2008-08-06 04:38:01 -
- Fitch Ratings affirms XL Capital Ltd (XL) and its property/casualty (re)insurance subsidiaries, including the Issuer Default Rating (IDR) for XL at 'A', and the Insurer Financial Strength (IFS) rating of lead (re)insurance companies XL Insurance (Bermuda) Ltd and XL Re Ltd. at 'A+'. (See the full list below.) All ratings have been removed from Rating Watch Negative. The Rating
Outlook is Stable.
The rating actions follow the successful completion of XL's capital raising initiatives. In total, the company raised $3.375 billion of equity and hybrid securities. The capital raising was made up of approximately $2.3 billion of new common equity and $575 million of new equity security units. Additionally, part of the capital initiatives included XL exercising the put option under its Mangrove Bay contingent capital facility that had been in place since July 2003, which resulted in net proceeds of approximately $500 million in exchange for the issuance of preference ordinary shares.
The capital raising initiative follows XL's agreement to extinguish certain exposure the company had to Security Capital Assurance Ltd (SCA) including its facultative reinsurance contracts and excess of loss reinsurance contract. In addition, SCA operating subsidiaries XL Financial Assurance Ltd (XLFA) and XL Capital Assurance Inc. (XLCA) commuted the quota share agreement between these two companies, extinguishing XL Insurance (Bermuda) Ltd's guarantee to XLCA of XLFA's obligations there under. In exchange for the commutation and termination of the various agreements, XL will transfer $1.775 billion in cash and eight million shares of XL common stock to SCA and transfer all of XL's SCA shares to a trust.
With the capital raising and payment to SCA completed and the planned redemption of $255 million of guaranteed senior notes, Fitch estimates XL's equity-adjusted debt-to-total capital, excluding any FAS 115 adjustment for unrealized losses, on a pro forma basis to be 22.0%, up slightly from 21.4% at June 30, 2008. Due to the size of the issuance relative to XL's market capitalization, Fitch believes the company's financial flexibility has been reduced since it would be difficult for the company to tap the capital markets again in the near term should the company suffer another large loss.
The Stable Outlook reflects Fitch's belief that while XL's operating performance will be hampered due to soft market conditions, the company will continue to produce underwriting results on par with comparably rated peers. In order to maintain its current ratings, XL must demonstrate consistent underwriting profitability and put an end to the large charges that have plagued the company and hampered its ability to grow its capital base.
Fitch believes XL's investment portfolio remains susceptible to additional mark-to-market losses given continued credit market volatility especially related to commercial and residential mortgage-backed securities; collateralized debt obligations (CDOs) and financial sector and consumer cyclical holdings.
Fitch notes that over the past six years, XL's volatility of earnings has been greater than peers due to a series of large charges attributable to credit market conditions, catastrophe losses, adverse prior-year loss reserve development, and charges related to the Winterthur arbitration.
The company has announced a number of changes designed to increase the stability of earnings and capital including the exploration of strategic alternatives for its life reinsurance business, potential future realignment of its investment portfolio and simplification of its management structure. Additionally, XL has reduced its catastrophe exposure and Fitch believes the company's overall loss reserve position is stronger than in recent years.
XL is a Bermuda headquartered holding company with subsidiaries providing insurance and reinsurance on a worldwide basis. XL reported consolidated GAAP assets of $52.1 billion and shareholders equity of $8.8 billion at June 30, 2008.
Fitch assigned the following ratings with a Stable Outlook:
XL Capital Ltd
--$575 million 10.75% equity units at 'A-';
--$500 million series C preference ordinary shares at 'BBB+'.
Fitch withdrew the following rating:
XL America Inc.
--IDR at 'A';
--$255 million 6.58% senior notes due 2011 at 'A-'.
Fitch has affirmed the following ratings and simultaneously removed them from Rating Watch Negative; The Outlook is now Stable:
XL Capital Ltd
--IDR at 'A';
--$600 million 5.25% senior notes due 2014 at 'A-';
--$350 million 6.375% senior notes due 2024 at 'A-';
--$745 million 5.25% senior notes due 2011 at 'A-';
--$325 million 6.25% senior notes due 2027 at 'A-';
--6.375% series E preferred ordinary shares at 'BBB+'.
XL Capital Finance (Europe) PLC
--IDR at 'A';
--$600 million 6.50% guaranteed senior notes due 2012 at 'A-'.
Fitch also affirmed the IFS ratings of the following XL Capital Ltd (re)insurance subsidiaries at 'A+' and removed them from Rating Watch Negative:
--XL Insurance (Bermuda) Ltd
--XL Re Ltd
--XL Insurance Switzerland
--XL Re Latin America Ltd
--XL Europe 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
The Rating Outlook is Stable.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Fitch Ratings, Chicago
Tana M. Higman, 312-368-3122
James B. Auden, CFA, 312-368-3146
or
Media Relations:
Cindy Stoller, 212-908-0526, New York
