What a difference a year and three hurricanes make. Last year, XL Capital (NYSE:XL) bled red ink to the tune of a $1.5 billion loss (excluding realized gains and losses). This year, the company's results were at the other end of the spectrum, at a positive $1.7 billion in net income.
Like nearly all of its property and casualty insurance peers -- including Markel (NYSE:MKL), W.R. Berkley (NYSE:BER), and AXIS Capital (NYSE:AXS) -- XL has been basking in better weather. Last year's 132.9% combined ratio -- which means the company expected to pay out nearly $1.33 for every $1 in insurance premiums it took in -- was ugly. This year's 88.5% combined ratio is much more to XL's liking, although one can never predict the weather.
XL reported $471 million in net income for the fourth quarter, versus an $821 million loss last year. About $809 million of last year's loss was because of an adverse decision regarding insurance operations XL bought from Winterthur Swiss Insurance; the company didn't get as much money in a settlement as it had reserved for losses and had to eat the difference.
This year, however, XL Capital wasn't troubled by such issues, or by any major storms. This allowed the company to increase book value nearly 20% to $53 per share, giving it a 1.4 price-to-book multiple.
During the conference call, management noted that it had unlocked value through its initial public offering of Security Capital Assurance (NYSE:SCA). Management said it believed the division was undervalued, and its "pure play" status as an independent company has helped its shares rise more than 50% since its first day of trading -- providing a windfall for XL, which still owns roughly two-thirds of the company.
The question on everyone's mind right now is how well pricing has held up. Most insurers had banner years in 2006 and many will be looking to grow premiums thanks to rising profits. XL's management noted that the market was gradually softening, but the pricing pressure on Jan. 1 (when contracts renew) was less than it expected, given its observations over the latest quarter.
Similar to comments in the AXIS earnings call, XL management also seemed to see increased, but not yet irrational, pricing pressure internationally. There was a "soft landing" in directors' and officers' liability lines in Europe, and 0% to 5% decreases in global casualty insurance pricing. Management also said that specialty lines pricing was flat, aviation and marine were down due to competitive pressures, and excess and surplus did well.
Looking at this year, XL Capital provided guidance of flat to negative single-digit growth in insurance net premiums earned. The company forecast that reinsurance net premiums earned will be down by a number in the low teens. XL was also looking for its insurance segment's combined ratio to end up in the low 90% range, and for reinsurance to have a high 80% combined ratio. Overall, XL expects 2007 to be a pretty good year, and it's targeting a 15% return on equity.
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Fool contributor Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the companies mentioned. Emil appreciates your comments, concerns, and complaints. The Motley Fool has a disclosure policy.
