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XL and ACE report contrasting fortunes

Bermudian XL Capital has reported fourth quarter earnings in line with last month's sub-prime loss fuelled profits warning, but analysts continue to focus on uncertainty surrounding the troubled (re)insurer.

In contrast compatriot ACE Limited, which was launched in the mid-'80s alongside XL, impressed with consensus beating earnings.

XL - downgraded last month by Fitch Ratings, Moody's and, most brutally, AM Best after announcing fourth quarter charges relating to the sub-prime fallout - booked a fourth quarter net loss of $1.06bn, or $2.01 a share.

The company confirmed after-tax charges of $1.5bn related to "credit market conditions", at the lower end of the pre-announced range of $1.5-1.7bn.

Breaking down the charges, XL revealed $915mn of the losses were linked to its relationship with Security Capital Assurance (SCA), the bond insurer it holds a 46 percent stake in after spinning it off in 2006.

XL took the hit after effectively deciding against bailing out SCA, which was subsequently downgraded from AAA to A by Fitch Ratings.

The remainder of the charges stem from $149mn of net realised and net unrealised losses on derivative financial instruments, and $471mn of realised losses on its investment portfolio.

For the full year, XL reported net profits of $360.4mn, or $2.01 a share, compared to $1.72bn or $9.60 a share in 2006.

XL said its combined ratio for the fourth quarter for property casualty business was 93.3 percent, and 88.8 percent for the year.

XL president, CEO and acting chairman Brian O'Hara said the fourth quarter charges, while disappointing, "have reduced uncertainty and increased investors' ability to recognise the strength of XL's diversified and global insurance and reinsurance franchise".

But Bear Stearns analyst David Small said the (re)insurer's core business was "weaker than we have seen from others thus far this earnings season".

Small raised a number of concerns which he said the earnings release did not address, including the likely impact of the AM Best downgrade on XL's insurance business, and the lack of disclosure of the (re)insurer's financial institutions directors' and officers' (D&O) exposures to the sub-prime fallout.

In a recent note, Small had suggested that, as a leading writer of management and professional lines business, the Bermudian has the greatest potential loss exposure as a percentage of current book value, with $1.1bn of exposure equating to 9.7 percent of book value.

The comment came as the analyst raised his estimates for industry losses in the lines from $3bn to up to $9bn as notifications and class action lawsuits continue to mount.

Small also noted that XL's combined ratio had increased in its insurance business to 101.7 percent in the fourth quarter, driven by an increase in the expense ratio.

"Additionally, investors should question why XL is already posting an accident year combined ratio over 100. Perhaps, XL is already seeing D&O losses," he suggested.

ACE, meanwhile, reported record full year 2007 net income of $2.58bn - up 12 percent on the prior year, although fourth quarter net income of $572mn was down 14 percent on the comparable period of 2006.

The company booked combined ratio of 88.1 percent for the quarter - almost flat with the 88.2 percent in the fourth quarter of 2006 - and 87.9 percent for the year, down from 88.1 percent in 2006.

Net written premiums were down 1.4 percent on the quarter and 0.4 percent on the year.

ACE chairman and CEO Evan Greenberg said the company performed well in "all areas", with the financial markets crisis having a "relatively modest impact" on results.

Earnings per share of $2.05 for the fourth quarter were ahead of analysts' consensus of $1.90 a share.

Small described the quarter as "solid" for ACE.

"We believe ACE is better positioned entering 2008 than many others, as it has a more diversified business mix, with a larger percentage generated from A&H, which is not prone to the same cyclicality as the P&C cycle," he said.

"Additionally, we believe ACE's balance sheet is solid on both the asset and liability side. On the liability side, it is worth noting that ACE was able to generate strong 2007 ROEs without releasing reserves, as most of their competitors have, giving ACE an added earnings cushion entering the soft cycle," Small concluded.

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