Avoid XL Group (XL), Add These 3 Insurance Stocks Instead

XL Group Ltd (NYSE:XL) has been witnessing downward revisions over the last 30 days. The Zacks Consensus Estimate of a loss of $1.41 for 2017 is worse than the loss of $1.11 per share, expected 30 days back. For 2018, it moved down by a cent over the same time frame. In fact, last quarter, XL Group failed to beat estimates.

Shares of XL Group have gained 4.7% year to date, lagging the industry’s growth of 11.8% as well as the S&P 500’s 15.8% rally.

The stock carries a Zacks Rank #5 (Strong Sell) with an unimpressive Growth Score of F. Back-tested results show that stocks with a Growth Score of A or B, when combined with a bullish Zacks Rank #1 (Strong Buy) or 2 (Buy), effectively outperform other stocks.

The third quarter was bruised by the unprecedented occurrence of three major hurricanes and two Mexican tremors that wreaked havoc and hampered underwriting profitability. Wildfires in California at the onset of the fourth quarter is also estimated to weigh on underwriting results.

Being a property and casualty insurer, XL Group also bore the brunt of these catastrophe events and its underwriting results have severely taken a beating.

The company has been witnessing catastrophe loss over the last few quarters. In fact the company incurred underwriting loss in the first three quarters of 2017 versus profit incurred in the year-ago period. Combined ratio — indicative of the underwriting profitability — deteriorated.

XL Group has also been witnessing increasing expenses, weighing on operating income expansion and thus inducing volatility to the bottom line. The company expects expenses to be about $1.77 billion in 2017.

Return on equity, a measure of profitability, has been declining over the last few years. Return on equity in the first nine months was -4%, declining from 8.8% in 2014. On the other hand, leverage ratio has been deteriorating. It increased to 27.8% as of Sep 30, 2017 from 14.5% as of Dec 31, 2014.

Amid all the bad news emanating from catastrophe occurrences, there is still a silver lining of hope. Insurers will now brace up for price increase that remained flat owing to a not-so-active catastrophe environment. Prudent underwriting practices should cushion underwriting results.

Also, the gradually improving interest rate environment is aiding progress in investment results for insurers, denoting a major component of the top line. The Federal Reserve has hiked rates three times since December 2016. Yet XL Group’s net investment income has decreased 3% through the first three quarters. Investment yields remained low owing to lower reinvestment rates.

Nonetheless, investors are pinning hopes on December 2017 FOMC meeting for another hike. The Fed had announced intention for three rate hikes each in 2017 and 2018.

Choosing the Stocks

There are other attractive stocks in the property & casualty insurance industry that may not be as big a name as XL Group but promise greater returns.

We have boiled down to three other stocks with potential to enhance one’s portfolio. We refine our search using the favorable Zacks Rank, northbound estimate revisions, VGM Score and growth projections. The VGM Score of A or B coupled with Buy-ranked stocks is the best deal to offer.

Birmingham, AL-based Infinity Property and Casualty Corp. (NASDAQ:IPCC) provides personal automobile insurance products in the United States. The company sports a Zacks Rank # 1 with a VGM Score of B. The company delivered positive surprises in three of the last four quarters with an average beat of 300.65%. Infinity Property is witnessing upward estimate revisions — up 41.4% for 2017 and 6.3% for 2018, respectively, — over the last 30 days. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for 2017 and 2018 reflects a year-over-year improvement of 16.4% and 26.6%, respectively.

Shares of Infinity Property have rallied 22.6% year to date, outperforming the industry, S&P 500 and XL Group’s gain.

Santa Ana, CA-based First American Financial Corp. (NYSE:FAF) provides financial services. The company has a Zacks Rank #2 and a VGM Score of B. First American Financial is witnessing upward estimate revisions — up 2.4% for 2017 and 2.1% for 2018, respectively — over the last 30 days.

The Zacks Consensus Estimate for 2017 and 2018 reflects a year-over-year improvement of 9.8% and 6%, respectively.

Shares of First American Financial have surged 49.2% year to date, outperforming the industry, S&P 500 and XL Group’s gain.

Marietta, PA-based Donegal Group Inc. (NASDAQ:DGICA) provides property and casualty insurance to businesses and individuals in the Mid-Atlantic, Midwestern, New England and Southern states. The company has a Zacks Rank of 2 and a VGM Score of A. Donegal Group is witnessing upward estimate revisions — up 32.7% for 2017 and 8.7% for 2018, respectively — over the last 30 days.

The Zacks Consensus Estimate for 2018 reflects a year-over-year improvement of 92.3% though the same for 2017 is estimated to decrease 40.9% year over year.

Shares of Donegal Group have lost 2.1% year to date, underperforming the industry, S&P 500 and XL Group’s gain.

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XL Group Ltd. (XL): Free Stock Analysis Report

First American Corporation (The) (FAF): Free Stock Analysis Report

Donegal Group, Inc. (DGICA): Free Stock Analysis Report

Infinity Property and Casualty Corporation (IPCC): Free Stock Analysis Report

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Zacks Investment Research