Fitch Lowers XL Ratings to ‘BBB+’

December 18, 2008

Fitch Ratings announced that it has downgraded XL Capital Ltd. and its P/C (re)insurance subsidiaries, including the Issuer Default Rating (IDR) for XL to ‘BBB+’ from ‘A’, and the Insurer Financial Strength (IFS) rating of its core operating companies to ‘A’ from ‘A+’. The ratings remain on Fitch’s Rating Watch Negative.

Standard & Poor’s Ratings Services took similar actions on Monday, lowering its counterparty credit and financial strength ratings on XL Capital Ltd.’s core operating companies to ‘A’ from ‘A+’, and its counterparty credit rating on XL to ‘BBB+’ from ‘A-‘, while assigning a negative outlook to the ratings (See IJ web site –

Fitch said it took the rating action following “XL’s announcement that the company anticipates the estimated mark-to-market decline in its investment portfolio through November 2008 to be largely in line with the $1.1 billion of unrealized losses, other than temporary impairments and realized losses on sales the company incurred in the third quarter of 2008 and the $200 to $220 million in net investment fund affiliate losses from its alternative investment portfolio for the fourth quarter of 2008.”

Fitch added: “Given the challenging credit market environment that grew increasingly more volatile in the fourth quarter, Fitch believes it will be difficult for XL to complete the realignment of its investment portfolio or the strategic review of its life operations in the near-term. Due to the long duration of the life operations’ assets, which are used to support its long-duration liabilities, Fitch believes this business has been a significant driver of the rate and credit spread volatility in XL’s investment portfolio.

Resolution of the Rating Watch is contingent upon the successful execution of XL’s plans to de-risk its investment portfolio and stabilization of investment performance. Last week XL commented that given the current environment, it is continuing to explore ‘value enhancing opportunities’. Fitch believes the continued drag from investment portfolio issues has made it marginally more difficult for XL’s insurance subsidiaries to compete with higher-rated peers. As such, Fitch remains concerned that XL’s underwriting performance going forward could show deterioration.

“The downgrade on XL’s holding company and debt ratings reflects the issues noted above as well as Fitch’s decision to widen the notching between the IFS ratings and the holding company ratings. The widened notching reflects Fitch’s view that financial leverage widens with the fourth quarter reduction in GAAP equity (including a possible risk of goodwill write-downs, in Fitch’s opinion), and that financial flexibility is limited due to recent declines in the company’s stock price, widening credit spreads, and difficult capital market conditions.”

Fitch did note that notes that XL “has taken a number of steps to increase the stability of operating results in its core property/casualty (re)insurance operations and capital going forward including the enhancement of its enterprise risk management capabilities, simplification of its management structure and reduction in exposure to corporate credit and commercial mortgage backed securities.

“Additionally, XL has reduced its catastrophe exposure and Fitch believes the company’s overall loss reserve position is stronger than in recent years. Finally, XL reached an agreement earlier this year to extinguish certain exposure the company had to Syncora Holding Ltd. (formerly Security Capital Assurance Ltd) which eliminated uncertainty and protected XL from any further deterioration in Syncora’s financial condition.”

Source: Fitch Ratings –

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