--Issuer Default Rating (IDR) to 'A-' from 'BBB+';
--Senior unsecured notes to 'BBB+' from 'BBB';
--Series D and E preference ordinary shares to 'BBB-' from 'BB+';
--Insurer Financial Strength (IFS) to 'A+' from 'A'.
A full list of rating actions follows at the end of this release. The Rating Outlook on the IDR is Positive. The Rating Outlook on the IFS is Stable.
KEY RATING DRIVERS
Fitch's rating rationale for the one-notch upgrade of XL's ratings reflects favorable recent underlying net earnings from improving calendar year and run-rate accident year underwriting results, particularly in the company's insurance segment, as well as improving operating earnings-based interest and preferred dividend coverage. The ratings also continue to reflect the company's solid capitalization, reasonable financial leverage and large diversified market position in both insurance and reinsurance lines, as well as anticipated challenges in the overall competitive property/casualty market rate environment.
The Positive Outlook on the IDR reflects XL's improved operating earnings-based interest and preferred dividend coverage that could potentially result in a return to standard notching for the moderate
XL posted a net loss of
XL's core property/casualty operations posted a very favorable six-month 2014 GAAP combined ratio of 89.0%, which included minimal catastrophe losses (1.9 points). This is improved from 92.5% and 96.3% for full years 2013 and 2012, respectively, which included 5.3 points and 8.0 points (6.2 points from Hurricane Sandy) for catastrophe losses.
Excluding the impact of catastrophes and favorable reserve development, XL's underlying accident year combined ratio has exhibited considerable improvement in recent periods to 91.5% in the first half of 2014 (1H:14), 92.0% in full-year 2013 and 93.7% in 2012. This is down from 98.5% for 2011, primarily driven by reduced large non-catastrophe property loss activity and business mix changes. XL's insurance segment, in particular, has demonstrated meaningful improvement, with an accident year combined ratio excluding catastrophes of 95.3% in 1H'14, compared with 96.7% in full-year 2013, 98.5% in 2012 and a sizable 104.2% in 2011. This favorable result is due in part to underwriting actions taken by the company over the last several years to improve margins in its poorer performing challenged insurance businesses.
XL's operating earnings-based interest and preferred dividend coverage has been weak in recent years, averaging a low 4.4x from 2009-2013. However, earnings coverage improved to more historical levels at 6.0x both through the first six months of 2014 and in 2013, with more manageable catastrophe losses and overall reduced interest costs. This follows 4.3x in 2012 and 1.6x in 2011, years with higher catastrophe losses.
XL continues to maintain a reasonable financial leverage ratio (adjusted for equity credit and excluding unrealized net gains/losses on fixed maturities) of 17.7% at
The key rating triggers that could result in a near-term upgrade to XL's IDR and debt ratings includes operating-earnings-based interest and preferred dividend coverage maintained at 6.0x or higher. Key rating triggers that could lead to an upgrade in XL's ratings over time include favorable earnings with low volatility, including a combined ratio in the low 90s. In addition, continued strong capitalization of the insurance subsidiaries, with a net premiums written-to-equity ratio of 0.8x or lower, a financial leverage ratio maintained at or below 20% and operating-earnings-based interest and preferred dividend coverage of at least 10x could generate positive rating pressure.
Key rating triggers that could result in a downgrade include significant charges for reserves that affect equity and the capitalization of the insurance subsidiaries, financial leverage ratio maintained above 20% or debt plus preferred equity to total capital above 30%, operating-earnings-based interest and preferred dividend coverage below 6.0x-7.0x, increases in underwriting leverage above 1.0x net premiums written-to-equity ratio, earnings below industry levels and failure to maintain consistent underwriting profitability.
Fitch has upgraded the following ratings:
--IDR to 'A-' from 'BBB+';
The IDR Rating Outlook is Positive.
Fitch has also upgraded to 'A+' from 'A' the IFS ratings of the following XL (re)insurance subsidiaries:
--XL Insurance Company SE;
--XL Insurance Company of
The IFS Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
--'Insurance Rating Methodology' (
Insurance Rating Methodology
James B. Auden, CFA
Source: Fitch Ratings
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