A.M. Best Co. has assigned an “a-” rating to Bermuda-based XL Capital Ltd.’s pending issue of 8,000,000 of 8.0 percent Series A preference ordinary shares, which may be increased by 1,200,000 if the over allotment feature is exercised. Additionally, the existing debt and indicative shelf ratings have been affirmed. The financial strength rating associated with XL’s operating subsidiaries remains unaffected.
The preference ordinary shares being issued under an existing shelf registration filing will be used to retire any of the Liquid Yield Option ™ Notes (“LYONS”), which holders may put to XL on Sept. 7, 2002, with any excess used for general corporate purposes. The preference ordinary shares have no stated maturity or mandatory redemption date and are not convertible or exchangeable into ordinary shares of XL. Financial leverage—debt plus preferred securities to total adjusted capital—has increased substantially since 2000 but is expected to remain within A.M. Best’s tolerance level of the mid-20 percent range.
The rating reflects XL’s historically strong and diverse earnings base, solid capitalization, excellent liquidity and leading market position as a provider of global excess and primary insurance along with worldwide property/casualty products. These strengths are derived from XL’s strong management team, solid underwriting expertise, recognized market presence and disciplined operating strategies. Offsetting these strengths are the risks associated with catastrophe and specialized books, particularly those imposed by financial products. Consequently, during periods of economic uncertainty, XL’s earnings are subject to variability due to its credit related products. Furthermore, XL carries a significant amount of goodwill associated with its acquisitions. However, these concerns are mitigated by strong capitalization and management’s demonstrated ability to optimally manage risk.
While significant losses were incurred during 2001—on account of losses emanating from the Sept. 11 terrorist attacks—XL has historically generated favorable earnings providing for solid coverage of its debt obligations. Despite experiencing adverse loss development from the Sept. 11 terrorist attacks and investment losses in 2002, A.M. Best expects XL to benefit from the favorable turn in the market and restore earnings to historical levels, thereby providing for fixed charge coverage in the mid to high single digit range. Accordingly, A.M. Best views the rating outlook as stable.
At June 30, 2002, the holding company reported total assets of $31.2 billion and shareholders’ equity of $5.4 billion. Current market capitalization stands at approximately $10.1 billion.
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