John Appel

XL Capital: Short Interest Poised to Drop, Will the Stock Pop?

I have been asked if I expect a short squeeze. The short answer (pun intended) is no. In general, if a short sale is a hedge of a future purchase of new issue shares, covering the short is unlikely to move the stock price because the short can be covered by new shares rather than market purchases. In the case of XL, it is hard to know what amount of short interest is related to hedges, and if the unwind of hedges will result in a need to cover short sales that is less than, equal to, or greater than the 11.46 million new shares to be issued.

The more important thing fundamentally is that the 7% units increase the company's equity capital by $745 million, which is good (although book value per share increases only slightly because of the increase in shares). If the related notes are remarketed successfully, total capital increases by $745 million as well, which is even better.

Reinsurer Stocks: A Fear-Driven Market Creates Opportunity

InsuranceDude, I agree that ORH has a very conservative fixed income portfolio, but the “target” price is driven more by its growth prospects. The figures for ORH are pro forma for $150 million of additional share buybacks. The “target” price is 0.9x est. pro forma book value of $42/shr. The P/B multiple is driven mainly by the headwinds ORH faces to both top-line and bottom-line growth. Casualty insurance is a large part of the business today (51% in Q3). The general casualty market is soft/competitive and is expected to remain so (expectations for a hard market are mainly for property cat, professional liability, and certain specialty lines). ORH’s casualty business has been shrinking for several years, leading growth in total GPW to be negative since 2004. Management has identified professional and specialty lines as a priority for growth, but ORH is not a big player in those segments yet. Meanwhile, earnings continue to be impacted by adverse prior year development. ORH has revised reserves for losses and LAE upward every year for the last 9 years (see 10-K page 21). This contributes to combined ratios that are the worst of the group. In ’07 and YTD ’08 this was offset by gains recognized on total return swaps and credit default swaps. However, the total return swaps were taken off in October. Given these impediments to earnings growth, it is hard to justify a higher valuation. A few quarters of premium growth and mid-90s combined ratios would change my view considerably.


On Nov 26 08:42 AM InsuranceDude wrote:

> I forgot one other thing--a massive share buyback program that is
> gathering up shares at a large discount to book. It's all about increasing
> shareholder value!

Reinsurer Stocks: A Fear-Driven Market Creates Opportunity

CORRECTION - The article states incorrectly that ACE's combined ratio does not include its reinsurance business. The ratio does include the Global Reinsurance segment. It is the Life Insurance and Reinsurance segment that is excluded. -JA