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XL profits down on China blast, merger costs

Posted On: Oct. 27, 2015 12:00 AM CST

XL Group P.L.C. on Monday reported a drop in third-quarter earnings of more than 60% as it absorbed costs from its integration with Catlin P.L.C. and losses from August's port explosion in Tianjin, China.

The three months ended Sept. 30 marks the first full quarter of XL's combined operations with Catlin under the banner XL Catlin.

The Dublin-based insurer recorded profits of $27.3 million in the third quarter, a 62.3% decrease from the year-ago period, XL said in a statement.

Net premiums written increased 69.5% to $2.09 billion, in the third quarter.

“The business itself is performing as expected or better, and we are incredibly excited by the additional opportunities we are seeing and the fundamental strength of this new company,” XL CEO Mike McGavick said Monday during a conference call with investment analysts.

However, market conditions and catastrophe losses weighed on the bottom line, he said.

Integration costs associated with the Catlin merger totaled $55.2 million in the quarter, and losses net of reinsurance and reinstatement premiums from the Tianjin explosion totaled $95.7 million, according to the statement.

Natural catastrophe losses tallied $30.8 million compared with $29.8 million in the year-ago period.

“This is a relatively light cat quarter, but offsetting that we did experience the Tianjin explosion,” Mr. McGavick said in the conference call.

Nomura Securities International Inc. analyst Cliff Gallant, based in San Francisco, said in a research note published Tuesday that despite the Tianjin “disappointments,” strong premium volumes and lower operating expenses “drives our confidence that XL's (returns on equity) are on track for solid improvement in 2016 and 2017 when the benefits of the Catlin combination are realized.”

XL's Integration with Catlin

During the conference call, Mr. McGavick also shed light on how the cultures of the organizations are fitting together.

Leading up to the merger, “the biggest concern we had was, 'were these cultures really compatible?' ” Mr. McGavick said of his pre-merger discussions with Stephen Catlin, former Catlin CEO and now executive deputy chairman of XL Catlin.

“I think in the end, we're discovering the answer to that is very much yes,” Mr. McGavick said.

“We were both definitely underwriting cultures, and the disciplines that come with being great underwriters is a healthy dose of skepticism (and) a real regard for numbers and analytics.”

At the same time, Mr. McGavick acknowledged that Catlin had “an unusual level of family feel within the business,” which he said was rare for a company of Catlin's size, and advised Catlin colleagues that the “family feel” wasn't likely to survive the merger.

“The size and complexity now is a bit greater, and it's more difficult to retain that exact feeling,” he said.

Despite that, the number of workers leaving the company voluntarily is only “modestly” above what it has been historically, he said.