XL's $647M Charge Triggers Rating Actions

NU Online News Service, Jan. 15, 2:34 p.m.EST?Rating agencies have reacted negatively to the bigreserve charge announced Tuesday by XL Capital Ltd.[@@]

Bermuda-based XL Capital Ltd. said it is taking a $647 millionafter-tax charge for its 2003 fourth quarter. XL said the charge,which follows previously announced claims-audit and regularlyscheduled year-end reserve reviews, will largely cover reinsurancelosses in its North American operations involving contracts sold byNAC Re Corp., a reinsurer that XL bought in 1999.

XL had already added some $160 million after tax to its NorthAmerican operations' reserves during the 2003 third quarter toaccount for higher-than-expected losses, primarily from newcasualty claims for the 1997-to-2000 underwriting years. Sincethen, the company has been examining whether it has fully adequatereserves to address these losses.

During a conference call with analysts yesterday, XL ChiefExecutive Officer Brian O'Hara remarked that XL is now in aposition to move forward without its legacy burden. "This review isnot the only thing going on at XL. We have a strong momentum in ourcurrent business flowing into 2004," he said. "I am looking forwardto leading XL to a stellar 2004 and beyond."

However, some analysts told National Underwriter thatthey were still surprised by the magnitude of the charge. "It waslarger than we had anticipated, cumulatively for the year," saidRobert DeRose, analyst at the Oldwick, N.J.-based A.M. BestCompany.

Mr. DeRose noted that XL "also took charge in the third quarter,and with this new charge on top of that, it's almost $900 millionfor the year." The agency has downgraded all debt ratings of XLCapital and also placed its "A-plus" financial strength ratings forXL Capital and its affiliated companies under review with"negative" implications.

Karole Barkley, analyst at the New York-based Standard &Poor's Ratings Services, which also cut its XL ratings, said, "Wehave taken a rating action on XL group because charges were higherthan we had anticipated. We have reassessed our view of thefinancial strength of the group, considering the operationperformance in light of the new information."

S&P's ratings action includes cutting itscounterparty-credit and financial-strength ratings on core XLoperating companies to "double-A-minus" from "double-A," as well aslowering its counterparty-credit rating on XL Capital to "A" from"A-plus" and removing it from the CreditWatch status.

Moody's Investors Service in New York cut ratings of XLCapital's senior unsecured debt to "A2" from "A1," as well asinsurance financial strength ratings for members of the XLReinsurance America's intercompany pool and XL Re, to "Aa3" from"Aa2." The outlooks for all rated members of the XL Capital groupare now stable.