Located on the beautiful island of Bermuda, XL Capital (NYSE:XL) and ACE Limited (NYSE:ACE) are global property and casualty insurers that come into focus when major disasters like hurricane Katrina and the recent devastation in China's Sichuan province occur. Increased competition in casualty insurance and the tight credit markets have curtailed recent sales figures for both insurers.

Value investors may be tempted to nibble, but there is danger in at least one of these stocks.

XL Capital
XL Capital cited the credit crunch and agency downgrades of its portfolio of subprime first lien mortgages as major sources of pain during the first quarter. Along with the slowing economy, renewals for XL's insurance segment also slowed at the beginning of 2008.

XL also recently received a ratings downgrade meaning that credit rating agencies have become less certain about the insurers ability to pay its claims. XL's net premiums earned were down 4% to $1.7 billion for the first quarter of 2008 compared to the previous year. Net investment income also dropped 10% to $499 million during the same period. Total revenue for the period dropped 14% to $2.2 billion. (From lenders to buyers to hedge funds, no one escapes culpability in Who Is To Blame For the Subprime Crisis?)

ACE Limited
ACE, which has its main corporate office in Bermuda, is in the process of re-domesticating its domicile of incorporation from the CaymanIsland to Switzerland. The reasons given point to a better legal and regulatory environment for its expansion plans.

Total revenue for ACE also dropped 15% to $3.1 billion during the first quarter of 2008 versus the prior year. ACE's loss was driven by net realized losses in liabilities on guaranteed minimum income benefit (GMIB) reinsurance associated with income streams promised to holders of often hard to understand variable annuity contracts.

Book Value Comparison
Management of these insurers places special emphasis on its book value per ordinary share. XL Capital's book value per ordinary share fell $4 from December 2007 to $46 during the first quarter primarily due to losses of investment income and the decline of the U.S. dollar. ACE reported a book value of $48.65 only slightly down from the end of 2007. ACE was able to boost its net premiums-written revenue on new business from its Private Risk Services segment that provides coverage for personal property like homes and autos for high net worth clients. Other property and casualty insurers with attractive book values include the Hartford Financial Services Group (NYSE:HIG) and Chubb Corp. (NYSE:CB). (To learn to calculate your portion of the shareholder pie, read Digging Into Book Value.)

Will Insurance Pay Off?
XL Capital has performed the worst of the two, down nearly 40% year to date to the $30 dollar range, well below its last reported book value. ACE is almost even for the year, trading near $61. It has been boosted by its new lines of business, which are supplementing its falling casualty insurance revenue.

Value investors enjoy finding stocks trading below their book value, so this suggests that XL Capital would get the nod. However, since one ratio is not enough to pick an investment I believe ACE's steady performance and its more diverse revenue streams make it the more attractive option.

For related reading, check out Value Traps: Bargain Hunters Beware!

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