Thoughts

XL Getting Sold Too Hard


The market is overreacting to an announcement.

XL is down because management said it would likely, for the time being, "pause" in its buyback program, as it might be more profitable (given the potential for rising premium rates) to write more new business.

Lousy ISM Non-Manufacturing Data


This was the lowest print since April 2008.

The ISM Non-manufacturing Index stunk up the joint, coming in at 52.8% vs. 57.3% last month. The consensus forecast was 57.5%.

This was the lowest print since April 2008.

Most conspicuous was the large decline in the new orders index, which fell to the lowest level since December 2009.

Stated simply, this index is signaling a weakening domestic economy.

XL:

* Despite outsized catastrophe losses, the drop in book value was only 2.5%, to $29.03 per share.

* Cash and investments are 3.3x equity, which will drive strong returns in the quarters ahead.

* XL has more than $4 billion of excess capital, nearly three-fourths of which will be used to buy back stock. During the quarter the company purchased $165 million of stock (7.3 million shares at $22.83 a share). Share purchases, in light of the current 17% discount to book value, are importantly profit-accretive, and $690 million is still outstanding in the company's buyback program.

* Property and casualty insurance reserves are considerably redundant. Reserve releases should buoy earnings in the years ahead.

* Premium growth was 9.2%, well above expectations, as new business initiatives have improved, renewals were strong and reinsurance results were better.

* Overall pricing is starting to improve. ("The conversation has changed.")