CHICAGO--(BUSINESS WIRE)--Fitch Ratings expects to assign a 'BBB-' rating to XLIT Ltd.'s (XL, a Cayman Islands subsidiary of XL Group plc) $1.033 billion issue of Solvency II compliant subordinated debt due 2025 and 2045 that is fully and unconditionally guaranteed by XL Group plc. A full list of Fitch's existing ratings on XL and its subsidiaries, which were not affected by today's action, follows at the end of this release.
KEY RATING DRIVERS
The company expects to use the net proceeds from the offering to partially finance the cash consideration for the purchase of Catlin Group Limited (CGL; Fitch does not publicly rate CGL). Fitch views the new Solvency II Tier 2 qualifying subordinated debt as dated deferrable debt hybrid securities, which receive 0% equity credit (100% debt treatment) in evaluating financial leverage under Fitch's hybrid securities rating methodology.
XL announced on Jan. 9, 2015 that it entered into an agreement to acquire CGL for total consideration of $4.1 billion, funded by $1.25 billion of cash on hand, $1.03 billion of Solvency II compliant fixed income securities and a $1.8 billion equity issuance. The company will be marketed as XL Catlin, with the close expected in mid-2015, subject to regulatory approvals and approval by CGL shareholders.
Following the debt issuance and acquisition of CGL ($90 million added existing CGL debt), pro forma financial leverage increases to 17.8% from 13.8% at Dec. 31, 2014, but is still below Fitch's 20% expectation. Pro forma debt plus preferred equity to total capital increases to 28.3% from 23.0%, below Fitch's tolerance level of 30%, as XL would assume CGL's existing perpetual preferred stock ($590 million).
Fixed-charge coverage is expected to decline following the acquisition to 4.0x - 5.0x due to the partial debt financing. XL's fixed-charge coverage has improved recently to 7.8x in 2014, but has been weak overall, averaging a low 4.9x from 2010 to 2014. Currently, the holding company IDR reflects nonstandard wider notching due to unfavorable fixed-charge coverage.
RATING SENSITIVITIES
The key rating trigger that could result in an upgrade to XL's IDR and debt ratings includes fixed-charge coverage maintained at 6.0x or higher. Key rating triggers that could lead to an upgrade to XL's ratings over time include favorable earnings with low volatility, including a combined ratio in the low 90s; continued strong capitalization of the insurance subsidiaries, with a net premiums written-to-equity ratio of 0.8x or lower; financial leverage ratio maintained at or below 20%; and fixed-charge coverage of at least 9x.
Key rating triggers that could result in a downgrade include failure to effectively integrate CGL; significant charges for reserves that affect equity and the capitalization of the insurance subsidiaries; financial leverage ratio maintained above 20% or debt plus preferred equity to total capital above 30%; fixed-charge coverage below 4.0x - 5.0x; increases in underwriting leverage above 1.0x net premiums written-to-equity ratio; or earnings below industry levels and failure to maintain consistent underwriting profitability.
Fitch expects to assign the following rating:
XLIT Ltd.
--$1.033 billion subordinated notes due 2025/2045 'BBB-'.
Fitch currently rates XL and its subsidiaries as follows:
XLIT Ltd.
--IDR 'A-';
--$300 million 2.30% senior notes due 2018 'BBB+';
--$400 million 5.75% senior notes due 2021 'BBB+';
--$350 million 6.375% senior notes due 2024 'BBB+';
--$325 million 6.25% senior notes due 2027 'BBB+';
--$300 million 5.25% senior notes due 2043 'BBB+';
--$345 million series D preference ordinary shares 'BBB-';
--$999.5 million series E preference ordinary shares 'BBB-'.
XL Insurance (Bermuda) Ltd
XL Re Ltd
XL Insurance Switzerland Ltd
XL Re Latin America Ltd
XL Insurance Company SE
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
--IFS 'A+'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Sept. 4, 2014).
Applicable Criteria and Related Research:
Insurance Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981581
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