Fitch Ratings has placed the ratings of XL Capital Ltd (XL) and its property/casualty (re)insurance subsidiaries, including the 'A' Issuer Default Rating (IDR) and the 'A+' Insurer Financial Strength (IFS) ratings of lead (re)insurance companies XL Insurance (Bermuda) Ltd and XL Re Ltd., on Rating Watch Negative. (See the full list below.)
The rating action follows XL's announcement that the company will be reporting net realized investment losses between $290 million and $315 million in the third quarter, which includes other-than-temporary impairment charges between $250 million and $275 million. Additionally, the company will report a change in unrealized losses between $800 million and $875 million.
When XL completed its capital raising initiative, Fitch believed the additional capital the company raised in excess of the payment to Syncora Holdings Ltd (formerly Security Capital Assurance Ltd) provided some cushion to absorb future investment or large catastrophe losses. Given the extraordinarily challenging credit market environment since August, XL has essentially depleted this additional capital cushion.
XL announced that it will complete the strategic review of its life operations in the fourth quarter of 2008. 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. Fitch believes the disposition of this business would reduce asset leverage and volatility in the investment portfolio while freeing up capital to support XL's core property/casualty operations.
XL is also realigning its investment portfolio to reduce its exposure to topical structured credit assets and corporate credit securities. Fitch will continue to monitor XL's progress in selling assets in a turbulent market. XL estimates its net unrealized losses total between $3.3 billion and $3.4 billion at Sept. 30, 2008. Fitch believes a portion of these unrealized losses will flow through the income statement and create a drag on earnings as the assets are either sold or impaired over time.
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.
Fitch believes XL's liquidity remains adequate as the company held approximately $5.6 billion in cash and cash equivalents at Sept. 30, 2008. Additionally, the company has revolving credit facilities of $7.3 billion available for letter of credit issuance with up to $1.1 billion available for direct borrowing. No debt is outstanding under these facilities.
XL is a Bermuda headquartered holding company with subsidiaries providing insurance and reinsurance on a worldwide basis. XL reported consolidated GAAP assets of $52.1 billion and shareholders equity of $8.8 billion at June 30, 2008. Fitch estimates XL's equity-adjusted debt-to-total capital, excluding any FAS 115 adjustment for unrealized losses, on a pro forma basis to be approximately 25%, up from 21.4% at June 30, 2008.
Fitch has placed the following ratings on Rating Watch Negative:
XL Capital Ltd:
--IDR 'A';
--$600 million 5.25% senior notes due 2014 'A-';
--$350 million 6.375% senior notes due 2024 'A-';
--$745 million 5.25% senior notes due 2011 'A-';
--$325 million 6.25% senior notes due 2027 'A-';
--$575 million 10.75% equity units 'A-';
--6.375% series E preferred ordinary shares 'BBB+';
--$500 million series C preference ordinary shares 'BBB+'.
XL Capital Finance (Europe) PLC
--IDR 'A';
--$600 million 6.50% guaranteed senior notes due 2012 'A-'.
Fitch also placed the 'A+' IFS ratings of the following XL Capital Ltd (re)insurance subsidiaries on Rating Watch Negative:
--XL Insurance (Bermuda) Ltd
--XL Re Ltd
--XL Insurance Switzerland
--XL Re Latin America Ltd
--XL Europe Ltd
--XL Insurance Company Limited
--XL Insurance America, Inc.
--XL Reinsurance America Inc.
--XL Re Europe Limited
--XL Insurance Company of New York, Inc.
--XL Specialty Insurance Company
--Indian Harbor Insurance Company
--Greenwich Insurance Company
--XL Select Insurance Company
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.