XL Group (XL) May Incur $240 Million Q2 Catastrophe Loss

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XL Group plc XL projects pre-tax catastrophe loss of $240 million, net of reinsurance and including reinstatement premiums, in the second quarter. The losses stemmed from the wildfire in Canada, flooding in Europe, earthquakes in Japan and Ecuador and hailstorms in the United States. The second-quarter estimate is significantly higher than the catastrophe loss incurred by XL Group in the first quarter.

XL Group stated the Reinsurance segment will bear a loss of $140 million while the Insurance segment will digest a loss of $100 million. Of these, the wildfire in and around Fort McMurray, Alberta contributed $120 million to the loss to be fully incurred by the Reinsurance segment.

Being a property and casualty insurer, XL Group is exposed to losses from natural disasters. This in turn affects its underwriting results. The cat loss incurred will weigh on underwriting profitability and combined ratio in the second quarter. In the last quarter too, the company had to incur cat loss of $52.8 million and combined ratio deteriorated 260 basis points over the prior-year quarter.

For the insurance industry, the expected loss is more than $16 billion.

The Zacks Consensus Estimate for XL Group's second-quarter earnings is currently pegged at 57 cents, translating into a year-over-year decrease of 32%. We expect the estimate to move down as analysts incorporate the impact of catastrophe loss in their estimates.

XL Group is scheduled to release second-quarter results on Jul 27. Our proven model does not conclusively show that the company will beat on earnings. This is because XL Group has an unfavorable Zacks Rank #5 (Strong Sell) and an Earnings ESP of -14%.

Given that the property and casualty insurance industry is plagued by the vagaries of catastrophe events, insurers are coming up with second-quarter catastrophe loss estimate. While Chubb Limited CB projects catastrophe loss of $315 million stemming from various events including U.S. weather incidents, the Japanese and Ecuadorian earthquakes, the Fort McMurray wildfire and the European floods, Kemper Corporation KMPR estimates loss of about $52 million primarily from Texas hailstorms. Also, Aspen Insurance Holdings Ltd. AHL expects second-quarter catastrophe loss of around $65 million largely due to wildfires in Alberta.

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