CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of XLIT Ltd. (a Cayman Islands subsidiary of XL Group plc) and its property/casualty (re)insurance subsidiaries (collectively XL), including the Issuer Default Rating (IDR) at 'BBB+', and the Insurer Financial Strength (IFS) rating of its core operating companies at 'A'. The Rating Outlook remains Positive.
Fitch's rating action follows the company's announcement that it has entered into a transaction to sell XL Life Reinsurance (SAC) Ltd. (XLLR) to GreyCastle Holdings Ltd. (GreyCastle) and retrocede (via 100% quota share reinsurance) the majority of its run-off life reinsurance business to XLLR. XL's life reinsurance operations are in runoff with no new business since March 2009. Fitch views the transaction as overall neutral to the rating as the immediate accounting write-off charge is manageable and is offset by reduced volatility, with the investment market risk passed on to the buyer through a funds withheld liability. As such, this should help XL to increase focus on its core property/casualty business.
The transaction includes all of XL's U.K. and Irish fixed annuity and U.K. term business, representing $4.4 billion, or over 90% of XL's $4.8 billion total GAAP life reinsurance future policy benefit reserves. XL's remaining life reserves will primarily include its U.S. term business, disability, and accident and health policies, which are excluded from this transaction.
Fitch notes that following the XLLR sale and retrocession transaction, XL will take on counterparty credit risk of XLLR, the retrocessionaire, a new, unrated Bermuda regulated entity being sold to GreyCastle. Fitch also notes that this credit exposure will be significantly mitigated by the collateral provided under the funds withheld agreement, which will be in excess of the underlying US GAAP liabilities and the level of capitalization of XLLR, which is in excess of regulatory requirements. GreyCastle is a newly formed Bermuda holding company whose shareholders are large families and university endowments.
The retrocession will result in an expected book value loss to XL of approximately $585 million, which represents about 5% of XL's total shareholders' equity of $11.6 billion at March 31, 2014. The expected net income statement loss of $580 million compares to XL's annual net income of $1.1 billion in 2013.
Fitch's rationale for the affirmation of XL's ratings reflects the company's solid capitalization, reasonable financial leverage, and large diversified market position in both insurance and reinsurance lines, as well as anticipated challenges in the overall competitive property/casualty market rate environment. The Positive Outlook reflects XL's favorable recent net earnings from improving calendar year and run-rate accident year underwriting results, particularly in the company's insurance segment, as well as improving operating earnings-based interest and preferred dividend coverage.
The key rating triggers that could result in an upgrade include consistent favorable underwriting profitability with combined ratios of 98% or better, overall flat to favorable loss reserve development, financial leverage ratio maintained below 20%, run-rate operating earnings-based interest and preferred dividend coverage of 7x, and continued strong capitalization of the insurance subsidiaries.
The key rating triggers that could result in a downgrade include significant charges for reserves or investments that affect equity and the capitalization of the insurance subsidiaries, financial leverage ratio maintained above 25% or debt plus preferred equity to total capital above 30%, and future earnings that are significantly below industry levels.
Fitch affirms the following ratings with a Positive Outlook:
--IDR at 'BBB+';
--$600 million 5.25% senior notes due 2014 at 'BBB';
--$300 million 2.30% senior notes due 2018 'BBB';
--$400 million 5.75% senior notes due 2021 at 'BBB';
--$350 million 6.375% senior notes due 2024 at 'BBB';
--$325 million 6.25% senior notes due 2027 at 'BBB';
--$300 million 5.25% senior notes due 2043 'BBB';
--$345 million series D preference ordinary shares at 'BB+';
--$999.5 million series E preference ordinary shares at 'BB+'.
Fitch has also affirmed at 'A' the IFS ratings of the following XL (re)insurance subsidiaries with a Positive Outlook:
--XL Insurance (Bermuda) Ltd;
--XL Re Ltd;
--XL Insurance Switzerland Ltd;
--XL Re Latin America Ltd;
--XL Insurance Company plc;
--XL Insurance America, Inc.;
--XL Reinsurance America Inc.;
--XL Re Europe SE;
--XL Insurance Company of New York, Inc.;
--XL Specialty Insurance Company;
--Indian Harbor Insurance Company;
--Greenwich Insurance Company;
--XL Select Insurance Company.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Nov. 13, 2013).
Applicable Criteria and Related Research:
Insurance Rating Methodology