XL Capital Excels Estimate

XL Capital’s (XL - Analyst Report) third- quarter earnings of 89 cents per share were ahead of the Zacks Consensus Estimate by 76 cents per share. This compares to earnings of 39 cents per share in the prior year quarter. However on a GAAP basis the company reported a loss of 3 cents per share, versus a loss of $6.04 in the prior year period.

Net loss came in at $11.4 million compared to a net loss of $1,649.0 million in the prior year quarter. The significant improvement in net loss is primarily due to a charge of $1.4 billion in the prior year quarter related to the transaction closed during Aug 2008 with Syncora Holdings Ltd.

Net written premiums fell 4.4% year-over-year to $1.3 billion, while gross written premiums dropped 15.3% to $1.7 billion. Premium volumes have been negatively impacted by the global economic conditions, reduction in mergers and acquisitions, the exit from certain (unprofitable) lines of business and the ongoing efforts of risk managers to reduce their concentration of risk (limits) with all insurers.

Net investment income decreased 25.0% year-over-year to $327.1 million, driven by a decrease in investment income from the company’s Property & Casualty and Life operations. This decrease was primarily due to lower investment yields − driven by both the impact of lower US LIBOR rates on floating rate structured credit assets − and higher allocations to lower yielding US Treasuries, Agencies and cash as a result of continued de-risking activities.

The annualized return on ordinary shareholders' equity, based on operating income, was 16.7%, versus 5.8% in the prior year quarter. Book value increased to $23.84 per share as compared to $21.65 in the prior year quarter.

Property and Casualty Operations
Gross premiums written were $1.6 billion, down 16.6% year-over-year, reflecting fewer long-term agreements, exiting of specific lines of business and agency contracts, global economic pressures and the push for rates. Combined ratio improved to 93.2% from 106.3% in the prior year quarter, benefiting from favorable prior year development of $74 million.

Life
Gross premiums written almost remained flat year-over-year at $156.9 million. The Life operations contributed $20.4 million to the operating income.

The company has taken measures to reduce its exposure by implementing an enterprise risk management program and de-risking the portfolio. The company has also implemented expense reduction initiatives in the second half of 2008. It has been streamlining processes across all geographic locations, with a primary emphasis on corporate functions.

The company has also been working towards developing a reliable infrastructure that will improve operational efficiency, standardize processes and optimize costs. Though we expect net premium written by the company to remain under pressure the above measures will help it to maintain its profitability. Therefore we maintain a Neutral rating on the shares for now.