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XL Group Posts Solid 1Q Earnings

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XL Group plc’s first-quarter 2013 net operating income of 93 cents per share breezed past the Zacks Consensus Estimate of 67 cents. Earnings surged 78.8% year over year.

Better-than-expected results were fueled by improved underwriting results, attributable to lower levels of catastrophe and large risk losses, coupled with higher affiliate earnings.

Including net realized gains on investments of $36.2 million, net realized and unrealized gains on derivatives of $7.9 million, net realized and unrealized gains on investments and derivatives related to the insurance company affiliates of $0.2 million and foreign exchange gains of $26.6 million, XL Group reported net income of $1.17 per share, comparing favorably with 56 cents per share in the year-ago quarter.

Quarterly Operational Performance

Total revenue of XL Group in the quarter was $1.86 billion, up 6.3% year over year. Revenues were higher than the Zacks Consensus Estimate of $1.7 billion.

Net premiums earned in the quarter increased 6.5% year over year to $1.53 billion.

Net investment income of $246.5 million in the quarter was down 7.1% year over year, largely due to lower investment rates inducing lower yields.

XL Group’s underwriting profit was $180.6 million, increasing nearly threefold year over year.

The combined ratio in the first quarter improved 760 basis points year over year to 87.7%.

Operating expenses inched up 0.5% year over year to $283.8 million.

P&C Operations: Gross premiums written in the quarter was $2.4 billion, improving 3.8% year over year. A 12.1% increase in insurance premium largely aided the improvement.

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 1030 basis points to 89.5% in the quarter.

Life Operations: Gross premiums written declined 15.8% year over year to $73 million in the first quarter.

Net premiums earned of $65.4 million in the quarter waned 16.6%.

Financial Position

XL Group exited the quarter with cash and cash equivalents of $2.47 billion, down from $2.62 billion at the end of 2012.

Notes payable and debt at the end of the reported quarter were $1.67 billion, flat with 2012-end level.

Book value of XL Group as of Mar 31, 2013 was $34.05 per share, up 2.1% from $33.35 as on Dec 31, 2012. The improvement was driven by higher net income and the benefit of share buybacks, partially mitigated by net unrealized losses on investments.

Annualized operating return on equity was 12.3% in the reported quarter, up from 7.4% in the year-ago quarter.

Share Repurchase and Dividend Update

In the reported quarter, XL Group spent $223.2 million to buy back 8 million shares.  The company, as on Mar 31, was left with $725 million under its $850 million authorization approved in February this year.

In Feb 2013, the board of XL Group also approved a 27% increase in its quarterly dividend to 14 cents per share.

Performance of few other Property and Casualty Insurer

The Travelers Companies Inc. (TRV - Free Report) reported earnings of $2.31 per share in the first quarter of 2013, surpassing the Zacks Consensus Estimate of $1.99 per share. Moreover, results increased 15% from $2.01 earned in the year-ago quarter.

RLI Corporation (RLI - Free Report) reported first-quarter 2013 operating earnings of $1.04 per share. The result lagged the Zacks Consensus Estimate of $1.06 by 1.89% but surpassed the year-ago level of 96 cents by 8.3%.

Chubb Corp. (CB - Free Report) reported record high first-quarter operating earnings of $2.14 per share, significantly ahead of the Zacks Consensus Estimate of $1.74 per share and $1.70 per share in the first quarter of 2012.

Our Take

XL Group has successfully maintained the trend of delivering positive earnings surprise. The reported quarter marked the fifth consecutive quarter of positive surprises.

The quarter largely benefited from the absence of any significant catastrophe activities. Though the Insurance segment wrote higher premiums relying on new business initiatives and pricing improvements across most lines, the Reinsurance segment wrote lower premiums.

Nevertheless, based on the company’s conservative underwriting practices and repositioned P&C portfolio, we expect XL Group to fare well going forward.

The company continues to enhance shareholder value through share buybacks and increasing in dividend.

XL Group carries a Zacks Rank #2 (Buy).

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