XL XL Fleet Corp

We are downgrading XL Group Plc. (XL) to Underperform from Neutral given its significant exposure to catastrophe losses that continue to weigh on results of the company.

Also, a soft property and casualty environment will continue to restrict top line growth. Moreover, the current interest rate environment and exposure to the credit market will hurt investment income to some extent.

XL has substantial exposure to losses resulting from natural and man-made disasters and other catastrophic events. During the first quarter, the company reported an operating loss in the first quarter due to the Australian flooding in January, the New Zealand earthquake in February and the Tohoku earthquake in March.

Recently, XL estimated a preliminary net loss related to the storms that affected the Midwest and Southeast United States in April and May between $50 million and $75 million, net of reinsurance and reinstatement premiums. The company expects a majority of the loss to be attributable to XL's reinsurance segment.

Net investment income at XL Group has shown a declining trend for the past few years. The first quarter experienced lower U.S. interest rates on the property and casualty portfolio as well as cash outflows from the invested portfolio affecting net investment income.

Counting on the positives, XL Group remains focused on business lines within its insurance and reinsurance operations that provide the best return on capital over the pricing cycle. The company is also taking initiatives to expand its operations. Moreover, XL Group continues to enhance shareholder value through dividend payment as well as share repurchase.

The Zacks Consensus Estimate for the second quarter 2011 is 52 cents per share. For full years 2011 and 2012, the Zacks Consensus Estimates are $1.07 and $2.12 per share, respectively.

The quantitative Zacks #5 Rank (short-term Strong Sell rating) for the company indicates a downward pressure on the stock over the near term.

Based in Dublin, Ireland, XL Group is a leading global provider of insurance, reinsurance and financial risk solutions to enterprises and insurance companies. It competes with ACE Limited (ACE).

 
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