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XL Group Releases Preliminary Catastrophe Loss Statistics

Zacks

XL Group Ltd XL has recently announced preliminary net catastrophe loss estimates for the fourth quarter of 2017 as well as its initial assessment of the recently revised tax cut.

XL Group anticipates net catastrophe loss of about $45 million, stemming from the recent wildfires in Southern California and another $20 million from other weather-related events. These estimated losses will be evenly divided between the company’s Insurance and Reinsurance segments.

The property and casualty (P&C) insurer has projected total pre-tax catastrophe loss, net of reinsurance, reinstatement and adjusted premiums plus redeemable non-controlling interest amounting to $315 million to noticeably impact the company’s fourth-quarter results. The abovementioned loss estimate comprises the previous projection of $250 million pertaining to the October 2017 Northern California wildfires and other cat events.

These losses are expected to put a considerable dent in the company’s underwriting results, rendering volatility in the company’s earnings. Throughout the first nine months of 2017, the company suffered underwriting loss of $909.1 million, which compared unfavorably with the underwriting profit of $431.9 million. Moreover, the company’s combined ratio will take a hit on such losses. Combined ratio for the first nine months of 2017 came in at 111.6%, deteriorating 1770 bps from the same period in 2016.

Among other P&C insurers that have released their respective fourth-quarter catastrophe loss estimates, Arch Capital Group Ltd.’s ACGL projects pre-tax catastrophe loss comes in between $60 million and $75 million while RenaissanceRe Holdings Ltd. RNR expects to incur a catastrophe loss of $90 million from the California wildfires. This apart, Chubb Limited CB estimates pre-tax catastrophe loss of about $320 million ($249 million after-tax), stemming from natural catastrophes including California wildfires.

Per the Tax Cuts and Jobs Act of 2017, effective from January 2018 onward, the corporate tax rate was slashed to 21% from the pre-existent 35%. As a result, the Zacks Rank #5 (Strong Sell) P&C insurer will incur a charge of $98 million in the fourth quarter of 2017 due to revaluation of its net Deferred Tax Asset. It is important to note here that the charge will not have a material impact on the company’s fourth-quarter operating net income.

Shares of XL Group have lost 10.8% since the onset of the fourth quarter of 2017 against the industry’s increase of 6.8%. However, we expect the company’s focus on its insurance and reinsurance business lines, resulting in the best return on capital over pricing cycle along with a solid capital position to turn the stock around in the near term.


XL Group is expected to report fourth-quarter results on Feb 7. However, our proven model does not conclusively show that the stock is likely to beat on earnings this season. This is because it carries a bearish Zacks Rank of 5, which lowers the predictive power of ESP and also has an Earnings ESP of 12.26%, which leaves the combination inconclusive.

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