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Fitch Affirms XL's Ratings; Outlook Stable
December 13, 2016 / 9:49 PM / a year ago

Fitch Affirms XL's Ratings; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, December 13 (Fitch) Fitch Ratings has affirmed the ratings of XLIT Ltd. (XL, a Cayman Islands subsidiary of XL Group Ltd) 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 very strong business profile as a large, diversified global insurance and reinsurance company, 'Strong' capitalization, favorable underwriting results and reasonable financial leverage. Partially offsetting these positives are overall earnings volatility, weak fixed charge coverage and Fitch's negative sector outlooks on global reinsurance and U.S. property/casualty insurance. XL posted net income of $431 million (excluding $294 million loss on the runoff life retrocession investment portfolio) through the first nine months of 2016, resulting in a net return on average common equity (ROAE) of 4.9%. Underwriting profits were partially offset by foreign exchange losses and integration/operational costs related to Catlin Group Limited (Catlin). This was reduced from $809 million (excluding $170 million gain on life retrocession investments) through the first nine months of 2015, with a 9.8% ROAE, which included a $340 million gain on the sale of its investment in ARX Holding Corp. XL's property/casualty operations posted a nine-month 2016 GAAP combined ratio of 93.9%. This included 5.4 points of natural catastrophe losses, largely from wildfires in Fort McMurray, Alberta, Canada and earthquakes in Japan and Ecuador, and 2.7 points of favorable prior-year reserve development. This underwriting performance compares with 92% for full-year 2015, which included 2.7 points for catastrophes, 1.2 points of large losses related to the Tianjin explosion and 3.8 points of favorable prior-year reserve development. The company's preliminary loss estimate for Hurricane Matthew in fourth quarter 2016 is a range of $100 million to $200 million, which Fitch views as manageable. Fitch views XL as having thus far reasonably managed the integration of Catlin since the acquisition closed in May 2015. However, significant risks remain as the operations and risk management practices of the 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. In addition, the company is on target to achieve $300 million of operating run-rate expense synergies by the end of 2017. To the extent that these savings are achieved, the overall profitability profile of XL Catlin would benefit. Fixed charge coverage has been weak overall, averaging a low 4.5x from 2011 to 2015, with 3.7x in 2015 and 3.3x in the first nine months of 2016. Fixed-charge coverage is anticipated to be 3.0x-5.0x in the near term due to increased fixed charges from the partial debt financing of the Catlin acquisition and assumption of Catlin's perpetual preference shares. XL continues to maintain a reasonable financial leverage ratio of 17.4% at Sept. 30, 2016, with debt plus preferred equity to total capital of 28%. Annualized net premiums written to shareholders' equity increased to 0.8x for nine months 2016 due to increased premiums from Catlin and flat shareholders equity growth, but remains within rating expectations. RATING SENSITIVITIES The key rating triggers that could result in an upgrade include sustained favorable earnings with low volatility, including an ROAE of 10% or better; capitalization at 'Very Strong' ('AA' IFS category 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' IFS category sector credit factors) capitalization levels. Fitch has affirmed 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 Bermuda 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. Contact: Primary Analyst Brian C. Schneider, CPA, CPCU, ARe Senior Director +1-312-606-2321 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst James B. Auden, CFA Managing Director +1-312-368-3146 Committee Chairperson Mark Rouck, CPA, CFA Senior Director +1-312-368-2085 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: 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. 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