XL Q2 Net Income Down; McGavick Warns of Possible Libor Losses Going Forward

NU Online News Service, Aug. 8, 2:20 p.m. EDT

XL Group reports 2012 second-quarter earnings 15 cents above consensus estimates, but still 5.3 percent lower than last year. Operating income was also down 8.7 percent compared to the same period a year ago.

Though the second quarter experienced solid underwriting results, lower investment yields and income from operating affiliates offset the positive impact. However, company officials say some of the decline stemmed from what they termed “targeted non-renewal.”

The 12.2 percent decline in net investment income on the P&C portfolio in the second quarter was linked to lower yields as well as cash outflows from the portfolio.

But Michael McGavick, XL Group CEO, said the results have XL management “greatly encouraged.”

“Make no mistake,” he said on a conference call, “we are not yet where we want to be across the board, but our actions are taking hold and we are beginning to see emerge the target book we have discussed with you before.

“So while our work continues in absolute and relative terms, this is a very solid quarter,” he stated.

At the same time, he said XL Group's reduced presence in the crop-insurance market should keep the impact of the current severe drought conditions on next quarter's results minimal. He also said the company continues to see improvement in pricing trends “across the vast majority of our lines, especially in insurance,” and that this progress “has accelerated through the quarter.”

But he cautioned that regulatory and civil action regarding mispricing by banks on their libor rates could impact results going forward. McGavick acknowledged that XL is “writing relevant coverage both in the U.S. and abroad, unfortunately the reality is it's just too early to tell how this will play out.”

In response to a question regarding the scope of the potential impact, McGavick said, “Because it's a developing event, it will take some time for us to come up with any kind of precise loss estimate.”

He said XL Group is monitoring the situation closely, but added that the uncertainty about potential liability begins with the lack of clarity around how many of the institutions engaged in the steadying of libor were not following established guidelines.

“That uncertainty is amplified by the inability at this point in time to establish a specific culpability of a particular insured,” he said.