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XL Group Surpasses on Both Counts

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XL Group plc’s (XL - Free Report) third-quarter 2012 operating income of 61 cents per share outpaced the Zacks Consensus Estimate by 22%.  Earnings soared nearly 118% from 28 cents incurred in the year-ago quarter. Operating income was $188.3 million, up 112% year over year.

Better underwriting results along with lower net realized losses on investments and derivatives aided the company to post better numbers.

Including net realized losses on investments of $5.7 million, net realized and unrealized gains on derivatives of $6.2 million, net realized and unrealized gains on investments and derivatives related to the insurance company affiliates of $0.01 million and foreign exchange losses of $16.7 million, XL Group reported net income of $171.9 million or 56 cents, compared favorably with $42.4 million or 14 cents per share in the year-ago quarter.

Operational Performance

Total revenue in the quarter was $1.82 billion, up 9.6% year over year. Revenue was higher than the Zacks Consensus Estimate of $1.75 billion.

Net premiums earned in the quarter increased 6.5% year over year to $1.59 billion.

Net investment income of $239.5 million in the quarter was down 17.5% year over year, largely due to lower investment rates inducing lower yields.

XL Group’s underwriting profit was $114.2 million, rebounding from the loss of $22.2 million incurred in the year-ago quarter.

The combined ratio in the third quarter improved substantially by 940 basis points year over year to 92.2% in the quarter.

Operating expenses escalated 23.4% year over year to $305.7 million, primarily attributable to the build-out of previously announced initiatives.

P&C Operations: Gross premiums written in the quarter was $1.58 billion, down 11.3% year over year. Lower premium at reinsurance segment was attributable to North America Property, where the Heartland Crop program was renewed as reinsurance rather than as primary business more than offset the slight increase in the Insurance segment. This was driven by new business initiatives and favorable pricing in North America Property and Casualty and improved pricing in Professional, partially offset by movements in foreign exchange rates and targeted non-renewals in International General Property.

Net premiums earned improved 7.8% year over year in the quarter under review.

Combined ratio (excluding prior-year development and the impact of natural catastrophe losses) improved 240 basis points to 92.5% in the quarter.

Life Operations: Gross premiums written declined 13.1% year over year to $87.4 million in the third quarter.

Net premiums earned of $79.5 million in the quarter waned 12.5%.

Financial Position

XL Group exited the quarter with cash and cash equivalents of $3.2 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 September 30, 2012, was $32.82, up 2.7% from $31.96 as of June 30, 2012. The improvement was driven by net income, unrealized gains on investments and the benefit of share buybacks.

Share Repurchase Update

In the third quarter, XL Group spent $125 million to buy back 5.3 million shares at an average price of $23.44.

The company is left with $400 million under its authorization.

Peer Comparison

ACE Limited , which competes with XL Group reported third quarter 2012 operating income of $2.01 per share, breezing past the Zacks Consensus Estimate by 15 cents. Earnings however, declined 9% from $2.20 earned in the year-ago quarter.

The results were hugely affected by drought conditions in the U.S. that hampered the company’s crop business. Nevertheless, ACE Limited delivered sturdy underwriting results.

Zacks Rank

We maintain our Neutral recommendation on XL Group. The quantitative Zacks #2 Rank (short term Buy rating) for the company indicates upward thrust on the stock over the near term.

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