Credit Suisse is upgrading span style=”font-weight: bold;”XL Capital (NYSE:XL)/span to Outperform from Neutral while raising target to $18 (prev. $13).br /div style=”text-align: justify;”br /Analyst notes they are upgrading XL for 2 reasons:br /br /span style=”font-weight: bold;”- 1. Improving fixed income markets should lead to/spanspan style=”font-weight: bold;” a strengthening capital position./span CSFB believes it is unlikely that the company will raise capital even if fixed income markets deteriorate significantly.br /br /span style=”font-weight: bold;”- 2. Firm believes that XL’s Franchise is stabilizing with lower top line declines going forward and underwriters continuing to maintain pricing discipline./span In their view, a stronger capital position and stabilization in the franchise could lead to the removal of the negative ratings outlook by rating agencies in 6-12 months which should lead to an improvement in valuation from distressed levels as investors focus more on book value growth rather than the company’s survival. As fixed income markets improve over the longer term, XL Capital’s book value should grow 50% due to reversal of unrealized losses, significantly faster than other less leveraged property casualty insurance companies.br /br /span style=”font-weight: bold;”CSFB increased their price target to $18./span This is mainly driven by a higher valuation as investors get more comfortable with XL’s capital position and franchise stability. They acknowledge that XL is a riskier stock than many Pamp;C and life insurance peers and their price target implies the stock can trade at 60% of 1Q10 book value excluding AOCI, a significant discount to the median Pamp;C and life insurance stocks which trade at 86% and 67% of BVPS ex AOCI respectively. With the capital position stabilizing and the risk of a capital raise more remote, they believe investors will value the stock based on the burned down value of book value including AOCI.br /br /a onblur=”try {parent.deselectBloggerImageGracefully();} catch(e) {}” href=”http://4.bp.blogspot.com/_YzBo7Kz5y1M/SlR-TbOIlrI/AAAAAAAAAGg/0PxQHVxjVz4/s1600-h/XL_AOIC.GIF”img style=”margin: 0px auto 10px; display: block; text-align: center; cursor: pointer; width: 400px; height: 242px;” src=”http://4.bp.blogspot.com/_YzBo7Kz5y1M/SlR-TbOIlrI/AAAAAAAAAGg/0PxQHVxjVz4/s400/XL_AOIC.GIF” alt=”" id=”BLOGGER_PHOTO_ID_5356044729040017074″ border=”0″ //abr /span style=”font-weight: bold;”50% upside to book value from potential reversal of unrealized losses:/span The company has $4 Bn or $11.70 per share in net unrealized losses on the balance sheet, or 78% of GAAP book value. CSFB estimates that $1.4 Bn could turn into realized losses over the life of the investments, implying that book value could grow a further $7.50 per share or 50% from 1Q09 levels as unrealized losses reverse over time.br /br /span style=”font-weight: bold;”Excess liquidity:/span Firm estimates the company has $2.4 Bn of excess cash and short term investments on the balance sheet which they believe is used to support the $4.7 Bn in risk assets. This implies the company will not be forced to sell risk assets at distressed prices. Also, as the risk assets roll off or recover in market value, they believe the company can put the excess cash to work in higher yielding investments which should help EPS by $0.07 per share.br /br /span style=”color: rgb(255, 0, 0);”Notablecalls: /spanThe sentiment in XL is getting stronger by day. Yesterday we had FBR Capital Markets team raise their target on XL to $17 from $12. The stock gapped up but failed to see any follow-through. I think CSFB’s call is more powerful and will help to retrace at least some of yesterday’s losses, if not more.br /br /span style=”font-weight: bold;”I think a 6-7% move may be in cards for XL today./spanbr //divdiv class=”blogger-post-footer”img width=’1′ height=’1′ src=’https://blogger.googleusercontent.com/tracker/29297569-5332832511148423975?l=notablecalls.blogspot.com’//div

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