XL Group Exits on a High Note

XL Group plc’s ( XL - Analyst Report ) fourth-quarter 2012 operating income of 13 cents per share outpaced the Zacks Consensus Estimate of a loss of 35 cents. Earnings rebounded from a loss of 25 cents incurred in the year-ago quarter.

Better underwriting results more than offset the adverse impact from catastrophe losses and higher tax expenses, aiding the company to post better numbers.

Including net realized gains on investments of $34.9 million, net realized and unrealized gains on derivatives of $2.6 million, net realized and unrealized gains on investments and derivatives related to the insurance company affiliates of $0.3 million and foreign exchange gains of $4.8 million, XL Group reported net income of 27 cents, reversing the loss of $1.62 per share in the year-ago quarter.

Quarterly Operational Performance

Total revenue in the quarter was $1.9 billion, up 11.8% year over year. Revenue was higher than the Zacks Consensus Estimate of $1.7 billion.

Net premiums earned in the quarter increased 9.5% year over year to $1.6 billion.

Net investment income of $245 million in the quarter was down 9.6% year over year, largely due to lower investment rates inducing lower yields.

XL Group’s underwriting loss narrowed to $90.7 million, from the loss of $114.1 million incurred in the year-ago quarter.

The combined ratio in the fourth quarter improved 230 basis points year over year to 105.9% in the quarter.

Operating expenses declined 14.8% year over year to $1.86 million, primarily attributable to lower claims and policy benefits and lower operating expenses.

P&C Operations: Gross premiums written in the quarter was $1.51 billion, improving 20.5% year over year. A 50.1% increase in reinsurance premium coupled with 17.8% higher insurance premium aided the improvement.

Net premiums earned improved 7% year over year in the quarter under review.

Combined ratio (excluding prior-year development and the impact of natural catastrophe losses) improved 980 basis points to 105.9% in the quarter.

Life Operations: Gross premiums written declined 7.6% year over year to $88.7 million in the fourth quarter.

Net premiums earned of $79.5 million in the quarter waned 10.5%.

Full Year Highlights

Operating income was $1.98 per share, which breezed past the Zacks Consensus Estimate of $1.51 and the year-ago earnings of 28 cents per share.

Net income came in at $2.10 per share, reversing the loss of $1.52 incurred in 2011.

Revenue improved 7.4% over 2011 to $7.2 billion and also exceeded the Zacks Consensus Estimate of $6.8 billion.

Financial Position

XL Group exited 2012 with cash and cash equivalents of $2.6 billion, down from $3.8 billion at the end of 2011.

Notes payable and debt at the end of 2012 were $1.67 billion, down from $2.27 billion at 2011 end.

Book value as of Dec 31, 2012 was $33.38 per share, up 17.8% year over year. The improvement was driven by higher net income, unrealized gains on investments and the benefit of share buybacks.

Share Repurchase Update

In the fourth quarter, XL Group spent $51.7 million to buy back 2.1 million shares taking the full year tally to 18.3 million share repurchased for $41.7 million. Subsequently through Feb 7, XL Group bought back 3.8 million shares for $98.3 million.

The company, as on Feb 7, was left with $250 million under its authorization.

Performance of Other Property and Casualty Insurers

The Travelers Companies ( TRV - Analyst Report ) reported earnings of 72 cents per share in the fourth quarter of 2012, surpassing the Zacks Consensus Estimate of 4 cents per share. However, results plunged 51% on a year-over-year basis.

RLI Corporation ( RLI - Analyst Report ) reported fourth-quarter 2012 operating earnings of 89 cents per share. The result surpassed the Zacks Consensus Estimate of 44 cents by 102% but missed the year-ago level of $1.13 by 32.1%.

Chubb Corp. ( CB - Analyst Report ) reported the fourth-quarter operating earnings of 16 cents per share, significantly ahead of the Zacks Consensus Estimate of a loss of 46 cents per share. Earnings were down substantially by 90% year over year.

Our Take

Based on the company’s conservative underwriting practices and repositioned P&C portfolio, we expect XL Group to fare well going forward. The company is also taking initiatives to expand its operations and is aiming to tap the opportunities in the growing economy.

The company continues to enhance shareholders' value through share buybacks and dividends. Also, the company scores strongly with the credit rating agencies.

However, significant exposure to catastrophe losses and continued low interest rate environment continues to weigh on the results of the company.

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