter 2013 operating earnings of $5.10 per share, substantially beating the Zacks Consensus Estimate of $4.26 per share.

Our Take

XL Group has successfully maintained the trend of delivering positive earnings surprise. The reported quarter marked the sixth consecutive quarter of positive surprises.

Although the quarter witnessed severe catastrophic incidents, results remained unaffected.  Both the Insurance as well as Reinsurance segment wrote higher premiums relying on new business initiatives and pricing improvements across most lines, increased reinstatement premium and select new business opportunities

Nevertheless, based on the company’s conservative underwriting practices and repositioned P&C portfolio, we expect XL Group to fare well going forward.

XL Group continues to enhance shareholder value through share buybacks and dividend hikes.

Moreover, management stated that though the company’s 2013 expenses will be higher than that of 2012, it would experience better operating leverage.

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

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