On Mar 17, 2015 we issued an updated research report on
XL Group plc
. With fourth-quarter earnings, the Zacks Rank #3 (Hold) property
and casualty (P&C) insurer kept its surprise streak alive.
Earnings per share surpassed the Zacks Consensus Estimate and
year-ago number on solid underwriting performances. Its trailing
four-quarter average beat is 19.8%.
The underwriting results were one of the best with underwriting
profit improving more than 50% and combined ratio being the
strongest in more than 15 years.
XL Group has always eyed strategic acquisitions to ramp up its
operational results. Targeting a premier spot in global specialty
insurance and reinsurance markets, XL Group will buy Catlin Group
Limited. The acquisition will increase its alternative capital
opportunities. Moreover, XL Group will significantly increase its
business in the Lloyd's platform, where Catlin boasts a leading
presence. Additionally, XL Group can straightaway expand quite a
few lines of business in which it has lately made investments.
XL Group remains focused on its insurance and reinsurance business
lines that provide the best return on capital over the pricing
cycle. To refine its business mix, XL Group is deploying capital in
businesses with lower loss ratios that in turn are expected to
result in margin expansion. The company will be eyeing new
businesses, emphasizing short-tail lines wherever available in its
reinsurance operations, exit other businesses like casualty
facultative, not renew certain insurance programs, and continue to
reduce long-term agreements (within the insurance operations) in
order to reap the benefits of improved pricing.
A strong capital and liquidity position enables XL Group Limited to
enhance its shareholders' value. The company bought back $800
million shares in 2014 and is left with $267.6 million under its
authorization. Share buyback lowers the share count and hence
boosts the bottom line of the company.
XL Group also has a record of hiking its dividend. Its present
dividend payout of 16 cents per share yields 1.79%, better than the
sector average of 1.75%. Given its ability to generate a healthy
cash flow, we expect the company to indulge in more shareholder
friendly moves, thereby instilling investor confidence in the
Nonetheless, a still soft interest rate environment continues to
weigh on investment results. Last year, weaker net investment
income resulted in lower investment yields due to lower
reinvestment rates. Also, $3.0 billion worth of P&C assets with
an average gross book yield of 3% is expected to mature over the
coming 12 months. This is also expected to put pressure on net
Being a P&C insurer, XL Group is always exposed to catastrophe
events. In the event of such an unfavorable environment,
underwriting results of the company will be adversely affected.
Stocks to Consider
Some better-ranked property and casualty insurers are Arch Capital
, AmTrust Financial Services, Inc.
and Allied World Assurance Company Holdings, AG
. All these stocks sport a Zacks Rank #1 (Strong Buy).
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