News Column

Fitch Upgrades XL's Ratings; IDR Outlook Positive

August 5, 2014

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has upgraded its ratings on XLIT Ltd. (a Cayman Islands subsidiary of XL Group plc) and its property/casualty (re)insurance subsidiaries (collectively XL) as follows:

--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 Bermuda regulatory environment that reflects the existence of limited payment restrictions to the holding company. Currently, the holding company IDR reflects nonstandard wider notching due to unfavorable fixed-charge coverage.

XL posted a net loss of $24 million through the first six months of 2014, as favorable underwriting results were offset by a $621 million net loss on the sale of its life reinsurance subsidiary to GreyCastle Holdings Ltd. in June 2014. Fitch views this transaction as overall neutral to the rating as the immediate accounting write-off charge is manageable (about 5% of XL's total shareholders' equity) and is offset by reduced future volatility, with the investment market risk passed on to the buyer through a funds withheld liability. As such, this should help XL to increase focus on its core property/casualty business. Net earnings totaled $1.1 billion in 2013 and $651 million in 2012, years which included modest catastrophe losses.

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 June 30, 2014 and 16.9% at Dec. 31, 2013, with debt plus preferred equity-to-total capital of 26.4% at June 30, 2014, compared with 26.5% at Dec. 31, 2013. XL's capital position has remained stable, with shareholders' equity of $11.4 billion at June 30, 2014, up slightly from $11.3 billion at Dec. 31, 2013, as the net loss and share buybacks were offset by net unrealized investment gains.

RATING SENSITIVITIES

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:

XLIT Ltd.

--IDR to 'A-' from 'BBB+';

--$600 million 5.25% senior notes due 2014 to 'BBB+' from 'BBB';

--$300 million 2.30% senior notes due 2018 to 'BBB+' from 'BBB';

--$400 million 5.75% senior notes due 2021 to 'BBB+' from 'BBB';

--$350 million 6.375% senior notes due 2024 to 'BBB+' from 'BBB';

--$325 million 6.25% senior notes due 2027 to 'BBB+' from 'BBB';

--$300 million 5.25% senior notes due 2043 to 'BBB+' from 'BBB';

--$345 million series D preference ordinary shares to 'BBB-' from 'BB+';

--$999.5 million series E preference ordinary shares to 'BBB-' from 'BB+'.

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 (Bermuda) Ltd;

--XL Re Ltd;

--XL Insurance Switzerland Ltd;

--XL Re Latin America Ltd;

--XL Insurance Company SE;

--XL Insurance America, Inc.;

--XL Reinsurance America Inc.;

--XL Re Europe SE;

--XL Insurance Company of New York, Inc.;

--XL Specialty Insurance Company;

--Indian Harbor Insurance Company;

--Greenwich Insurance Company;

--XL Select Insurance Company.

The IFS Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Nov. 13, 2013).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723072

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=845155

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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 MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Brian C. Schneider, CPA, CPCU, ARe

Senior Director

+1-312-606-2321

Fitch Ratings, Inc.

70 W. Madison Street

Chicago, IL 60602

or

Secondary Analyst

James B. Auden, CFA

Managing Director

+1-312-368-3146

or

Committee Chairperson

Mark Rouck, CPA, CFA

Senior Director

+1-312-368-2085

or

Media Relations

Brian Bertsch, New York, +1-212-908-0549

brian.bertsch@fitchratings.com


Source: Fitch Ratings


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