XL Group's (NYSE:XL) website describes that through its subsidiaries, it is a global insurance and reinsurance company providing property, casualty and specialty products to industrial, commercial and professional firms, insurance companies and other enterprises. Here is a quick breakdown of gross premiums earned by business segment to get a better sense of where the company makes its money.
Overview - Financial Strength and Stock Value
XL Group caught our eye because of its strong financials in terms of liquidity and management's handling of cash flows and to some extent the balance sheet. Using our scoring method to rate financial strength, the company scored 57.5 out of an average of 50 for their industry. The stock price also shows a good value when comparing it to book value (1.105) and earnings value (0.063) which we calculated by annualizing the last available quarterly earnings per share. The combined value score of 1.17 was above the 1.0625 threshold that indicates good value. Overall, XL Group compares favorably to others in the property and casualty insurance industry in terms of its financial statement strength and stock value. Admittedly, our methodology uses a value investing perspective and highlights companies that have high book value and pay dividends among other metrics. Nonetheless, XL Group is a stock that stands out among its peers and deserves some attention. If inclined, check out the details of our rating for XL Group which shows a breakdown of how we scored and valued the company and how it compares graphically to its peers.
Stock Buy Back Program and Dividend Increase
Something else that caught our eye while digesting the most recent 10-K was how much money XL Group has reinvested into itself through stock buy backs. Since 2012 XL Group has initiated two stock repurchasing programs and purchased approximately 44.6M shares valued at approximately $1.173B or nearly 14% of shares outstanding before any buy backs. On February 21, 2014, the Board of Directors approved an increase to the most recent program that authorizes purchases up to $1B of ordinary stock. That is approximately 12% of the company's current market cap. This suggests that XL Group has long-term faith in itself and that management believes its shares are undervalued. Simple supply and demand indicates that if it purchases more of its outstanding ordinary stock, all things being equal, we'll see the share price rise, although it will presumably use revenue to fund the buyback program which will affect other metrics. From a value perspective this will favorably affect per share metrics, especially book value per share. Over the last two years since it started the buyback program share prices are up about 50%.
XL Group has a long history of consistent and increasing dividends except for a huge parsing back during the dark days of the financial crisis. It offers a modest 2.12% dividend yield which is just slightly below the industry average and the company just recently announced a dividend increase from $0.14 to $0.16 per share.
Risk Factors Impacting Financial Performance
The majority of XL Group's investments are in fixed asset securities and are therefore sensitive to a changing interest rate environment. With the Fed winding down quantitative easing and a generally improving US economy, many people anticipate interest rates to rise, which would decrease the value of fixed asset securities.
XL Group has experienced less catastrophic losses in 2013 compared to 2012 and 2011 which has reduced what it has paid out in claims and improved many of its basic financial metrics. These are continuing risks affecting most insurance companies. Most of the business is generated in the United States therefore it is more sensitive to disasters that occur here.
Overall these are risks commonly associated with any insurance company. There were no obvious company specific risks that we could find.
We don't put too much faith into technical analysis especially since our methodology highlights financially strong companies with good value relative to competitors and the market at any time. But there are certainly better times to jump in and out the market than others. Over the last month XL Group's stock price has increased from a low of about $28.00/share to just over $30.00/share, or about 7-8%, but it is still down from its 52-week peak of $33.12/share, or about 10% lower. Looking at the market from a higher prospective, right now tensions between the United States and Russia seem to have rattled investor confidence to some degree, so right now may not be the best time to jump in. Although, if investors pour into safer investments, such as fixed assets securities (e.g. Treasuries) this may improve the value of those assets and thus increase book value. It may be safer to wait until after tensions settle and prices stabilize before purchasing XL Group.
How XL Group Compares to its Peers
Here is some key data calculated from 50 stocks in our database that represent the property and casualty insurance industry. Compared to its peers XL Group has a price to book value under 1, has a comparable dividend yield, and a below average PE ratio. All these factors suggest that XL Group is undervalued within its industry.
|Metric||XL Group||Peer Average|
Our methodology identified XL Group as having a relatively strong financial status and good value compared to its peers, which grabbed our attention. We further investigated the company's recently released annual report to better understand the company's business and financial position. With XL Group's prospect of repurchasing additional stock, recent dividend increases and the stock trading near the middle of its 52-week high/low, XL Group makes for a good long-term bet.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.