XL Profit Drops 99% to $3.1 Million on Investments (Update1)

By Andrew Frye
Bloomberg News
April 28, 2009

April 27 (Bloomberg) -- XL Capital Ltd., the insurer whose stock has more than doubled this year, said first-quarter profit plummeted 99 percent on investment losses.

Net income declined to $3.1 million, or 53 cents a share, from $244.4 million, or $1.19, in the year-earlier period, the Bermuda-based company said today in a statement distributed by PR Newswire. The per-share number includes a gain on the sale of preferred shares by investors back to the company.

Chief Executive Officer Michael McGavick, hired last year, is scaling back riskier investments after soured mortgage bets drained capital. McGavick helped boost shares from record lows in February by saying XL has adequate funds after two straight quarterly losses of more than $1 billion. The insurer's outlook remains "negative" at Standard & Poor's and Moody's Investors Service on the potential for further portfolio declines.

XL's investments are "a major issue," Paul Newsome, an analyst with Sandler O'Neill & Partners in Chicago, said in a research note before results were released. "XL has significant investments in mortgage-backed securities and private investment funds. It is generally considered to have a more aggressive investment portfolio than its U.S.-listed peers."

XL fell 3.7 percent to $8.17 in New York after the close of regular trading. The insurer has jumped from $3.70 this year on the New York Stock Exchange after dropping 93 percent in 2008. The stock, the biggest gainer on the 24-company KBW Insurance Index since Dec. 31, is still down about 90 percent from a two- year high of more than $80 in July of 2007.


McGavick, a former CEO at Seattle-based Safeco Corp., announced job cuts totaling about 10 percent of the workforce in February as the insurer reported a 2008 net loss of $2.55 billion. In his first year on the job, McGavick wrote down the value of a property reinsurer that XL acquired a decade ago and incurred costs tied to the rescue of Syncora Holdings Ltd., a bond insurer created by the company.

McGavick has been selling depressed investments to reduce the risk of further losses and took a $400 million charge in the fourth quarter to help speed some divestitures. The company was downgraded twice by both Moody's and Fitch Ratings last year.

XL is seeking to reassure clients and fend off rivals Ace Ltd., Chubb Corp. and Travelers Cos., each of which sidestepped the worst of the subprime meltdown and remained profitable throughout the financial crisis. Retaining customers has become increasingly important as new sources of revenue run dry amid the U.S. recession.

Smaller Decline

Book value per share, a measure of assets minus liabilities monitored by rating firms, declined 2.8 percent to $15.02 in the three months to the end of March. That's the smallest decline in six quarters.

Impairments in the first quarter more than doubled to $285 million from the year-earlier period and included $80.6 million in losses tied to holdings in hybrid securities issued by European financial companies including Royal Bank of Scotland Group Plc. Investment income, which includes dividends and bond coupons, fell 30 percent to $348 million as the company held more lower-yielding securities to cut risk.

Operating profit, which excludes some investment results, was 63 cents a share, beating by 2 cents the average estimate of 12 analysts surveyed by Bloomberg.

XL has reported more than $4 billion in writedowns and unrealized losses tied to the housing slump since 2007. That's part of more than $190 billion in losses at North American insurers, led by American International Group Inc. with $87 billion and life insurers MetLife Inc. and Hartford Financial Services Group Inc.

Premium Revenue

XL's premium revenue from property and casualty policies slipped 15 percent to $1.32 billion. After paying claims and expenses, the insurer kept 7 cents of every dollar of property- casualty premium collected in the quarter compared with 6.3 cents in the year earlier period.

U.S. property and casualty carriers posted the biggest sales drop in half a century last year as corporations and individuals scaled back on insurance purchases. Business insurers have been cutting prices for four years and cut rates 5.1 percent in the first quarter, according to the Council of Insurance Agents and Brokers.

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