Insurance Stocks

XL Group Ltd Valuation – April 2018 $XL

Company Profile (excerpt from Reuters): XL Group Ltd, through its subsidiaries, is an insurance and reinsurance company providing property, casualty and specialty products to industrial, commercial and professional firms, insurance companies and other enterprises. The Company operates through two segments: Insurance and Reinsurance. As of December 31, 2016, the Company served clients in more than 200 countries across the world, through its global network of locally licensed and Lloyd’s of London Syndicates (Lloyd’s) operations, and network partners managed from its three network partner management hubs in Austria, Hong Kong and Mexico. Its Asia Pacific region operates with a mix of locally licensed and Lloyd’s operations. The Company has underwriting operations in Hong Kong; Labuan, Malaysia; Melbourne, Australia; Shanghai, China; Singapore; and Sydney, Australia. Its Americas region operates across Bermuda, Canada, Latin America and the United States. It serves clients in the Europe, the Middle East and Africa (EMEA) region. The United Kingdom & Ireland region operates out of six locations: Birmingham, Chelmsford, Dublin, Guernsey, London and Manchester.

XL Chart

XL data by YCharts

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of XL – April 2018

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass all 6 of the following tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $14,237,684,200 Pass
2. Earnings Stability Positive EPS for 10 years prior Fail
3. Dividend Record Dividend Payments for 10 years prior Pass
4. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 192.68% Pass
5. Moderate PEmg Ratio PEmg < 20 41.48 Fail
6. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.44 Pass
Enterprising Investor; must pass all 3 of the following tests, or be suitable for the Defensive Investor.
1. Earnings Stability Positive EPS for 5 years prior Fail
2. Dividend Record Currently Pays Dividend Pass
3. Earnings Growth EPSmg greater than 5 years ago Fail

 

Stage 2: Determination of Intrinsic Value

EPSmg $1.34
MG Growth Estimate -1.91%
MG Value $6.24
Opinion Overvalued
MG Grade F
MG Value based on 3% Growth $19.36
MG Value based on 0% Growth $11.35
Market Implied Growth Rate 16.49%
Current Price $55.39
% of Intrinsic Value 887.92%

XL Group Ltd. does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability over the last ten years, and the high PEmg ratio. The Enterprising Investor has concerns regarding the lack of earnings stability or growth over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $1.53 in 2014 to an estimated $1.34 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 16.49% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into XL Group Ltd. revealed the company was trading above its Graham Number of $50.95. The company pays a dividend of $0.88 per share, for a yield of 1.6% Its PEmg (price over earnings per share – ModernGraham) was 41.48, which was above the industry average of 22.6.

XL Group Ltd. scores quite poorly in the ModernGraham grading system, with an overall grade of F.

Stage 3: Information for Further Research

Graham Number $50.95
PEmg 41.48
PB Ratio 1.44
Dividend Yield 1.59%
TTM Dividend $0.88
Number of Consecutive Years of Dividend Growth 5

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Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2017
Long-Term Debt & Capital Lease Obligation $3,220,769,000
Total Assets $63,436,236,000
Intangible Assets $2,225,751,000
Total Liabilities $53,587,919,000
Shares Outstanding (Diluted Average) 255,967,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $3.00
Dec2017 -$2.16
Dec2016 $1.56
Dec2015 $4.15
Dec2014 $0.69
Dec2013 $3.63
Dec2012 $2.10
Dec2011 -$1.52
Dec2010 $1.73
Dec2009 $0.61
Dec2008 -$10.94
Dec2007 $1.15
Dec2006 $9.60
Dec2005 -$9.14
Dec2004 $8.11
Dec2003 $2.71
Dec2002 $2.88
Dec2001 -$4.55
Dec2000 $4.03
Dec1999 $3.62
Nov1998 $5.56

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $1.34
Dec2017 $0.86
Dec2016 $2.39
Dec2015 $2.47
Dec2014 $1.53
Dec2013 $1.74
Dec2012 -$0.01
Dec2011 -$1.31
Dec2010 -$0.66
Dec2009 -$1.81
Dec2008 -$2.10
Dec2007 $2.38
Dec2006 $2.94
Dec2005 -$0.26
Dec2004 $3.66
Dec2003 $1.54
Dec2002 $1.41

Recommended Reading:

Other ModernGraham posts about the company

14 Best Undervalued Stocks of the Week – 8/6/16
XL Group Ltd Valuation – July 2016 $XL
27 Companies in the Spotlight This Week – 4/4/15
XL Group Annual Valuation – 2015 $XL
17 Companies in the Spotlight This Week – 3/29/14

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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