Fitch Affirms XL's Ratings; Outlook Stable
NEW YORK -- December 19, 2012
Fitch Ratings has affirmed the ratings of XLIT Ltd. (XL, a Cayman Islands
subsidiary of XL Group plc) and its property/casualty (re)insurance
subsidiaries, including the Issuer Default Rating (IDR) for XL at 'BBB+', and
the Insurer Financial Strength (IFS) rating of its core operating companies at
'A'. A full rating list is shown below. The Rating Outlook is Stable.
Fitch's rationale for the affirmation of XL's ratings reflects the company's
solid capitalization, reasonable financial leverage and stable competitive
position. The ratings also reflect anticipated challenges in the overall
competitive but generally improving property/casualty market rate environment,
recent earnings volatility, and the potential drag from the remaining runoff
XL recently announced that it expects to incur estimated net losses of $350
million pre-tax from Hurricane Sandy. Fitch considers this level to be
manageable given the company's strong capitalization (net loss represents
about 3% of shareholders' equity at Sept. 30, 2012), although the loss
estimate is still subject to significant uncertainty.
XL posted net earnings of $570 million through the first nine months of 2012,
improved from net losses of $475 million for full year 2011. This improvement
was the result of reduced catastrophe losses posted through Sept. 30, 2012, as
full-year 2011 results included $761 million of catastrophe losses from the
Japanese and New Zealand earthquakes, Thailand floods, Australian floods, U.S.
tornado activity, Hurricane Irene, and Tropical Storm Lee. Full-year 2011
results also included a fourth quarter $429 million goodwill impairment charge
in the insurance segment.
Excluding the impact of catastrophes (2.7 points) and favorable reserve
development (5.2 points), XL's combined ratio for the first nine months of
2012 was 95.2%. This compares to 98.5% for full year 2011. The improvement in
2012 was primarily driven by lower large-loss activity in the insurance
segment's energy, property and marine business as compared to 2011, partially
offset by a large marine loss for the Costa Concordia cruise ship event in
first quarter 2012.
XL continues to maintain reasonable financial leverage with an equity
credit-adjusted financial leverage ratio (excluding unrealized net gains on
fixed income investments) of 13.3% at Sept. 30, 2012, down from 17.8% at Dec.
31, 2011, as $600 million of debt was repaid at maturity in January 2012. XL's
capital position has improved thus far in 2012, with shareholders' equity of
$11.8 billion at Sept. 30, 2012, up 9% from $10.8 billion at Dec. 31, 2011,
XL's competitive position remains stable, with total property/casualty net
premiums written up 7.1% thus far in 2012 following growth of 8.7% in 2011,
with both of XL's insurance and reinsurance segments experiencing premium
growth. The increases are the result of targeted new business growth, strong
mid-to-upper-80% retentions at historical levels across all lines of business,
and the generally improving rate environment.
The key rating triggers that could result in an upgrade include consistent
underwriting profitability in line with higher rated peers, overall
flat-to-favorable loss reserve development, financial leverage maintained
below 20%, run-rate operating earnings-based interest and preferred dividend
coverage of at least 5x, and continued strong capitalization of the insurance
The key rating triggers that could result in a downgrade include significant
charges for reserves, investments, or runoff business that affect equity and
the capitalization of the insurance subsidiaries, financial leverage ratio
maintained above 25% or debt plus preferred equity to total capital above 30%,
and future earnings that are significantly below industry levels.
Fitch affirms the following ratings with a Stable Outlook:
--IDR at 'BBB+';
--$600 million 5.25% senior notes due 2014 at 'BBB';
--$400 million 5.75% senior notes due 2021 at 'BBB';
--$350 million 6.375% senior notes due 2024 at 'BBB';
--$325 million 6.25% senior notes due 2027 at 'BBB';
--$345 million series D preference ordinary shares at 'BB+';
--$999.5 million series E preference ordinary shares at 'BB+'.
XL Capital Finance (Europe) PLC
--IDR at 'BBB+'.
Fitch has also affirmed at 'A' the IFS ratings of the following XL
(re)insurance subsidiaries with a Stable Outlook:
--XL Insurance (Bermuda) Ltd;
--XL Re Ltd;
--XL Insurance Switzerland;
--XL Re Latin America Ltd;
--XL Insurance Company Limited;
--XL Insurance America, Inc.;
--XL Reinsurance America Inc.;
--XL Re Europe Limited;
--XL Insurance Company of New York, Inc.;
--XL Specialty Insurance Company;
--Indian Harbor Insurance Company;
--Greenwich Insurance Company;
--XL Select Insurance Company.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Oct. 18, 2012).
Applicable Criteria and Related Research:
Insurance Rating Methodology - Amended
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Brian C. Schneider, CPA, CPCU, ARe
70 W. Madison Street
Chicago, IL 60602
James B. Auden, CFA
Julie A. Burke, CPA, CFA
Brian Bertsch, +1-212-908-0549 (New York)
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