Will XL Group (XL) Q2 Earnings Suffer From Catastrophe Loss?

XL Group plc (NYSE:XL) is set to report second-quarter 2016 results on Jul 27, after the market closes. Last quarter, the company posted a negative earnings surprise of 30.61%. Let’s see how things are shaping up for this announcement.

Factors to be Considered this Quarter

XL Group has likely witnessed a rise in operating expenses in the to-be-reported quarter, which in turn, might restrict operating margin expansion. Also, the company might experience a decline in net investment income in the second quarter owing to lower reinvestment rates.

Further, the company has projected pre-tax catastrophe loss of $240 million, net of reinsurance and including reinstatement premiums, in the second quarter. The wildfire in Canada, flood in Europe, earthquakes in Japan and Ecuador and hailstorms in the United States were primarily responsible for the estimated loss. We expect the massive catastrophe loss to hurt the company’s upcoming earnings.

Reinsurance and Insurance segments have likely incurred catastrophe losses of $140 million and $100 million, respectively. These in turn will weigh on underwriting results.

However, the company has likely witnessed an increase in its net premiums earned in the to-be-reported quarter. Moreover, XL Group’s property and casualty operations have likely experienced a rise in gross premiums written in the quarter.

With respect to surprise trend, the company delivered a negative earnings surprise in two of the last four quarters with an average miss of 14.30%.

Earnings Whispers

Our proven model does not conclusively show that XL Group is likely to beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: XL Group has an Earnings ESP of -42.31%. This is because the Most Accurate estimate is pegged at 15 cents, while the Zacks Consensus Estimate stands at 26 cents.

Zacks Rank: XL Group carries a Zacks Rank #5 (Strong Sell).

We caution against Sell-rated stocks (Zacks Rank #4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies from the insurance industry that you may want to consider as these have the right combination of elements to post an earnings beat this quarter:

The Allstate Corporation (NYSE:ALL) has an Earnings ESP of +1.89% and a Zacks Rank #3. The company is set to report second-quarter earnings on Aug 3.

Cigna Corp. (NYSE:CI) has an Earnings ESP of +1.67% and a Zacks Rank #3. The company is set to report second-quarter earnings on Aug 4.

Manulife Financial Corporation (NYSE:MFC) has an Earnings ESP of +2.94% and a Zacks Rank #3. The company is expected to report second-quarter earnings on Aug 4.

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