XL Capital: Expecting Extra Large Gains on BoA Call

Bank of America is out with a strong call on XL Capital (XL) saying a resolution to settle XL Capital's guaranties on the pre-IPO liabilities of SCA Capital could be looming and could lead to significant upside to the stock. Reiterates Buy and $67 target offering 100%+ upside.

In the Firm's view, the new XL Capital CEO Michael McGavick wants to leave the company's SCA issues behind him and focus on the core business. Thus, the Firm believes that the two companies and regulators could be working diligently to provide SCA with much-needed capital, in exchange for extinguishing XL's guarantees on SCA's pre-IPO liabilities. The resolution of the pre-IPO guaranties would be a significant catalyst for the stock, but the question is at what cost?

Negative impacts from a potential settlement could be mitigated. In February 2009, XL Capital will receive $745 million in capital likely issued at $65 (or 11.5 million shares) from equity units issued a couple of years ago. Unless the resolution is significantly more costly than that, the EPS dilution and book value per share impact of any settlement or capital raised could be significantly less than expected.

XL currently trades at a trough multiple of 0.6x book value per share. BofA believes XL's ultimate losses related to its exposure to SCA will be significantly less than market expectations. XL remains a high reward/high risk pick. Reiterates Buy and $67 target.

Notablecalls: I expect to see 3-5% of upside in XL stock today.