XL Surges Back To Profitability
Bermuda headquartered XL Group PLC yesterday [Feb. 8] posted a fiscal fourth-quarter profit as investment losses plunged and net premiums earned at its core business spiked.
The global property and casualty insurer has benefitted from smaller investment losses in recent quarters. In November, Standard & Poor’s Ratings Services lifted its outlook on the company to stable, indicating a near-term downgrade is unlikely as XL Group has removed risk in its investment portfolio while sustaining strong operating results.
Incorporated in Ireland but with executive offices on Bermudiana Road in Hamilton, XL reported a profit of $195.4 million, compared with a year-earlier loss of $34.7 million. On a per-share basis, which includes preferred dividends, it swung to 57-cent earnings from a prior-year loss of 12 cents a share. Operating income, which excludes items such as investment gains and losses, rose to 74 cents from 63 cents.
Net premiums earnings in the property-and-casualty operations rose 2.2% to $1.28 billion.
The combined ratio, or the percentage of premiums paid out on losses and expenses, fell to 91.4% from 96.4% in the P&C business.
Net realized investment losses plunged 61% to $99.3 million.
The latest quarter included $30.3 million in natural catastrophe losses, net of restatement premiums, compared with a favorable impact of $5.5 million in the year-earlier quarter.
Commenting on the company’s performance, CEO Mike McGavick said: “XL’s fourth quarter results demonstrated progress in several key elements driving shareholder value. Our P&C operations’ 91.4% combined ratio benefited from outstanding performance from our Reinsurance segment, positive prior year development and sustained operating efficiency.
“We received our license to offer insurance in China and added experienced teams in lines we believe offer prospects for strategic growth. Our on-going risk management discipline resulted in our catastrophe losses being at the low end of the expected range, with only modest changes to our initial estimates for the New Zealand earthquake.
“We reduced exposures to non-core holdings, and we continued to return excess capital through share buybacks. We believe XL is in a solid position to meet the challenges of current market conditions and the opportunities that will come as conditions improve.”
The company also announced that fourth quarter natural catastrophe losses include $23.3 million related to flooding in Australia. Based on preliminary data available, the company’s first quarter losses related to flooding in Australia are expected to range between an additional $75.0 million and $95.0 million.
The company’s estimates are based on its review of individual treaties and policies expected to be impacted and client data received to date. The company’s loss estimates involve the exercise of considerable judgment and are accordingly subject to revision.
XL said improvement in operating net income compared to the prior year quarter was driven by an increase in P&C underwriting income, where premiums written and earned have increased and combined ratios during the quarter have improved by 5.0 points over the prior year quarter.
Net investment income for the quarter was $290.4 million compared to $316.4 million in the prior year quarter. The decline was due to the impact of lower US interest rates on the P&C portfolio and changes in foreign exchange rates on the Life portfolio.
The company’s net income attributable to ordinary shareholders also improved compared to the prior year, primarily due to less realized investment losses — $99.3 million in 2010, compared to $254.8 million in 2009 — plus a gain of $51.6 million on the sale of shares of Primus Guaranty.
Fully diluted book value per ordinary share continued to grow, with an increase of 0.7% from the prior quarter, driven by a combination of net income and the impact of the purchase of 11.8 million shares during the quarter under the previously announced share buyback programs, mostly offset by declines in investment portfolio values due to increasing interest rates.
In the fourth quarter of 2010, the company purchased 11.8 million ordinary shares for $250.9 million at an average price of $21.29 per share, which were accretive to book value per ordinary share by $0.29. During the full year, 25.7 million shares were purchased at an average price of $20.23 per share for a total of $520.0 million.
The full year return on ordinary shareholders’ equity based on operating net income was 9.0% compared to 14.7% in 2009. The increase in average ordinary shareholders’ equity from 2009 to 2010 was a large driver of this decline.
P&C premiums written in the fourth quarter increased 13.8% from the prior year quarter. This growth was driven by a multi-year insurance agreement, partially offset by a negative impact from foreign exchange rate fluctuations.
Excluding these items, the insurance segment saw an increase of 8.6% from the prior year quarter, comprised of increases from selective growth initiatives, including international professional lines, upper middle markets and construction, marine lines and improved retention rates in environmental businesses, offset by reductions in US professional lines, excess casualty and equine. The 27.0% decrease in Reinsurance was due to reductions in the company’s US crop portfolio and timing differences.
P&C net premiums earned of $1.28 billion for the fourth quarter of 2010 was comprised of $891.3 million from the Insurance segment and $391.2 million from the Reinsurance segment, compared to $1.25 billion in the prior year quarter, which was comprised of $862.8 million from the Insurance segment and $391.6 million from the Reinsurance segment.
For the full year, P&C net premiums earned was $5.0 billion, comprised of $3.5 billion from the Insurance segment and $1.5 billion from the Reinsurance segment. For the prior year, P&C net premiums earned was $5.2 billion, comprised of $3.6 billion from the Insurance segment and $1.6 billion from the Reinsurance segment.
Included in the current quarter loss ratio was favorable prior year development of $121.5 million compared to $30.8 million in the fourth quarter of 2009.
The current quarter loss ratio was also impacted by natural catastrophe losses of $30.3 million, net of reinstatement premiums. In the prior year quarter, natural catastrophe loss activity had a favorable impact of $5.5 million. Excluding prior year development and natural catastrophes, the current quarter loss ratio was largely in line with the prior year quarter.
The current quarter underwriting expense ratio decreased 2 percentage points compared to the prior year quarter from 34.2% to 32.1%, in line with the company’s 2009 restructuring and cost management plan.
