We are retaining our Neutral recommendation on
XL Group plc
(
XL
), following the second quarter earnings. Operating earnings
outpaced the Zacks Consensus Estimate but was lower year over year.
Though it experienced solid underwriting results, yet lower
investment yields and income from operating affiliates dwarfed the
positive impact.
Counting on the positives, XL Group remains focused on those lines
of business within its insurance and reinsurance operations that
provide the best return on capital over the pricing cycle. Higher
premiums written at Insurance were primarily driven by new business
initiatives in the North American Property & Casualty lines,
higher retention levels, and improved pricing. Also, the second
quarter marked the sixth consecutive quarter of accident year loss
ratio. With a strong international exposure and a diversified suit
of product offering, we believe the company is well positioned to
write higher premiums fueling top-line growth, going forward.
XL Group continues to enhance shareholders' value through dividend
payments as well as share repurchases. In the second quarter, the
company spent $125 million in share buyback and has $525 million
under its authorization. With a dividend payout of 11 cents per
share, it currently offers a yield of 1.85%.
The company also scores strongly with the rating agencies. Rating
affirmations or upgrades from credit rating agencies play an
important role in retaining investor confidence in the stock as
well as maintaining creditworthiness in the market.
On the flip side, its exposure to catastrophic events always
remains a concern. Though the entire industry benefited from lower
cat loss in the second quarter, occurrence of any catastrophic
events will adversely impact the results.
Net investment income continues to follow a downward trend. It
experienced lower investment rates and cash outflows from the
investment portfolio effecting net investment income. Management
expects net investment income to remain constrained due to the
persistent low interest rate environment. Of the total property
& casualty assets of the company, assets worth $3.4 billion
with an average gross book yield of 2.8% are scheduled to mature
and paid down over the upcoming 12 months. Further, operating
expense continues to escalate primarily attributable to the
build-out of previously announced initiatives.
The quantitative Zacks #2 Rank (short term Buy rating) for the
company indicates slight upward pressure on the stock over the near
term.
ACE Limited
(
ACE
), which closely competes with XL Group currently holds a Zacks #3
Rank (short term Hold rating), indicating no clear directional
pressure on the stock over the near term.
ACE LIMITED (ACE): Free Stock Analysis Report
XL GROUP PLC (XL): Free Stock Analysis Report
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