We are downgrading
XL Group plc
) to Neutral from Outperform as its underwriting profitability
was impacted by cat losses. The stock carries a Zacks Rank
GLOBAL INDEMNTY (GBLI): Free Stock Analysis
HCI GROUP INC (HCI): Free Stock Analysis
EVEREST RE LTD (RE): Free Stock Analysis
XL GROUP PLC (XL): Free Stock Analysis Report
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Why the downgrade?
XL has substantial exposure to losses resulting from natural and
man-made disasters and other catastrophic events. Underwriting
profit declined 28.8% year-over-year in the second quarter with
combined ratio deteriorating 300 basis points. The downside
resulted from catastrophe losses, which included flooding in
Europe, Argentina and Canada, and tornadoes and hailstorms in the
Net investment income at XL Group has been on a declining trend
for the past few years, and the second quarter was no exception.
It experienced lower cash outflows from the investment portfolio
and unfavorable foreign exchange movements affecting net
investment income. With performance closely linked to credit
markets, the exposure to these assets can further cause
volatility in investment earnings.
Additionally, XL Group's operating expenses have been on a rising
trend over the last few years.
On a positive note, XL Group's second quarter earnings breezed
past the Zacks Consensus Estimate as well as year-ago earnings.
Increase in affiliate earnings was offset by higher level of
catastrophe losses inducing flat year-over-year comparison.
However, the bottom line increased year-over-year due to lower
share count. XL Group has successfully maintained the trend of
delivering positive earnings surprises. The reported quarter
marked the sixth consecutive quarter of positive surprise.
Nevertheless, based on the company's conservative underwriting
practices and repositioned P&C portfolio, we expect XL Group
to fare well going forward. XL Group continues to enhance
shareholder value through share buybacks and dividend hikes.
Other stocks to consider
Property and casualty insurer
Everest Re Group Ltd
Global Indemnity plc
HCI Group, Inc
) carry a Zacks Rank #1 (Strong Buy) and are worth considering.