Standard & Poor's Ratings Services has lowered the financial strength and counterparty credit ratings on XL Capital Ltd.'s core operating companies, citing the Bermuda insurer's diminished underwriting performance and competitive position.
The rating agency lowered XL's financial strength to "A" from "A-plus," and the counterparty credit rating to "triple-B-plus" from "A-minus." The outlook for the companies is negative.
Standard & Poor's analyst Steven Ader said "perceived franchise issues stemming from a string of material earnings and capital charges over the past several years" have led to the diminished competitive position and underwriting performance.
Mr. Ader explained, "Although XL remedied many of these issues this past summer, the material deterioration in the unrealized position of XL's investment portfolio in the third quarter has again pressured XL's market presence."
While XL maintains a strong liquidity position, Standard & Poor's said its financial flexibility is a weakness to the rating. Standard & Poor's also said it believes there will be a reductions in new business opportunities for XL, and also that renewal activity will be modestly below historical norms.
"This would hamper prospective underwriting performance, which, though strong, is inconsistent with what we typically expect for the prior rating," said the rating firm.
XL's chief executive officer, Michael S. McGavick, issued a statement disagreeing with Standard & Poor's decision.
"We are very disappointed with S&P's decision, particularly in light of the many positive comments S&P made about XL in its release," he said.
Standard & Poor's called XL's capitalization strong, and also mentioned XL's initiatives to refocus operations on the company's strong property-casualty insurance and reinsurance operations, while reducing noncore risks. Standard & Poor's also said continuation of XL's "adequate" focus on enterprise risk management (ERM) will help the company going forward.
"If, in the next two years, ERM continues to develop, additional investment losses fail to materialize, and no negative surprises arise that dampen consolidated results, we could revise the outlook to stable," Mr. Ader said.
But, he added, "if more unexpected adverse events occur (such as unexpected additional realized investment losses, large underwriting losses, or large operational related risk), if the company does not meet our financial tolerance levels, or if there is inadequate progress related to XL's ERM, another downgrade would most likely result."
Mr. McGavick issued an additional comment later noting that "based on very recent discussions with A.M. Best in which we reviewed our business and financial condition, A.M. Best is leaving our 'A' Excellent/Stable outlook rating on our core operating subsidiaries unchanged."
"As we indicated yesterday, XL has no need or intent to seek additional capital at this time," he said. "We are pleased with the results of our discussions with A.M. Best and believe it is indicative of our financial strength and the power of our franchise."
This article updated, 4:01 p.m.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.