We are downgrading our recommendation on XL Group plc (XL - Analyst Report) to Underperform from Neutral based on its weak fourth quarter performance.
The company suffered in the fourth quarter largely due to higher catastrophe losses, lower levels of positive prior-year loss development and higher tax expenses. The company incurred a loss in the quarter, compared with operating profit in the year-ago quarter and Zacks Consensus Estimate of earnings.
XLGroup has substantial exposure to losses resulting from natural and man-made disasters and other catastrophic events. Cat loss in the quarter totaled $195 million, thereby resulting in the company incurring loss. Underwriting loss compared unfavorably with underwriting gains in the year-ago quarter while combined ratio plummeted 1,680 basis points year over year.
Net investment income at XL Group has been on a declining trend over the past few years. The fourth quarter experienced lower investment rates and cash flows from the investment portfolio, effecting net investment income. With performance closely linked to credit markets, which remains volatile, the exposure to these assets can further cause volatility in investment earnings.
XL Group also incur 24% higher expenses over 2010 and 17% over 2009. The company expects its 2012 expense to be $100 million more than the 2011 level.
On the positive side, XL Group is taking initiatives to expand its operations. The company has received the final approval to establish a Brazilian insurance operation. It will now offer Casualty, Property, Professional and Specialty insurance products through XL Seguros Brasil S.A., thereby launching its insurance operations there. With Brazil continuing to play an important part in the global economy, we expect XL Group to capitalize on the opportunities as and when they arise.
XL Group continues to enhance shareholders’ value through dividend payment as well as share repurchase. Theboard recently approved a share repurchase program wherein the company is authorized to buy back up to $750 million worth of shares.
The Zacks Consensus Estimate for first quarter 2012 is 39 cents per share. For full years 2012 and 2013, the Zacks Consensus Estimates are $1.84 and $2.17 per share, respectively.
The quantitative Zacks #5 Rank (short-term Strong Sell rating) for the company indicates downward pressure on the stock over the near term.
Based in Dublin, Ireland, XL Group is a leading global provider of insurance, reinsurance and financial risk solutions to enterprises and insurance companies. The company competes with ACE Limited (ACE - Analyst Report).