Balanced View on XL Group - Analyst Blog

XL Group plc XL is witnessing solid bottom-line growth fueled by its robust operational strategies. Moreover, the company is also engaged in enhancing its shareholders' value through consistent share repurchase and dividend payments.

XL Group remains focused on those lines of businesses within its insurance and reinsurance operations 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, which is resulting in margin expansion.  

In addition, XL Group's inorganic growth story also remains impressive. Its subsidiary – XL Reinsurance America Inc. acquired crop insurance provider Global Ag Insurance Services to capitalize on the expertise of Global Ag in western U.S.

Moreover, the company is committed to rewarding it shareholders with more dividend and buying back of shares, that in turn lower the share count leading to greater earnings per share. In February this year, the board of directors approved a 14.3% hike in its quarterly dividend to 16 cents per share The board also approved a buyback program, authorizing XL Group to repurchase shares worth $1 billion. The current program includes about $200 million worth of shares remaining from the previous authorization.

On the flip side, net investment income at XL Group has been on a declining trend for the past few years. With performance closely linked to credit markets that remain volatile, the exposure to these assets can further cause volatility in investment earnings.

Moreover, XL Group's operating expenses have been on a rising trend over the last few years. Higher net losses and loss expense as well as higher operating expenses induced the increase. If operating expenses continue to escalate, it might take a toll on operating margin expansion.

In addition, exposure to catastrophe events remains a headwind for property and casualty insurers and XL Group is no exception in this regard.

With respect to earnings performance, XL Group has delivered positive earnings surprises in three of the last four quarters, with an average beat of 18.3%. A benign cat environment and higher net income from investment funds and investment manager operating affiliates continue to aid the upside.

Meanwhile, XL Group continues to witness estimate revisions. Over the last 30 days, the Zacks Consensus Estimate for 2014 increased by a penny to $3.00. The expected long-term earnings growth for the stock is 5.7%.

XL Group currently carries a Zacks Rank #3 (Hold). Some better-ranked property and casualty insurers worth considering are Alleghany Corporation Y, AmTrust Financial Services, Inc. AFSI and Atlas Financial Holdings, Inc. AFH. All these stocks sport a Zacks Rank #1 (Strong Buy).