XL Group Cut To Sell At Deutsche Bank, Analysts Hold Forecasts Far Below Consensus

XL Group plc (NYSE: XL) has fallen 12.43 percent year-to-date, significantly off its one-year movement downward of just 4.03 percent.

The picture doesn't look much prettier when zoomed in on the week or day, with 3.68 percent and 1.12 percent falls, respectively.

Earlier in February, the company reported broadly disappointing Q4 and full-year 2015 results. Negatives from the report included:

• $1.95 million in operating net income for the full year;
• Natural catastrophe pre-tax losses of $107.8 million for the quarter and $213.2 million for the full year (compared to $3.17 million and $113.3 million from the prior year quarter and year)
• Quarterly earnings from affiliates came in at almost half of the previous year ($14.7 million compared to $33.5) and share buybacks totaled 4.7 million shares for the quarter and 12.4 million for the full year.

On Tuesday, Deutsche Bank issued a research report, slashing the rating on XL Group from Hold to Sell, cutting the price target 15 percent from $34 to $40 and lowering EPS from 3 to 2.35.

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Changes: EPS, PT

Regarding XL's EPS forecast, Deutsche Bank projects a lower EPS result than the consensus, commenting, "We are forecasting EPS results of $2.35, $3.00 and $3.25 for 2016, 2017 and 2018 compared with consensus expectations of $3.20, $3.99 and $4.59." The firm confirmed, "We expect significant earnings disappointments."

In regards to the price target cut, Deutsche Bank noted, "Our price target drops to $34 as we shrink the multiple on which we base our target price to 1.1x book from 1.3x."

The analysts continued, "We believe this is suitable for what we view as a normalized 10 percent ROE business in an average catastrophe year."

Justification For The Changes

According to the report, "We believe consensus earnings continue to hope for improving loss ratios that may not occur."

Furthermore, the company cited the merger of Catlin with XL as disappointing investors, "We believe that 2014 results may've skewed investor sentiment into viewing Catlin results as better than the underlying trend. Insurance loss ratios were already deteriorating and Reinsurance loss ratios, in retrospect, seem unsustainable when comparing to uncommonly good 2014 results to prior years."

Potential Risks To Ratings

Deutsche Bank did add an aside to its recommended changes, "The biggest risk to our rating is represented by a lack of catastrophe activity which would grow earnings and book value ahead of our expectations, while a major event would seriously upend any one quarter's results."