XL Group $1.5bn Q3 nat cat loss alleviates capital concerns: Morgan Stanley

XL Group’s reported preliminary third-quarter catastrophe loss estimate of $1.48 billion alleviates recent investor concerns about an outsized loss from XL and any concerns about capital raise needs, according to an Oct. 11 Morgan Stanley analyst note.

The total loss amount equates to about 10 percent of book value, a manageable hit, according to the analysts. XL Group had more than $3 billion in cash sitting on its balance sheet at the second quarter of 2017.

The key debate now remains cantered on the level and extent of a reinsurance pricing turn, and implications on reinsurers, Morgan Stanley noted. “We're a bit more optimistic than others,” the analysts said. They pointed to record industry losses in the quarter, impacting industry earnings and eroding reinsurance capital. At the same time, reinsurance property cat pricing is at pre-9/11 levels, and possible tie-up of alternative capital going into 1/1 renewals may also support pricing, the analysts said.

“Regardless of who's right on the level of reinsurance pricing in 2018, reinsurers should benefit from an end to declining rates, at worst,” the analysts commented.

“We think XL is poised to separate from the reinsurer pack, reflecting continued execution on integration goals and improved underwriting margins. These should lead to return on equity (ROE) expansion in 2018, which should only be bolstered by an improved rate environment.”

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