XL Looks Cheap; Bermuda Ties May Attract Offers

By Supantha Mukherjee and Sweta Singh | September 15, 2010

It’s cash-rich, led by a CEO with political aspirations, and was last year’s top S&P 500 performer.

Pressured by soft pricing and slow premium growth, (re)insurer XL Group is also undervalued, analysts say, and a prime target for a bidder with $10 billion to spend and an eye on expanding into Bermuda, the world’s biggest offshore reinsurance centre.

Canada’s Fairfax Financial and Berkshire Hathaway, led by billionaire investor Warren Buffett, are among those cited by analysts as potential bidders, attracted by XL’s $31.7 billion investment portfolio.

More plausibly, large European reinsurance groups such as Munich Re, Swiss Re or Allianz — all sitting on billions of dollars in cash — could be potential suitors who recognize the value of a Bermuda platform.

“XL derives a lot of business from Bermuda and that might entice a large foreign reinsurer looking to enhance its platform by adding a Bermuda presence,” said Michael Paisan at Stifel Nicolaus.

With more than half its premium volume originating outside the United States, Ireland-headquartered XL offers geographic and product diversification, a favorable tax status, and a platform that can generate a materially higher return on equity with the right kind of partnership.

XL stock, which trades at just above $20, has an economic book value of $34. This means if the company were liquidated, its investors would pocket $8.70 more than its tangible book value, analyst Bijan Moazamio of FBR Capital Markets said.

“No insurer in our coverage universe has a larger gap between its economic BV and tangible BV than XL,” he said.

XL CEO Michael McGavick, 52, ran as a Republican candidate for the U.S. Senate in 2006, and is seen as a person motivated enough to sell up if the right offer comes along.

McGavick, who stands to make $16.6 million from a possible sale of XL, was key to turning around Seattle-based insurer Safeco, which was sold to Liberty Mutual at a big premium in 2008 just after he left the company.

McGavick took over at XL at a time when the reinsurer was hit hard by structured finance losses at majority-owned bond insurer Syncora Capital.

Analysts credit McGavick with turning around XL, whose shares jumped fivefold last year, while the S&P 500 index gained 29 percent.

“If given the right price, McGavick would certainly entertain offers,” said Paisan at Stifel Nicolaus.

XL declined to comment on the possibility of a takeover — one which analysts said could trigger consolidation in Bermuda, where pricing in the reinsurance sector is soft and business growth is slow.

“Acquisition offers the only potentially prudent means of growth in a softening pricing environment,” said Bill Yankusat Macquarie Research.

(Reporting by Sweta Singh in Bangalore, Editing by Ian Geoghegan)

Was this article valuable?

Here are more articles you may enjoy.