Analyst notes they are upgrading XL for 2 reasons:

- 1. Improving fixed income markets should lead to a strengthening capital position. CSFB believes it is unlikely that the company will raise capital even if fixed income markets deteriorate significantly.

- 2. Firm believes that XL's Franchise is stabilizing with lower top line declines going forward and underwriters continuing to maintain pricing discipline. In their view, a stronger capital position and stabilization in the franchise could lead to the removal of the negative ratings outlook by rating agencies in 6-12 months which should lead to an improvement in valuation from distressed levels as investors focus more on book value growth rather than the company's survival. As fixed income markets improve over the longer term, XL Capital’s book value should grow 50% due to reversal of unrealized losses, significantly faster than other less leveraged property casualty insurance companies.

CSFB increased their price target to $18. This is mainly driven by a higher valuation as investors get more comfortable with XL’s capital position and franchise stability. They acknowledge that XL is a riskier stock than many P&C and life insurance peers and their price target implies the stock can trade at 60% of 1Q10 book value excluding AOCI, a significant discount to the median P&C and life insurance stocks which trade at 86% and 67% of BVPS ex AOCI respectively. With the capital position stabilizing and the risk of a capital raise more remote, they believe investors will value the stock based on the burned down value of book value including AOCI.




50% upside to book value from potential reversal of unrealized losses: The company has $4 Bn or $11.70 per share in net unrealized losses on the balance sheet, or 78% of GAAP book value. CSFB estimates that $1.4 Bn could turn into realized losses over the life of the investments, implying that book value could grow a further $7.50 per share or 50% from 1Q09 levels as unrealized losses reverse over time.

Excess liquidity: Firm estimates the company has $2.4 Bn of excess cash and short term investments on the balance sheet which they believe is used to support the $4.7 Bn in risk assets. This implies the company will not be forced to sell risk assets at distressed prices. Also, as the risk assets roll off or recover in market value, they believe the company can put the excess cash to work in higher yielding investments which should help EPS by $0.07 per share.

Notablecalls: The sentiment in XL is getting stronger by day. Yesterday we had FBR Capital Markets team raise their target on XL to $17 from $12. The stock gaped up but failed to see any follow-through. I think CSFB's call is more powerful and will help to retrace at least some of yesterday's losses, if not more.

I think a 6-7% move may be in cards for XL today.