We are retaining our Neutral recommendation on
), given its exposure to catastrophe losses, declining net
investment income and increasing operating expenses.
Though the entire industry benefited from lower cat loss in the
first quarter, exposure to cat activities will always remain a
concern, as natural disasters can affect the company's results
adversely. Because of lower cat activities, XL Group booked
underwriting profit, rebounding from the year-ago loss. Also, there
was an improvement in its combined ratio.
Net investment income at XL Group has been on a declining trend
for the past few years, and the first quarter was no exception. It
experienced lower investment rates and cash outflows from the
investment portfolio, thereby affecting net investment income. With
performance closely linked to credit markets, which remain
volatile, the exposure to these assets can further cause
uncertainty in investment earnings.
Operating expenses are on an increasing trend augmenting 8% in
the first quarter, primarily attributable to the build-out of
previously announced initiatives.
However, 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. New business initiatives in North American Property &
Casualty lines, higher retention levels, and improved pricing aided
the uptick at Insurance.
Higher premiums at the Reinsurance segment largely came from the
International segment. With a strong international exposure and a
diversified array of product offerings, we believe the company is
well positioned to write higher premiums, thus fueling top-line
growth, going forward.
XL Group continues to enhance shareholders' value through
dividend payment as well as share repurchase. The company is left
with $650 million under its authorization after pursuing share
buyback worth $100 million in the first quarter of 2012.
Rating affirmations or upgrades from credit rating agencies play
an important part in retaining investor confidence in the stock as
well as maintaining creditworthiness in the market. XL Group scores
strongly with the rating agencies. Recently, Fitch Ratings affirmed
the Issuer Default Rating (IDR) at 'BBB+' of XLIT Ltd., a
subsidiary of XL Group.
The rating agency also affirmed the Insurer Financial Strength
(IFS) rating of its core operating companies at 'A'. We believe,
the company's strong ratings scores will help retain investor
confidence and help it to write more businesses going forward,
thereby augmenting the results.
The quantitative Zacks #4 Rank (short-term Sell rating) for XL
Group indicates downward pressure on the shares over the near term.
The company competes with
ACE LIMITED (ACE): Free Stock Analysis Report
XL GROUP PLC (XL): Free Stock Analysis Report
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