XL Group's (XL) Inorganic Growth Booms, Expenses A Woe

Shares of XL Group Ltd (NYSE:XL) gained 18.09% year to date, significantly outperforming the Zacks categorized Property and Casualty Insurance industry’s increase of 3.89%. We expect this stock to retain the flourishing momentum on the back of several positives.

XL Group has put in some substantial efforts to boost its insurance and reinsurance business lines, which have been providing the best return on capital over the pricing cycle for the past few years. With an eye to improve its business mix, the property and casualty (P&C) insurer has been deploying capital in businesses with lower loss ratios, resulting in margin expansion.

Additionally, this Zacks Rank #3 (Hold) P&C insurer’s inorganic growth continues to impress with the company’s ceaseless efforts to diversify its operations and accelerate growth through tactical buyouts. The most significant one has been the acquisition of Catlin Group, back in 2015. Expansion of few business lines apart, the buyout has helped the company increase its alternative capital opportunities as well as business in Lloyd’s platform.

The Catlin buyout is also anticipated to help XL Group achieve its expense synergy target of minimum $300 million. The company expects the integration costs to wane in 2017, raising optimism for margin expansion in the process. For second quarter, integration expenses are estimated to range between $30 and $35 million.

Notably, XL Group has been generating sufficient capital to engage in shareholder-friendly moves. The company had shares worth $900 million remaining under its authorization. In 2017, the company hopes to complete not less than $700 million in buy backs.

The P&C insurer has also been dispensing dividend hikes and wishes to carry on with the same in the near term. Such moves no doubt catapult the company to an attractive pick status for all those yield-seeking investors.

Escalating expenses and exposure to catastrophe losses will however continue to hurt the company’s overall results, spurring concerns in the near term.

Nonetheless, valuation is attractive at present as the stock is currently trading at a price to book multiple of 0.89, an enormous 37.8% discount to the industry average of 1.43, in the last one year. Besides, the company’s expected long-term earnings growth is impressively pegged at 9.00%.

Stocks to Consider

Some better-ranked stocks from the same space include American Financial Group, Inc. (NYSE:AFG) , Fidelity National Financial, Inc. (NYSE:FNF) and Argo Group International Holdings, Ltd. (NASDAQ:AGII) . Each of these stocks holds a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

American Financial provides property and casualty insurance products in the United States. The company has delivered positive surprises in three of the last four quarters with an average beat of 11.47%.

Fidelity National provides title insurance and technology plus transaction services to real estate and mortgage industries in the United States. The company has consecutively delivered positive surprises in three of the last four quarters with an average beat of 8.47%.

Argo Group underwrites specialty insurance and reinsurance products in the property and casualty market on a global scale. The company has consistently delivered positive surprises in all of the last four quarters with an average beat of 35.70%.

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