XL Capital Ltd. may be hit with a downgrade after Moody's Investors Service announced it is reviewing the company's financial strength and debt rating.
The New York-based rating service said it placed the Hamilton, Bermuda-based insurer's "A-1″ financial strength ratings on its insurance subsidiaries and the "Baa1″ senior debt rating on XL Capital Ltd. under review after it's recent preliminary third-quarter results announcement that included net loss estimates of $1.6 billion to $1.7 billion.
Despite raising substantial new capital in August, Moody's said the money has been eroded on an accounting basis by unrealized and realized losses on the company's investment portfolio.
While Moody's expects those investment portfolio losses to be less than current market value suggests, the losses are still placing pressure on the insurer's capital adequacy and financial flexibility. Moody's added that while the third quarter produced some organic capital generation, net earnings excluding realized gains and losses were modest primarily due to storm losses.
Moody's said its review will focus on exposures to the potential of further losses on the insurer's investment portfolio as well as the implications of possible operating weakness on its business franchise and balance sheet strength. The review will also evaluate the company's prospective profitability and interest coverage as well as executive risk associated with changes in its management team, organizational structure and corporate governance.
Moody's said the downgrade could occur if medium-term prospective profitability is judged to be weaker than its equally rated peers, realized investment losses are anticipated to be significant (other than temporary impairment losses in excess of $500 million), and franchise value and financial flexibility remain under pressure.
The rating could be confirmed if prospective economic investment losses are anticipated to be moderate, activities to strengthen capitalization continue and its new management team produces a simpler organization.
The rating agency said the last rating action occurred on Aug. 7 when it confirmed the ratings of XL and its affiliates with a negative outlook.
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