Citi Gives Color On XL Group; Adds XL To Top Picks Live

Citi is adding XL Group XL to Top Picks Live, as it sees several potential catalysts including continued redeployment of excess capital for share repurchases and dividends; yield upside within the investment portfolio; continued expense saves and rationalization of wide product portfolio. Tactical move based on recent mgmt meetings and with stock down ~9% in last two weeks. Based on a historical premium to surplus levels, Citi estimates XL's excess capital position at ~$3B or approx. 42% of its market cap. XL has been actively repurchasing shares offsetting the potential dilution from the mandatory converts to be exercised in August. As of Feb. 22nd XL had ~$735M available under current buyback programs, Citi expects a base case buyback of $1B per annum for the next 3 years. XL has substantially completed revamping its investment portfolio which now more closely resembles a P/C (re)insurer. Overall investment income fell 9% YoY in 4Q10 as new money yields within the P/C portfolio were 2.7% at year end; Citi estimates that a 100 bps increase in int. rates would be ~5% accretive to its ‘11 EPS est. Citi has a Buy rating and $27 PT on XL XL closed Wednesday at $22.35