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XL Group plc’s (XL - Analyst Report) second-quarter 2012 operating income of 71 cents per share outpaced the Zacks Consensus Estimate by a decently 15 cents.  Results, however, were 5.3% lower than 75 cents incurred in the year-ago quarter. Operating income was $221.9 million, down 8.7% year over year.

Though the second quarter experienced solid underwriting results, lower investment yields and income from operating affiliates dwarfed the positive impact.

Operational Performance

Total revenue in the quarter was $1.75 billion, up 3% year over year. Revenue was in line with the Zacks Consensus Estimate of $1.75 billion.

Net premiums earned in the quarter increased 6.3% year over year to $1.49 billion.

Net investment income of $262.6 million in the quarter was down 11.4% year over year, largely due to lower investment rates and cash outflows from the investment portfolio.

XL Group’s underwriting profit nearly doubled year over year to $129.4 million.

The combined ratio in the second quarter improved substantially by 410 basis points year over year to 90.8% in the quarter.

Operating expenses increased 12.4% year over year to $299.1 million, primarily attributable to the build-out of previously announced initiatives.

P&C Operations: Gross premiums written in the quarter was $1.76 billion, flat year over year. Higher premium at Insurance segment driven by new business initiatives and improved pricing in most North America Property and Casualty, Professional and Specialty lines were offset by lower premium from International Casualty and North America Property lines at Reinsurance segment.

Net premiums earned improved 7.3% year over year in the quarter under review.

Combined ratio (excluding prior-year development and the impact of natural catastrophe losses) improved 570 basis points to 93.7% in the quarter.

Life Operations: Gross premiums written declined 7.4% year over year to $92.9 million in the second quarter.

Net premiums earned written in the quarter decreased 7.1%.

Financial Position

XL Group exited the quarter with cash and cash equivalents of $3.3 billion, down from 2011 level end of $3.8 billion.

Notes payable and debt at quarter end were $1.67 billion declining from $2.27 billion at 2011 end.

Book value per ordinary share as of June 30, 2012, was $31.96, up 4.3% from $30.88 as of March 31, 2012. The improvement was driven by net income, unrealized gains on investments and the benefit of share buybacks.

Dividend and Share Repurchase

XL Group’s Board of Directors declared a quarterly dividend of 11 cents per share payable on October 1, 2012 to shareholders of record on September 15, 2012.

In the second quarter, XL Group spent $125 million to buy back 6.1 million shares at an average price of $20.44.

The company is left with $525 million under its authorization.

Peer Comparison

ACE Limited (ACE - Analyst Report), which competes with XL Group, reported second quarter 2012 operating income of $2.17 per share, breezing past the Zacks Consensus Estimate by 24 cents. Earnings improved 10% from $1.97 earned in the year-ago quarter. The quarter largely benefited from solid current accident year underwriting results as well as lower catastrophe losses.

Zacks Rank

We maintain our Neutral recommendation on XL Group. The quantitative Zacks #3 Rank (short term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.
 

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