XL Group (XL) reported its first-quarter 2011 operating loss of 52 cents per share, wider than the Zacks Consensus Estimate of a loss of 38 cents. Results compare unfavorably with operating profit of 44 cents earned in the year ago quarter. Operating loss was $163 million, compared with operating profit of $150 million in the prior-year quarter.
The quarter suffered hugely due to the Australian flooding in January, the New Zealand earthquake in February and the Tohoku earthquake in March.
Catastrophe losses, affecting XL Group totaled $66.9 million from the Australian Flood, $75.3 million from the New Zealand Earthquake and $242.6 million from the Japanese earthquake.
Adjusted for net realized losses on investments of $63.3 million, net realized and unrealized gains on derivatives of $5.2 million, net realized and unrealized gains on investments and derivatives related to XL’s insurance company affiliates of $0.9 million, foreign exchange losses of $7.2 million and gain on repurchase of preference ordinary shares of $0.1 million, net loss attributable to shareholders was $227.3 million in the quarter, compared with net income of $128 million in the prior-year quarter.
Net loss was 73 cents per share in the quarter under review, compared with a profit of 37 cents in first-quarter 2010.
The year-earlier quarter included net realized losses on investments of $36.2 million, net realized and unrealized losses on derivatives of $20.2 million, net realized and unrealized gains on investments and derivatives of the company’s insurance company affiliates of $1.1 million, foreign exchange gain of $17.1 million and gain on repurchase of preference ordinary shares of $16.6 million.
Operational Performance
Total revenue in the quarter was $1.61 billion, down 1.3% year over year from $1.64 billion in the year-ago period. Results however surpassed the Zacks Consensus Estimate of $1.52 billion.
Net premiums earned in the quarter increased 0.6% year over year to $1.27 billion.
Net investment income of $280.3 million was down 9% year over year largely due to lower US interest rates and cash outflows from the invested portfolio.
Underwriting loss widened substantially to $328.1 million in the quarter from a loss of $6.6 million in the year ago quarter.
Catastrophe losses, net of reinstatement premiums, in the quarter totaled $387.4 million, more than a two fold increase from $181.1 million in the first quarter of 2010.
Combined ratio in the fourth quarter deteriorated to 125.8% from 100.5% in the first quarter of 2010. Excluding prior year development and the impact of natural catastrophe losses, combined ratio deteriorated 780 basis points in the quarter.
Operating expenses increased 13% year over year to $260.5 million largely due to the build-out of the company’s previously announced strategic implementation office and other initiatives, coupled with redundancy costs.
P&C operations: Gross premiums written in the quarter were $2.1 billion, up 9.2% year over year largely driven by renewal of multi-year insurance agreement and new business initiatives.
Net premiums earned were $1.27 billion, up 0.6% year over year.
Life operations: Gross premiums written were $69.6 million, down 13.5% year over year.
Net premiums earned were $95 million, down 14.5% year over year.
Financial Position
Cash and cash equivalents of XL Group were $3.38 billion at quarter-end compared with $3.64 billion at 2009-end.
Notes payable and debt at first-quarter 2011-end were $2.46 billion flat compared to 2010-end.
Book value per ordinary share as of March 31, 2011, was $29.03, down 2.5% from $29.03 as of December 31, 2010 attributable to catastrophe losses and increased dilution, partially offset by the impact of share buybacks during the quarter.
In the first quarter, XL Group spent $165.6 million to buy back 7.3 million shares at an average price of $22.83.
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. XL Group had started its operations in Shanghai, widening its presence in the emerging market. Also, the addition of CIMI Professional to XL Insurance will broaden the latter’s exposure to the long-term care industry.
The company continues to enhance shareholders’ value through share buybacks and dividend increases. Also the company scores strongly with the credit rating agencies.
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. It competes with ACE Limited (ACE).
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