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Will Higher Premiums Drive XL Group's (XL) Q1 Earnings?

Zacks Equity Research
Updated

XL Group Ltd XL is slated to report first-quarter 2018 results on May 2 after the market closes. In fourth-quarter 2017, the company delivered a negative earnings surprise of 8.16%.

Let’s see, how things are shaping up for this announcement.

Factors to be Considered This Quarter

The P&C insurer is likely to witness premium growth in the to-be-reported quarter, fueled by higher premiums at both its Insurance and Reinsurance segments. Strong international exposure, expanded capabilities and diversified product offerings will likely fuel premiums. The consensus mark is pegged at $2.7 billion, translating into a 6.5% improvement from the year-ago quarter.

XL Group is projected to report higher net investment income in the quarter to be reported, driven by improved interest rates as well as better-than-expected reinvestment rates and portfolio management activities.

Improved net investment income and premiums are expected to have supported the company’s top line. In fact, the Zacks Consensus Estimate for the metric is pegged at $2.9 billion, representing a rise of 4.8% on a year-over-year basis.

The company is likely to have witnessed an increase in operating expenses this yet-to-be-reported quarter, mainly due to higher net loss and loss expenses incurred as well as claims and policy benefits. This in turn might restrict the operating margin expansion as well.
    
But the company assumes that a rise in expenses will be a fraction of business growth, thereby continuing to drive the operating expense leverage.  

As a property and casualty (P&C) insurer, XL Group is highly exposed to unpredictable weather-related events that result in substantial catastrophe loss. Therefore, the company might report cat loss in the soon-to-be-reported quarter, which is anticipated to impact the insurer’s results.
    
Nonetheless, the corporate tax cut, which lowered the tax rate to 21% from 35%, is expected to aid the companies’ bottom line and drive margin expansion. The Zacks Consensus Estimate for earnings in the to-be-reported quarter is pegged at 95 cents per share, reflecting an increase of a whopping 90% from the prior-year period.

XL Group Ltd. Price and EPS Surprise

 

XL Group Ltd. Price and EPS Surprise | XL Group Ltd. Quote

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

Zacks ESP: XL Group has an Earnings ESP of -5.80%. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.  

Zacks Rank: XL Group carries a Zacks Rank #4 (Sell), which lowers the predictive power of ESP. We caution against the Sell-rated stocks (4 or 5) going into an earnings announcement, especially when the company is seeing negative estimate revisions.
 
Stocks to Consider

Some stocks worth considering from the insurance industry with the right combination of elements to surpass estimates this time around are as follows:

American Financial Group, Inc. AFG is set to report first-quarter earnings on May 2. The stock has an Earnings ESP of +4.46% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.    

Cigna Corporation CI has an Earnings ESP of +0.62% and is a Zacks #3 Ranked player. The company is slated to release first-quarter earnings on May 3.

National General Holdings Corp. NGHC has an Earnings ESP of +5.59% and is a Zacks #1 Ranked player. The company is slated to release first-quarter earnings on May 7.

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Cigna Corporation (CI) : Free Stock Analysis Report
 
XL Group Ltd. (XL) : Free Stock Analysis Report
 
American Financial Group, Inc. (AFG) : Free Stock Analysis Report
 
National General Holdings Corp (NGHC) : Free Stock Analysis Report
 
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Zacks Investment Research