With the NFL season under way, football fanatics have begun to follow their favorite teams with a passion. I may not be much of a football fan, but I do like to root for the underdog -- both in sports and investing. XL Capital (NYSE:XL), the victim of more than a few stock market sacks lately, definitely fits the bill.
Shares of XL, a leading provider of insurance and reinsurance, have fumbled nearly 20% since peaking last December, and are currently trading near their 52-week low. Investors have been leery of XL's stock because the company had to increase its reserves for its North American reinsurance operations. That wreaked havoc on XL's second-quarter earnings, and just when it appeared as if things couldn't get worse for XL, Hurricane Katrina showed up.
The recent tragedy sent investors punting insurance and reinsurance stocks, and with good reason; the industry could lose anywhere from $25 to $60 billion. Investors are clearly nervous. Last year's Florida hurricanes produced nearly $23 billion in claims, which severely hampered third-quarter profits for major insurers like St. PaulTravelers (NYSE:STA) and Allstate (NYSE:ALL). XL's net losses from Katrina are estimated to be around 1.75% of the disaster's insured total; however, the company still expects to report an operating profit in the third quarter.
Is there value in XL? Last quarter's earnings offered plenty to cheer about. Total revenues rose 30%, and XL achieved a record $55.95 in book value per ordinary share. The company appears to be fairly valued, since its price-to-book ratio is in line with comparable firms, and its price-to-cash-flow ratio is substantially better than its competitors'.
Will additional catastrophic events or unexpected reserve charges continue to plague the insurance industry? No one knows for sure. But with a forward P/E of less than 7, it may be riskier not to invest in XL.
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Fool contributor M.D. Mitchell is down the street at the local junkyard looking for some good trash. He will read his email as soon as he gets back. At the time of publication, he held no financial position in the companies mentioned above.
