XL Group Upgraded To Buy At UBS, Says Benefits Of Catlin Buy 'Not Fully Reflected In Stock'

UBS upgraded XL Group plc (NYSE: XL) Tuesday from Neutral to Buy and raised its price target from $36 to $42.

Analysts led by Brian Meredith believed "the financial benefits of the Catlin acquisition, including significant EPS and ROE accretion, will result in multiple expansion over the next twelve months."

Synergies and improved operational leverage were also cited as drivers of multiple expansion as $200 million in savings is realized from the acquisition.

XL was also expected to be better positioned in the soft commercial lines pricing environment due to "increased product breadth and geographic spread" from the acquisition.

The firm's 2016 EPS estimate was raised by 14 percent to $3.75. The 2017 EPS estimate was also raised by 14 perecent to $4.30 as a result of incorporating the Catlin acquisition into the analyst's forecast.

Addressing risks, Meredith cautioned, "There is meaningful execution risk given the size of the acquisition and magnitude of expense savings as well a concentration risk from client overlap. Additionally, XL's financial leverage will increase post-deal to the high end of where ratings agencies are comfortable at its ratings level, hurting the company's capital flexibility post deal."

The analysts concluded that XL shares would re-rate over the next 12 months as updated guidance was made available on synergies following the acquisition of Catlin.

XL Group recently traded at $37.58, up 0.75 percent.