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, 'Strong' 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 shifting market landscape in reinsurance is pressuring profitability and sparking consolidation as companies aim to enhance their relative competitive position.

Fitch views XL as having thus far reasonably managed the integration of Catlin during the first year of the acquisition, with the transaction having closed on May 1, 2015. However, significant risks remain as the operations and risk management practices of the two companies continue to be combined. 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.

XL posted net income attributable to ordinary shareholders (net income) of $104 million in the first quarter of 2016 (excluding $82 million loss on investment results from the runoff life retrocession investment portfolio that is passed directly to the reinsurer, GreyCastle Holdings Ltd.), resulting in a net return on average common equity (ROAE) of 3.6%. Favorable underwriting results were offset by increased corporate expenses from the integration and operation of Catlin and dividends on preference shares by XL and its subsidiaries.

This follows net income of $982 million in 2015 (excluding $225 million gain on life retro investment results), which included a $340 million gain on the sale of ARX Holdings Corp. Net income was $554 million in 2014 (excluding $366 million loss on life retro investment results), which included a $621 million loss on the sale of its runoff life reinsurance subsidiary to GreyCastle.

XL's core property/casualty operations posted a favorable three-month 2016 GAAP combined ratio of 92.5%, which included 2.3 percentage points for natural catastrophe losses and 1.9 points of favorable prior-year reserve development. This underwriting performance compares with 92% for full-year 2015, which included 2.7 points for natural catastrophe losses, 3.8 points of favorable prior-year reserve development and 1.2 points of large losses related to the Tianjin explosion in China.

Excluding the impact of natural catastrophes and reserve development, XL's underlying accident-year combined ratio has been fairly steady in recent periods at 92.1% in the first three months of 2016, 93.1% in 2015 and 90.6% in 2014.

Fixed charge coverage has been weak overall, averaging a low 4.5x from 2011 to 2015, with 3.7x in 2015 and 3.9x in the first three months of 2016. Fixed-charge coverage is anticipated to remain near 4.0x-5.0x with the added debt from the Catlin acquisition.

XL continues to maintain a reasonable financial leverage ratio of 17.1% at March 31, 2016, with debt plus preferred equity to total capital of 27.9%. Net premiums written to shareholders' equity increased to 0.6x in 2015 from 0.5x in 2014 due to increased premiums from Catlin that more than offset higher shareholders' equity.

XL recently announced a proposed change in the parent holding company's incorporation to Bermuda from Ireland, with XL Group Ltd (Bermuda) replacing XL Group plc (Ireland). This redomestication is subject to regulatory and shareholder approval and will not result in any rating changes to XL and its subsidiaries.

RATING SENSITIVITIES

The key rating triggers that could result in an upgrade include sustained favorable earnings with low volatility, including a ROAE 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 the IFS ratings of the following XL (re)insurance subsidiaries at 'A+' 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.

Summary of Financial Statement Adjustments:

Fitch has adjusted XL's net income and ROAE to remove the net income contribution from the GreyCastle life retrocession investment results which are reversed in comprehensive income. The investment results for the life reinsurance assets are passed directly to the reinsurer (GreyCastle) pursuant to a contractual arrangement that is accounted for as a derivative. The noted adjustment did not result in a different rating than had the adjustment not been made, but it is material in how Fitch views net income and ROAE.

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=1004387

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004387

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/20160512006198/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, New York, +1-646-582-4947
[email protected]

Source: Fitch Ratings

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