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XL underestimated its exposure to catastrophes, says Deutsche Bank

Deutsche Bank analyst Joshua Shanker has lowered his investment opinion on XL Group Ltd to "sell" from "hold," saying the company may be underestimating its exposure to recent catastrophes.

XL's after-tax loss estimate of $1.35 billion for the third quarter is based on its expectations that industry losses will be in the range of $75 billion to $90 billion, the analyst said. The company's peers, however, forecast higher industry-wide losses, he said, adding that XL could book additional losses of $150 million in the fourth quarter.

Raising questions over its risk management, the analyst said the insurer's loss projection exceeds its estimates of probable maximum losses for a 1-in-100-year North Atlantic wind event by 26%.

"If XL is leaving itself open to a series of events that exceed its single-event [probable maximum losses] on a not infrequent basis, we see the company as having a low probability of building book value over any multi-year period," Shanker wrote.

While CEO Mike McGavick expects property and casualty prices to climb, the analyst said such pricing improvement could be limited to property-catastrophe and coastal property risks. He raised doubts over the insurer's ability gain much from higher prices, saying the company is "over-exposed to those risks and will have to write less of it in 2018."

Shanker lowered his target price on the stock to $37.00 from $42.00.