XL posts fourth-quarter loss of $515m on goodwill charge
XL Group plc posted a net loss of more than half a billion dollars in what CEO Mike McGavick described as a “frustrating” fourth quarter of last year.
The $515.5 million loss was driven by a non-cash goodwill impairment charge of $429 million, relating to company’s insurance segment.
Goodwill refers to the value of an asset over and above its book value.
XL said the charge was related to “persistent low market valuations in the insurance industry and the recurring losses in the company’s insurance segment”, but stressed the non-cash charge had no material impact on regulatory capital.
Standard & Poor’s (S&P) Rating Services issued a statement last night saying the goodwill writedown would have no impact on XL’s ratings, since the agency discounted goodwill in its capital calculations.
The company made a fourth-quarter operating net loss of $79.6 million, or 25 cents per share, principally because of nearly $195 million in catastrophe losses. This fell far below the expectations of analysts polled by Bloomberg, who had predicted earnings per share of 15 cents.
Mr McGavick said the company had suffered an “unacceptable level of non-catastrophe insurance losses in isolated underwriting areas”.
The fourth quarter loss forced XL into the red for the year. The full-year net loss was $478.8 million, or $1.52 per share.
In a conference call with analysts last night, after the results were released Mr McGavick explained more about the goodwill charge.
He said the property and casualty insurance sector had been trading at low valuations and XL had been trading at an even lower level, relatively. During a review of goodwill valuation, the company concluded that, with the high levels of non-catastrophe losses during the fourth quarter, the company should take action to reflect the likely market view of the value of the insurance segment, no matter how bullish XL itself was about its future prospects.
He admitted that the company had been “plagued” by losses in a handful of insurance lines. He added that the company shared the frustration of investors in “the time it takes for an insurance book to respond to medicine”.
Also during the call, chief financial officer Peter Porrino said the company estimated losses of $40 million to $50 million related to the
Costa Concordia cruise ship disaster.
“XL was clearly impacted in 2011, like companies throughout the property and casualty industry, by a year that suffered from one of the largest aggregate worldwide catastrophe losses in history, including, most recently, the devastating Thailand floods,” Mr McGavick said in a statement.
“While we believe XL’s catastrophe loss profile, relative to our peers, showed the effectiveness of our risk management process, we also again experienced an unacceptable level of non-catastrophe insurance losses in isolated underwriting areas.
“We have added new leaders and talented teams to these areas, and are sharply focused on delivering improved results. We will not shy away from our 2011 results, including a frustrating fourth quarter and full year 2011, and a significant non-cash charge to eliminate the Insurance segment’s goodwill reflecting continuing low valuations in our sector. But, we do want to ensure our results are viewed within the broader perspective of our goals and strategy.”
Natural catastrophe losses net of reinsurance and reinstatement premiums were $761.1 million for the full year, while the property and casualty operations’ combined ratio, the proportion of premium dollars spent on claims and expenses, was 108.2 percent for the quarter and 107.5 percent for the full year.
XL wrote more business in 2011, with gross premiums written increasing to $6.9 billion from $6.26 billion in 2010. XL said the 10.2 percent increase was driven by select new business, favourable pricing and foreign exchange movements.
During the year, the company purchased 31.7 million shares for $665.5 million at an average price of $21.03 per share, which was accretive to fully diluted book value per share by 75 cents.
S&P commented last night: “Although XL’s reported combined ratio is somewhat above our expectation for 2011 of 103 percent to 105 percent, these catastrophe losses were not outside its stated risk thresholds and XL does not appear to be a negative outlier relative to its peers.
“More importantly, excluding the goodwill impairment, XL would have reported a modest amount of net income for the year.”
Mr McGavick added: “In 2011, XL made significant progress executing our strategy and, although our actions have not yet taken hold in our financial performance, we are confident in the path we are on.”