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Investors should look beyond ‘meaningless’ Q2 estimates

Analysts have advised investors to look beyond consensus estimates to underlying results as the sector heads for a second quarter earnings season hit by cat losses above what was modelled.

In a note, Barclays analyst Jay Gelb said: "Q2 consensus estimates for the P&C (re)insurers are essentially meaningless, in our view, based on the wide range of expectations.

"This situation stems from many unknowns in the latest quarter including substantial catastrophe losses, another decline in investment yields and otherwise volatile investment markets."

A number of companies have pre-announced cat loss estimates in the weeks before the earnings season, which is set to enter its busiest period in the coming days.

Gelb noted that among the P&C carriers he covers Allstate, Allied World, RenaissanceRe, Validus and American International Group had the widest spread in the range of Q2 earnings estimates - some of which had not been updated by other analysts to reflect pre-announcements.

"For the P&C (re)insurers, consensus earnings per share estimates for Q2 earnings don't matter, in our view. Instead, it will be increasingly important to analyse the underlying results, metrics and earnings drivers," he continued.

Bernstein's Josh Stirling said that Wall Street analysts had not lowered expectations sufficiently given the pre-announcements from carriers such as Chubb and XL.

"Though predicting cat losses for specific companies with any precision ranges from very difficult to impossible, the data points we have to date suggest to us the direction of travel is more likely for cat-driven misses than beats," he said.

"More fundamentally, we'd be looking past the cat-driven noise this quarter to focus on management commentary on pricing and competition across the broad P&C space," Stirling continued.

The analyst said there may be a short-term opportunity to "lighten up on the group or even short some names" in response to cat-induced earnings misses.

But he added that his long-term view on the sector had not altered materially as a result of elevated cat losses in the quarter.

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