Best, S&P Assign Ratings to XL’s Capital Increase Plan

December 2, 2005

A.M. Best Co. and Standard & Poor’s Ratings Services have reacted more or less positively to XL Capital Ltd.’s capital raising initiative (See previous article).

Best has assigned indicative debt ratings of “a-” to the senior unsecured debt, “bbb+” to the subordinated debt and “bbb” to the preferred stock that can be issued under XL’s shelf registration.

S&P has assigned its preliminary ‘A-‘ senior debt, ‘BBB+’ subordinated debt, and ‘BBB’ preferred stock ratings to XL’s recently filed universal shelf. S&P also affirmed its ‘A-‘ counterparty credit ratings on XL and its core holding companies, Nac Re Corp. and XL America Inc., and affirmed its counterparty credit and financial strength ratings on XL’s core operating companies. All of the ratings were recently downgraded, taken off CreditWatch and assigned a stable outlook (See IJ Website Nov. 28).

S&P has also assigned its ‘A-‘ senior debt rating to XL’s planned $650 million of mandatory convertible securities (MCS). “The ratings on XL reflect its very strong competitive position and global market presence, diversified earnings stream, very strong investments and liquidity, strong capitalization and financial flexibility, and negligible asbestos and environmental exposure,” explained S&P credit analyst Mohammed Ashab. “Partially offsetting these positive factors are XL’s exposure to large catastrophic losses, its susceptibility to adverse reserve development, and market concern of XL’s management’s ability to deliver consistent earnings without significant negative surprises.”

S&P said it maintains a stable outlook, because it “believes that XL will be positioned globally to take advantage of the expected hardening of the insurance and reinsurance markets due to 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.”

Best, however, said it will maintain XL’s ratings under review with negative implications. It also noted that it has taken into account the “draft report from the independent actuary in its dispute with Winterthur Swiss Insurance Co. relating to its acquisition of Winterthur International in 2001.” Best said, however, that despite the $830 million charge, the “financial strength rating of ‘A+’ (Superior) and its issuer credit ratings of “aa-” and the existing debt ratings of XL Capital Limited remain unchanged at this time.”

Best also indicated that it “will assess these various charges and XL Capital’s total recapitalization plan, which will include increasing capital by $2.8 billion and entering into a quota share agreement with a newly-formed Bermuda reinsurer (Cyrus Re) with regard to some of the group’s property catastrophe and retrocessional exposures.” The rating agency said it would also “consider XL Capital’s ongoing earnings capability in light of the anticipated improvement in the property insurance and reinsurance segments.”

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