S&P Downgrades XL’s Ratings to ‘A+’

November 29, 2005

Standard & Poor’s Ratings Services announced that it has lowered its counterparty credit and financial strength ratings on XL Capital Ltd.’s core operating companies to “A+” from “AA-” and removed them from CreditWatch with negative implications, where they were placed on Sept. 20, 2005.

S&P also lowered its counterparty credit ratings on XL Capital Ltd. and its core group holding companies –XL America Inc. and Nac Re Corp.– to “A-” from “A” and removed them from CreditWatch negative. The outlook on all the companies is stable.

S&P noted, however, that so far “the downgrade of XL’s core operating companies will not affect the ratings on XL Capital Assurance Inc. (AAA/Stable/–) or XL Financial Assurance Ltd. (AAA/Stable/–).”

S&P indicated that the rating actions “follow XL’s public announcement on Nov. 23, 2005, in which XL stated that the draft report prepared by the independent actuary (IA) indicated that XL had lost in the IA net reserve valuation process with Winterthur Swiss Insurance Co.” (See IJ Website Nov. 25).

Following the actuary’s finding, “XL expects to receive about $575 million in cash from Winterthur Swiss and expects to take approximately a $830 million pretax charge (approximately the difference between XL’s and Winterthur Swiss’s submissions to the IA) as a write-off for its unsecured reinsurance recoverable against earnings in the fourth quarter of 2005,” S&P noted.

“XL’s apparent loss of the IA net reserve valuation process is a significant departure from our expectations, and these expectations were factored into the previous ratings,” noted S&P credit analyst Mohammed Ashab. “In addition, the loss to Winterthur raises questions surrounding some of XL’s risk-management capabilities, including areas such as the reserve-setting processes, data quality, and systems issues. Accordingly, we will be meeting with XL to ascertain its risk-management capabilities within the context of our new enterprise risk management criteria.”

The final report from the IA is due to be released next week. S&P noted that “both XL and Winterthur Swiss have the option to submit what they believe to be manifest errors to the IA by Nov. 29, 2005.”

The rating agency stated, however, that “regardless of the final outcome of the IA net reserve valuation process, Standard & Poor’s continues to believe that the paramount issue is one of XL’s management’s ability to deliver consistent earnings without significant negative surprises.”

Concerning the present ratings, S&P indicated they, “reflect XL’s very strong competitive position and global market presence, diversified earnings stream, very strong investments, liquidity and financial flexibility, and negligible asbestos and environmental exposure. Partially offsetting these positive factors are XL’s exposure to large catastrophic losses, its susceptibility to adverse reserve development, and market perception of XL’s management’s ability to deliver consistent earnings without significant negative surprises.”

S&P said it had assigned a stable outlook as it “believes that XL will be positioned globally to take advantage of the expected hardening of the insurance and reinsurance markets because of the natural catastrophes in the third quarter of 2005. As a result, Standard & Poor’s expects XL to reduce the volatility of its operating performance from its balance sheet in 2006 and beyond.”

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