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Cat Loss to Hurt XL Group Q3

Zacks Equity Research

XL Group plc (XL) provided its estimates for loss from catastrophes for the third quarter. According to the company, pretax loss from catastrophes in the third quarter of 2013, net of reinsurance and reinstatement premiums, will likely be approximately $60 million.

The Reinsurance segment of XL Group will incur majority of the estimated loss. Losses stemmed from the hailstorms in Germany and France in late July. The loss will thus be a drag on the underwriting results of the segment. The last quarter also experienced 28% decline in underwriting income.

According to media reports, reinsurance firm Swiss Re estimated industry loss from the cat event to range between $2 billion and $2.7 billion, while French reinsurer SCOR estimated the loss to be about EUR 3 million. Yet another catastrophe modeling firm, AIR Worldwide projected the industry to suffer as much as $2 billion in losses.

In the last reported quarter, XL Group’s underwriting profit declined 28.8% year over year with combined ratio deteriorating 300 basis points year over year. The downside resulted from catastrophe losses, which included flooding in Europe, Argentina and Canada, and tornadoes and hailstorms in the United States. We expect the third quarter also to face the brunt of catastrophes, which would weigh on its underwriting results.

Nevertheless, XL Group continues to deliver positive earnings surprises. The last reported quarter marked the sixth consecutive quarter of positive surprises. We expect the trend to continue riding on the strength of new business initiatives, pricing improvements across most lines, and conservative underwriting practices, among others. The Zacks Consensus Estimate for the current quarter is pegged at 45 cents, reflecting a year-over-year decline of 25%.

Currently, XL Group carries a Zacks Rank #3 (Hold). Better-placed property and casualty insurers Alleghany Corporation (Y), Cincinnati Financial Corp. (CINF) and CNA Financial Corporation (CNA), carrying a Zacks Rank #1 (Strong Buy), are worth considering.

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