Fitch Affirms XL's Ratings; Outlook Stable

CHICAGO--(BUSINESS WIRE)-- 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. The affirmations include XL's Issuer Default Rating (IDR) at 'A-' and the Insurer Financial Strength (IFS) rating of its core operating companies at 'A+'. A full list of rating actions follows at the end of this release. The Rating Outlook is Stable.

KEY RATING DRIVERS

Fitch's affirmation of XL's ratings reflects the company's large diversified market position in both insurance and reinsurance lines, solid capitalization, favorable underwriting results and reasonable financial leverage. Partially offsetting these positives are overall earnings volatility and weak fixed charge coverage.

The ratings also reflect Fitch's negative sector outlook on global reinsurance. The current stressful reinsurance market conditions are promoting weaker pricing and more generous terms and conditions. This is leading to consolidation in the reinsurance sector as companies aim to enhance their relative competitive position.

Fitch historically considered XL to have a large market position and size/scale in (re)insurance lines. The recent acquisition of Catlin Group Limited (Catlin) on May 1, 2015, with the combined company marketed as XL Catlin, further expands XL into a larger global specialty and property (re)insurer, with meaningfully greater size and scale.

Fitch views the combination as an overall near-term credit negative, given the integration risk inherent in the acquisition. However, successful integration of Catlin could provide longer term positive credit benefits relating to further diversification of earnings and business profile, leveraging the benefits of a larger organization.

Fitch notes that the execution and integration risks have thus far been well managed by XL. However, significant risks remain as the operations and risk management practices of the two companies continue to be combined. This is particularly challenging given Catlin's relatively large size and XL's more limited recent acquisition experience.

XL posted net income of $979 million through the first nine months of 2015 due to favorable underwriting results and a $340 million gain on the sale of its investment in ARX Holdings Corp. In addition, XL benefited from five months of added earnings generated by Catlin. This follows $188 million of net income in 2014, which included a $621 loss on the sale of its runoff life reinsurance subsidiary.

XL's core property/casualty operations posted a favorable nine-month 2015 GAAP combined ratio of 91.9%, which included a minimal 1.8 points of natural catastrophe losses, 3.2 points of favorable prior-year reserve development and 1.7 points of large losses related to the Tianjin explosion. Excluding the impact of natural catastrophes and reserve development, XL's underlying accident-year combined ratio has been favorably steady in recent periods at 93.3% in the first nine months of 2015, 90.6% in full-year 2014, 92.0% in 2013 and 93.7% in 2012.

Fixed charge coverage has been weak overall, averaging a low 4.8x from 2010 to 2014. Coverage improved to 6.0x in 2013 and 7.1x in 2014 with modest catastrophe losses. However, fixed charge coverage declined to 3.8x through the first nine months of 2015 and is expected to be at 4.0x-5.0x in the near term due to increased interest costs from the partial debt financing of the Catlin acquisition.

XL continues to maintain a reasonable financial leverage ratio of 17.1% at Sept. 30, 2015, up from 13.8% at Dec. 31, 2014 due to added debt related to the Catlin purchase. This includes $1 billion of Solvency II Tier 2 compliant subordinated debt issued in March 2015 to partially finance the cash consideration for the transaction. Debt plus preferred equity to total capital increased to 27.9% at Sept. 30, 2015 from 23.0% at year-end 2014, as XL assumed Catlin's $562 million of perpetual preferred shares.

Operating leverage, as measured by net premiums written (NPW) to shareholders' (S/H) equity, increased to 0.75x in the first nine months of 2015 from 0.5x-0.6x in recent periods. This increase reflects an approximately 75% surge in annualized NPW to $10.4 billion due to the addition of Catlin's premiums. However, total S/H equity is up less at 22% to $13.9 billion at Sept. 30, 2015 from $11.4 billion at Dec. 31, 2014. This equity growth is driven by favorable net earnings and a $1.85 billion share issuance to fund the stock consideration for the Catlin acquisition.

RATING SENSITIVITIES

The key rating triggers that could result in an upgrade include sustained favorable earnings with low volatility, including a net return on average common equity of 10% or better; capitalization at 'Very Strong' ('AA' category Fitch sector credit factors) or higher levels; financial leverage ratio maintained at or below 20%; and fixed-charge coverage of at least 7.0x-8.0x.

The key rating triggers that could lead to a downgrade include failure to effectively integrate Catlin as evidenced by underwriting losses or sizable goodwill impairments; significant charges for reserves 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%; fixed-charge coverage below 4.0x-5.0x; failure to maintain at least 'Strong' ('A' category Fitch sector credit factors) capitalization levels.

Fitch affirms the following ratings with a Stable Outlook:

XLIT Ltd.

--IDR at 'A-';

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

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

--$500 million subordinated notes due 2025 at 'BBB-';

--$500 million subordinated notes due 2045 at 'BBB-';

--$345 million series D preference ordinary shares at 'BBB-';

--$999.5 million series E preference ordinary shares 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 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.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Insurance Rating Methodology (pub. 16 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871172

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=994235

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=994235

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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.

View source version on businesswire.com: http://www.businesswire.com/news/home/20151117006532/en/

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:
Hannah James, +1 646-582-4947
[email protected]

Source: Fitch Ratings

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