XL Capital Ltd. (XL) last week announced its plans to expand its international operations in China. XL has received approval from the China Insurance Regulatory Commission (CIRC) to start preparatory work to set up a Property and Casualty (P&C) company in China.

The China Insurance Regulatory Commission is an agency of China authorized by the State Council to regulate the country’s insurance products and services market and maintain legal and stable operations in the insurance industry.

XL has got permission from CIRC to prepare for China operations till the second half of 2010. After the initial preparations are done, if the company receives license, it will establish an insurance subsidiary that will serve both local and international corporations in China, as well as its existing clients with operations in China.

Year till date, gross premium generated from the P&C operations was $4.9 billion, down from $6.4 billion last year, with a combined ratio of 92.8% compared to 96.9% in the same period last year.

A substantial portion of the company’s P&C insurance business and a majority of its life reinsurance business are carried on internationally, thereby leaving it vulnerable to foreign exchange fluctuations. During the third quarter of 2009, the company suffered a loss of $16.8 million in this regard, negatively affecting results.

XL has had a representative office in Beijing since 2006, dedicated to deepening the company’s understanding of the China market.

During the third quarter, the company reported earnings of 89 cents, up from 39 cents last year. Net written premiums fell 4.4% year-over-year to $1.3 billion. Premium volumes have been negatively impacted by the global economic conditions, reduction in mergers and acquisitions, exit from certain (unprofitable) lines of business and the ongoing efforts of risk managers to reduce their concentration of risk (limits) with all insurers.

XL Capital has also been working towards developing a reliable infrastructure that will improve operational efficiency, standardize processes and optimize costs. Though we expect net premium written by the company to remain under pressure, the above measures will help it to maintain its profitability. Therefore we maintain a Neutral rating on the shares for now.

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