Best Affirms Ratings of XL and Subs; Removes from Under Review

May 4, 2015

A.M. Best has removed from under review with negative implications and affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and the issuer credit ratings (ICR) of “a+” of the ongoing property/casualty (P/C) subsidiaries of XL Group plc, “based on the recent announcement that XL has closed on the acquisition of Catlin Group Limited.”

Best also said it has withdrawn the ICR of “bbb” of Catlin Group Limited, and has removed from under review with negative implications and affirmed the ICRs of “bbb+” of Cayman Islands-based XL and XLIT Ltd., as well as the debt ratings of XLIT Ltd. The outlook assigned to all ICRs and debt ratings is negative, while the outlook assigned to the FSR is stable.

Best has also removed from under review with positive implications and affirmed the FSR of ‘A’ (Excellent) and the ICRs of “a” of the Bermuda-based Catlin Insurance Company Limited (CICL), the lead operating entity of the Catlin group of companies, and its insurance subsidiaries.

In addition Best has removed from under review with positive implications and affirmed the ICR of “bbb” of UK-based Catlin Underwriting (CU), a non-operating holding company, as well as the debt ratings of CU. The outlook assigned to the ICRs and debt ratings is positive, while the outlook assigned to the FSR is stable.

Best also said the FSR of ‘A’ (Excellent) and the ICR of “a+” of Lloyd’s Syndicate 2003, which is managed by Catlin Underwriting Agencies Limited, are unchanged. The outlook for both ratings is positive. The syndicate’s ratings reflect the financial strength of Lloyd’s, which underpins the security of all Lloyd’s syndicates.

Best report explained that the assignment of a negative outlook to XL’s ICR ratings reflects its “concern associated with the complexity of an acquisition of this size and scope. Furthermore, in order to achieve the greatest efficiencies and long-term gains, a successful integration must be achieved in a timely fashion.

“XL has made progress in identifying and retaining key management teams but still needs to integrate operations and systems infrastructure and assimilate company cultures. There is execution risk while this transition is taking place, which is partially mitigated by the collaborative nature of this transaction.”

Best also indicated that it believes that “during the integration period there is greater inherent risk to the ongoing operations of the combined company.”

The assignment of a positive outlook to the Catlin ratings “reflects the potential for the ratings to be raised to the level of XL’s ongoing P/C subsidiaries,” the report said. “Additionally, it is anticipated that Catlin’s insurance subsidiaries may benefit over time from scale advantages accruing to the enlarged group, expense savings and enhanced diversification. XL has undertaken detailed integration planning, which should mitigate operational risks associated with the acquisition. Changes to the ratings or an outlook revision will be closely related to any movement in XL’s ratings.”

Best also pointed out that “the proposed transaction has favorable attributes, which include the combining of two quality companies with solid management teams, global capabilities and strong risk-adjusted capital positions. The combined organization has greater scale, a broader product offering and is expected to have increased influence in the market.”

In conclusion Best said: Factors that could lead to a rating downgrade include its view that “integration represents a potentially material risk to the organization, an altered view of the organization’s enterprise risk management capability, outsized investment or catastrophe losses or a significant drop in risk-adjusted capitalization.

“Factors that could lead to stabilization or an upgrade of the ratings include a sound and streamlined integration process, retention of key personnel, moderate debt and leverage measures and solid operating results coupled with strong risk-adjusted capitalization.”
Best summarized the rating actions and the companies, affected by them as follows:
The FSR of ‘A’ (Excellent) and the ICRs of “a+” have been removed from under review with negative implications and affirmed, with the FSR assigned a stable outlook and the ICRs assigned a negative outlook, for the following subsidiaries of XL Group plc:
XL Re Ltd
Indian Harbor Insurance Company
Greenwich Insurance Company
XL Insurance Company of New York, Inc.
XL Insurance America, Inc.
XL Select Insurance Company
XL Reinsurance America Inc.
XL Specialty Insurance Company
XL Insurance (Bermuda) Ltd
XL Re Latin America Ltd
XL Insurance Company SE
XL Re Europe SE
XL Insurance Switzerland Ltd

The FSR of ‘A’ (Excellent) and the ICRs of “a” have been removed from under review with positive implications and affirmed; with the FSR assigned a stable outlook and the ICRs assigned a positive outlook, for the following subsidiaries of Catlin Insurance Company Limited:
Catlin Indemnity Company
Catlin Insurance Company (UK) Ltd.
Catlin Insurance Company Inc.
Catlin Re Switzerland Ltd
Catlin Specialty Insurance Company

The following debt ratings been removed from under review with negative implications, affirmed and assigned a negative outlook:
XLIT Ltd.—
— “bbb+” on $350 million 6.375% senior unsecured notes, due 2024
— “bbb+” on $325 million 6.25% senior unsecured notes, due 2027
— “bbb-” on $999.5 million 6.5% Series E non-cumulative preferred securities, redeemable 2017
— “bbb+” on $400 million 5.75% senior unsecured notes, due 2021
— “bbb+” on $300 million 2.30% senior unsecured notes, due 2018
— “bbb+” on $300 million 5.25% senior unsecured notes, due 2043
— “bbb-” on $345 million Series D non-cumulative preferred securities
The following debt ratings been assigned with a negative outlook:
XLIT Ltd.—
— “bbb” on $500 million 4.45% subordinated notes, due 2025
— “bbb” on $500 million 5.5% subordinated notes, due 2045

The following indicative ratings on shelf securities have been removed from under review with negative implications, affirmed and assigned a negative outlook:
XLIT Ltd.—
— “bbb+” on senior unsecured debt
— “bbb” on subordinated debt
— “bbb-” on preferred stock

The following debt ratings been removed from under review with positive implications, affirmed and assigned a positive outlook:
Catlin Insurance Company Limited—
–“bbb” on $600 million 7.249% preferred stock
Catlin Underwriting—
— “bbb-” on $27 million subordinated floating rate notes, due 2036
— “bbb-” on €7 million subordinated floating rate notes, due 2035

Source: A.M. Best

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