S&P Rates XL Re Europe ‘A+’

Standard & Poor’s Rating Services has assigned its “A+” counterparty credit and financial strength ratings to newly created, Dublin-based XL Re Europe Ltd. The new Company will assume all non-life business previously underwritten by the U.K. branch of XL Re Ltd. – rated A+/Stable and XL Re Europe SA – rated A+/Stable – (See previous article).

At the same time, S&P said it “has withdrawn the ‘A+’ counterparty credit and financial strength rating on XL Re Europe SA as a result of its assets and liabilities being transferred to XL Re Europe Ltd. In addition, the ‘A+’ financial strength ratings on XL’s other core operating companies (see ratings list) and the ‘A-‘ rating on XL Capital Ltd. (XLC) have been affirmed. The outlook on all the ratings is stable.”

S&P credit analyst Steven Ader noted: “The ratings reflect Standard & Poor’s continuing view that the reinsurance business being underwritten through XL Re Europe Ltd. is a core and integral part of XLC’s competitive profile. This view is further supported by the $1.5 billion of initial capitalization that is viewed by Standard & Poor’s as appropriate for a core entity of the XL group.”

S&P also indicated that it “views the reorganization of the European reinsurance business under XL Re Europe Ltd. as providing the dual benefit of unified regulatory compliance under one regulator (Ireland) while affording enhanced infrastructure and capital efficiency.

“The counterparty credit rating on XL’s core operating companies is based on the group’s very strong global market presence, very strong interest and fixed-charge coverage, and a diversified earnings stream.”

However, S&P noted that “somewhat offsetting these strengths is a track record of inconsistent earnings performance, material (though reduced) exposure to large catastrophic losses, susceptibility to adverse reserve development, and complex business integration challenges borne from the relatively rapid and successful building of a very strong and diversified global competitive position.”

The rating agency said the stable outlook reflects its view that “XL’s continued integration of its very strongly positioned global insurance, reinsurance and life and annuity operations, and the reduced volatility through the shedding of property catastrophe exposure on a gross and net basis will enhance overall earnings performance while demonstrating significantly reduced volatility.

“This improvement, also borne from the materially reduced impact of prior-year reserve additions and other adverse earnings borne from acquisition and integration of core operations, will be realized through consistent results in 2006 and beyond as operating performance improves to the level of its current and higher level peers, with capitalization and financial leverage remaining appropriate for the rating category.

“However, if there is a continuation of significant negative developments that dampen consolidated results, the outlook could be revised to negative. In 2006, continued pricing discipline in combination with modestly softening but still adequate casualty pricing will, absent an unusually severe catastrophe year, result in strong operating performance as measured by a combined ratio below 95 percent and a pretax ROR (excluding realized gains) approaching 15 percent.”

S&P also indicated that “XLC’s capital adequacy ratio (as measured by Standard & Poor’s capital model) to be in the ‘A+’ range. Standard & Poor’s expects fixed-charge coverage to approach 8x.”