We have reiterated our Neutral recommendation on XL Group plc (XL) as we expect the sustained low interest rate environment and catastrophe loss to weigh on the performance of the company.
The Zacks Consensus Estimate for the fourth quarter is pegged at a loss of 33 cents, representing a year-over-year decline of 31.5%.
XL has substantial exposure to losses resulting from natural and man-made disasters and other catastrophic events. Given the impact of Hurricane Sandy in the fourth quarter, the industry is likely to incur an approximate loss of $25 billion. XL expects its preliminary net loss from Sandy to be $350 million, of which 60% is to be borne by the reinsurance segment. On account of huge cat losses, underwriting profit for XL is expected to decline.
Net investment income at XL Group has been on a declining trend for the past few years, and the third quarter was no exception. The performance of the investment portfolio is dependant on the volatile credit market environment. The exposure of assets in these markets might have an adverse impact on investment earnings. Also, any loss from the investment portfolio will depreciate the book value. Management expects net investment income to remain constrained due to the persistent low interest rate environment.
However, these headwinds are countered by several positives. XL Group remains focused on those lines of business within its insurance and reinsurance operations that provide the best return on capital over the pricing cycle. Given its strong international exposure and a diversified suite of product offerings, we believe that the company is well positioned to write higher premiums to propel top-line growth, going forward.
XL Group is also taking initiatives to expand its operations. Following the final approval, the company established its insurance operations in Brazil.
XL Group continues to enhance shareholders’ value through dividend payment as well as share repurchase. In the third quarter, the company spent $125 million to buy back 5.3 million shares. The company was left with $400 million under its authorization. The company, with a quarterly dividend payout of 11 cents, offers a dividend yield of 1.77%.
Riding on the solid performance in the first three quarters, the full year Zacks Consensus Estimate is currently pegged at $1.58 per share. It carries a Zacks #3 rank, translating into a short term ‘Hold’ rating. It closely competes with ACE Limited (ACE), which also carries the same Zacks Rank.
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