UPDATE: Morgan Stanley Upgrades XL Group

In a note released Wednesday, Morgan Stanly analyst Kai Pan upgraded XL Group plc

from Equal-weight to Overweight and set a $39 price target. Shares of XL have risen ~2 percent in the pre-market following the Morgan Stanley upgrade. Pan suggests it should continue to rise as the company's shares were ~25 percent below its long-term average and ~10 percent below its book value as of the close on Tuesday. Looking forward, Pan sees the company's divestiture of its Life Re business as clearing the path from sub-10 percent ROE to a plus-10 percent ROE. He anticipates the company will post a combined ratio improvement for 2014-2016 of ~260 basis point based on on operating ROE of 9.2 percent. In terms of returning value to shareholders, Pan says the free up of capital from the sale of Life Re will help to drive a $3 billion return to shareholders of 2014-16 made up of ~$2.6 billion in buybacks and the remainder in dividends.