Moody’s Confirms XL’s Ratings, Changes Outlook to Negative

Moody’s Investors Service announced that it has confirmed the ratings of XL Capital “(A1 senior unsecured debt) and supported debt-issuing affiliates, as well as the Aa2 insurance financial strength ratings of members of the XL America intercompany pool, XL Re Ltd and UK-based XL Insurance Company Limited and changed the outlooks for these entities to negative.”

Moody’s announcement said its ratings on “other XL Capital subsidiaries — including its financial guaranty insurance subsidiaries XL Capital Assurance Inc. and XL Financial Assurance Ltd. and other primary insurance subsidiaries such as XL Insurance (Bermuda) Ltd – are not affected.”

The rating agency indicated that the “shift to a negative outlook for the parent company and the reinsurance operating subsidiaries is prompted by XL Capital’s announcement on October 17, 2003, that its third quarter 2003 results will be reduced by approximately $184 million as a result of higher than expected losses in its North America reinsurance operations on business written in the 1997-2000 underwriting years.”

Moody’s also noted that XL was conducting a further review of the financial situation, which it believes will “lead to additional charges in the fourth quarter of 2003, and that the magnitude of additional charges remains difficult to estimate.”

The implications could have deeper repercussions. The bulletin said that the “negative outlook further reflects Moody’s general concern that as business written by XL Re America in prior years has proven to be less profitable than originally estimated, the profitability of business written more recently remains uncertain and will require time to more accurately assess.”

It also indicated that “the charges are material to the normalized earnings capacity and capitalization of the XL America companies, and that these charges, together with others taken in 2002 and at the time of the acquisition of NAC Reinsurance in 1999 call into question the quality of that operation’s underwriting, as well as the magnitude of risk inherent in excess casualty insurance and reinsurance lines of business, which the rating agency said was a concern that increasingly has industrywide implications.”