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 big reserve charge announced Tuesday by XL Capital Ltd.[@@]
Bermuda-based XL Capital Ltd. said it is taking a $647 million after-tax charge for its 2003 fourth quarter. XL said the charge, which follows previously announced claims-audit and regularly scheduled year-end reserve reviews, will largely cover reinsurance losses in its North American operations involving contracts sold by NAC Re Corp., a reinsurer that XL bought in 1999.
XL had already added some $160 million after tax to its North American operations' reserves during the 2003 third quarter to account for higher-than-expected losses, primarily from new casualty claims for the 1997-to-2000 underwriting years. Since then, the company has been examining whether it has fully adequate reserves to address these losses.
During a conference call with analysts yesterday, XL Chief Executive Officer Brian O'Hara remarked that XL is now in a position to move forward without its legacy burden. "This review is not the only thing going on at XL. We have a strong momentum in our current business flowing into 2004," he said. "I am looking forward to leading XL to a stellar 2004 and beyond."
However, some analysts told National Underwriter that they were still surprised by the magnitude of the charge. "It was larger than we had anticipated, cumulatively for the year," said Robert DeRose, analyst at the Oldwick, N.J.-based A.M. Best Company.
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 million for the year." The agency has downgraded all debt ratings of XL Capital and also placed its "A-plus" financial strength ratings for XL 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, "We have taken a rating action on XL group because charges were higher than we had anticipated. We have reassessed our view of the financial strength of the group, considering the operation performance in light of the new information."
S&P's ratings action includes cutting its counterparty-credit and financial-strength ratings on core XL operating companies to "double-A-minus" from "double-A," as well as lowering 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 XL Capital's senior unsecured debt to "A2" from "A1," as well as insurance financial strength ratings for members of the XL Reinsurance America's intercompany pool and XL Re, to "Aa3" from "Aa2." The outlooks for all rated members of the XL Capital group are now stable.
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