XL Takes $647M Reserve Hit

The new year is still in its infancy, but one familiar scene from previous years is already being played out in the insurance industrya big reserve charge quickly followed by rating agency reactions.

Last week, the Bermuda-based XL Capital Ltd. announced 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, mostly from new casualty claims for 1997-to-2000 underwriting years. Since then, the company has been examining further whether it has fully adequate reserves to address these losses.

XL said that because of the new charge, it will issue convertible securities to raise at least $750 million in the first half of 2004.

In a conference call with analysts, XL management emphasized repeatedly that this reserve addition will finally resolve the companys prior-year liability problems. “This concludes a very difficult chapter for XL. I believe that with these actions taken, we have fully and completely addressed our legacy issues,” said XL Chief Executive Officer Brian O'Hara.

There are four major components to XLs overall reserve change.

First, the bulk of the charges are for late-emerging development from the old NAC Re from the soft market years of 1997 to 2001. “This is concentrated primarily in the more problematic business lines: directors and officers and medical malpractice reinsurance treaties,” Mr. O'Hara said.

Second, a regularly scheduled reinsurance year-end review of all other reserves, excluding the Sept. 11 terrorism event, resulted in the recognition of $62 million of casualty and professional-lines losses from late 1990s to 2001, XL noted.

Third, a regularly scheduled year-end review of XL insurance segments reserves resulted in $150 million of prior-year development, mostly related to Bermuda-based professional lines.

Fourth, XL also had some favorable reserve development to announce. Due to the high degree of participation by World Trade Center claimants in the Sept. 11 victim compensation fund process, which ended last month, XL said it was able to take down its Sept. 11-related reinsurance reserves by $181 million.

Mr. 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. 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.

“We have taken a rating action on XL group because charges were higher than we had anticipated,” added Karole Barkley, analyst at the New York-based Standard & Poor's Ratings Services, which also cut its XL ratings. S&Ps ratings actions include cutting its counterparty-credit and financial-strength ratings on core 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 Capitals senior unsecured debt to “A2″ from “A1,” as well as insurance financial strength ratings for members of the XL Reinsurance Americas intercompany pool and XL Re, to “Aa3″ from “Aa2.” The outlooks for all rated members of the XL Capital group are now stable.

Reproduced from National Underwriter Edition, January 16, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

Special Reports /

XL Takes $647M Reserve Hit

Related Stories

Recommended For You