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 life business.
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 percent of shareholders' equity at Sept. 30,), 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, 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 percent. This compares to 98.5 percent 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 percent at Sept. 30, down from 17.8 percent 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, up 9 percent from $10.8 billion at Dec. 31, 2011, driven
XL's competitive position remains stable, with total property/ casualty net premiums written up 7.1 percent thus far in 2012 following growth of 8.7 percent 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 percent 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 percent, run-rate operating earnings- based interest and preferred dividend coverage of at least 5x, and continued strong capitalization of the insurance subsidiaries.
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 percent or debt plus preferred equity to total capital above 30 percent, 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 percent senior notes due 2014 at 'BBB';
--$400 million 5.75 percent senior notes due 2021 at 'BBB';
--$350 million 6.375 percent senior notes due 2024 at 'BBB';
--$325 million 6.25 percent 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 '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,).
Insurance Rating Methodology - Amended
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