Standard & Poor’s commented on XL Capital Ltd.’s announcement that its subsidiary, XL Reinsurance America Inc., took a $215 million pretax adverse development charge for the fourth quarter of 2002.
The charge will not affect the ratings on XLC, XLRA, XLRA’s affiliated pool members, or XLRA’s parent holding company, Nac Re Corp.
Standard & Poor’s is in the process of reviewing XLC’s overall operations and will continue to separately monitor XLRA’s financial strength, capital adequacy, and ability to reduce exposure to prospective adverse loss development. The review is expected to be completed in March 2003.
Since 1999, XLRA – like most U.S. casualty reinsurers – has shown
vulnerability to adverse development in the 1997-2000 accident years, as selected loss ratios over the last three accident years (for certain business lines) have proven less than adequate. The additional $30 million of asbestos reserves is viewed more as prudent protection, as XLRA has minimal pre-1986 asbestos exposures.
Qualitatively, pre-XLC ownership underwriting practices and declining
loss trends have hampered XLRA’s and, directly, XLC’s earnings performance over the last two years. In addition, because XLRA is the lead reinsurer of the XL America Pool, the adverse development has had a pervasive impact on its affiliated pool members’ respective earnings capacity and capital structure since the pool’s inception in calendar-year 1999.
Offsetting these negative factors, XLRA maintains a leading U.S. broker market presence and is regarded as a full-risk management provider with notable financial strength and strong client relationships. Furthermore, XLC continues to provide XLRA with both explicit and implicit support, and disciplined capital management has allowed XLRA to maintain a very strong capital base.
Overall, Standard & Poor’s believes XLC’s extremely strong capital
adequacy, conservative reserving methodologies, earnings diversification, and appropriate financial leverage allow it the capability to withstand such an underwriting loss. Expectations are that the momentum of rate increases earned in its core (re)insurance segments, strong cash flows, and proactive risk management will provide very strong earnings in 2003.
However, these strengths are hampered by XLC’s continued potential for prospective earnings volatility, susceptibility to market risk, and the need for active operational management.
Was this article valuable?
Here are more articles you may enjoy.