XL Capital Ltd. may be an acquisition target as weak prices in the business fuel more mergers and takeovers, a leading business website reported yesterday.

Marketwatch.com reported that analysts and investors singled out Munich Re as a possible acquirer of XL as it looks to expand more in the US and put excess capital to work.

"Munich Re has done well and has lots of money to make acquisitions, but the reinsurance market is soft and the company isn't growing, so their strategy may be to grow by acquisition," said Andy Barile, an independent insurance industry consultant.

"The operating subsidiaries of XL Capital would fit in very nicely with Munich Re."

Spokeswomen from Munich Re and XL told Marketwatch they don't comment on market rumours.

Reinsurers have spare capital as premiums have softened, creating what's known as a soft market and pressuring compa nies to consolidate.

A.M. Best, a leading insurance industry rating agency, said this week that reinsurers are battling against a softening market.

XL is recovering from the opposite problem, as huge losses from the financial crisis increased investor concern that the reinsurer did not have enough capital to take on lots of new risks and pay claims.

Last year, XL said it would pay a unit of Warren Buffett's Berkshire Hathaway as much as $250 million over a decade to provide guarantees on policies protecting directors and executives against lawsuits. This so-called cut-through endorsement is essentially a guarantee from Berkshire that claims will be paid if XL can't come up with the cash, Marketwatch said.

"Whether true or not, investors and customers have been concerned about capital adequacy at XL," said Stewart Johnson, a portfolio manager at insurance-focused investment firm Philo Smith & Co.

Such concerns make it difficult for a reinsurer to sell big new policies and encourage investors to sell shares of the company, he added.

"If an acquirer comes along with capital, it can solve both those problems," Johnson said. "XL has a great business model, as long as they have access to capital."

XL's recent troubles hammered its shares in 2008, but the stock rallied hard last year.

Despite that, the shares recently traded at about 70 percent of the company's book value, Johnson noted. That's a discount to rival reinsurers like Ace Ltd. and PartnerRe, which trade at much smaller discounts to book value, he added.

XL shares rose 3.5 percent to $19.88 on afternoon trading yesterday. The stock has surged almost 160 percent in the past year.