S&P Revises Outlook on XL Group to Stable; Affirms Ratings

Standard & Poor’s Ratings Services has revised its outlook on XL Group Ltd. and its subsidiaries to stable from negative. S&P also affirmed its ‘A’ counterparty credit and financial strength ratings on XL Group’s core insurance subsidiaries and its ‘BBB+’ counterparty credit ratings on the holding companies.

“The revision of the outlook to stable recognizes the group’s success in strengthening its capitalization and financial flexibility,” explained credit analyst Steven Ader. “It has done so by derisking its investment portfolio while sustaining strong operating results and a strong, stable competitive profile.”

S&P added that, although it believes XL has a “higher potential for realized investment losses and potential losses from runoff businesses than its property/casualty peers, it has markedly reduced this potential, and we do not anticipate that any such losses would materially detract from the group’s continued strong operating performance.

“Furthermore, our revised assessment of the group’s enterprise risk management to strong supports our belief that XL has materially reduced the potential for unanticipated material losses, which hurt its historical earnings performance.

S&P said the ratings on XL Group Ltd. and the members of the XL group (XL) reflect the group’s “strong global market presence, operating performance, and capitalization.”

As offsetting factors, S&P cited the Group’s “susceptibility to additional realized losses in the investment portfolio and potential losses from runoff businesses.

S&P described XL as “strongly positioned in the U.S, European, and Bermudian property/casualty insurance and reinsurance markets, as its $6.1 billion of gross premium written in calendar-year 2009 demonstrates. This business is well diversified by segment (64 percent insurance, 36 percent reinsurance), geography (49 percent sourced in U.S, 12 percent Bermuda, and 39 percent Europe and other), and line of business.

“XL’s competitive resilience (renewal, new business consistent with historical norms) in the face of material charges in 2008 and 2009 supports our view that XL’s competitive position is strong and sustained by its global presence, scale, and underwriting expertise.”

As far as the future is concerned, S&P said: “We could lower the rating if the group does not meet our performance expectations, particularly if there were a significant shortfall in underwriting results (absent a significant catastrophe, for which XL’s results should be consistent with expectations and the industry as a whole).

“We could also consider a downgrade if unexpected adverse events–such as unexpected additional realized investment losses, large underwriting losses, or unanticipated material charges–were to recur.

“Alternatively, we could raise the ratings if XL were to markedly enhance its competitive profile, which would be demonstrated by greater diversification within business sub-segments and improved operating performance that is even more favorably differentiated from the property/casualty industry as a whole. At the same time, the group would have to further reduce the potential for adverse charges from the investment and runoff business.

Source: Standard & Poor’s