S&P Revises Outlook on Global Multiline Insurer XLIT to Positive; Affirms Ratings

December 22, 2015

Standard & Poor’s Ratings Services has revised its outlook on the global multiline insurer XLIT Ltd. and its operating companies (collectively XL) to positive from stable.

S&P has also affirmed its ‘A-‘ issuer credit and senior debt ratings on XLIT Ltd. and its ‘A+’ long-term counterparty credit and financial strength ratings on XL’s core subsidiaries, as well as its ‘A’ long-term counterparty credit and financial strength ratings on XL’s highly strategic entities.

In addition S&P has raised its long-term counterparty credit and financial strength ratings on Catlin Re Switzerland Ltd. and Catlin Insurance Co. (UK) Ltd. to ‘A+’ from ‘A’, as it said it now views “them as core entities to XL.

“The outlook revision reflects our view of XL’s strengthening competitive position and ultimately its business risk profile with the acquisition of Catlin,” said S&P’s credit analyst Taoufik Gharib.

The report explains that the “combined entity benefits from two recognized brands and cultures based on disciplined underwriting. This transformational acquisition has enhanced scale and increased product offering, growing 2015 pro-forma gross premiums written to $11 billion from $8 billion in 2014, and could reach $14 billion by year-end 2016 when Catlin is fully integrated.”

As a result, S&P said it believes “the combination of the two companies will bolster XL’s specialty business by expanding its position at Lloyd’s via Catlin’s leadership role, and foster growth in Catlin’s network via XL’s greater global footprint.

The report notes, however, that “given the size, complexity, and potential overlap between the two insurance and reinsurance portfolios, management could face challenges in the next 12 months, including the execution and integration risks inherent in this type of transaction. However, these risks are mitigated by both companies’ strong management teams, which both have strong track records in running complex companies. Furthermore, a disciplined underwriting culture and strong risk-management capabilities should put XL in a solid position to execute its strategy.

With the addition of Catlin, XL will continue to have extremely strong capital and earnings supported by its strong and more-diversified operating results and capital adequacy that is redundant at the ‘AAA’ level. With a larger capital base post-merger of $16.6 billion of total reported capital as of Sept. 30, 2015, XL will be able to absorb potentially large losses. We expect XL’s capitalization to remain extremely strong in 2015-2017.”

S&P explained that the positive outlook reflects “our opinion that we could raise the ratings within the next 24 months. Raising the rating would require XL to integrate Catlin successfully with minimal business loss and continue generating sustainable and strong earnings in both insurance and reinsurance while cementing its re-underwriting actions and optimizing its portfolio toward higher-margin businesses. Other contributing factors would include XL’s ability to maintain ‘AAA’ capital redundancy, and sustainably to meet our aforementioned operating performance expectations.

“We could affirm the current ratings if XL does not meet our performance expectations, particularly if there is a significant shortfall in underwriting results (absent a significant catastrophe, in which case we would expect XL’s results to be consistent with the industry’s as a whole); if the integration of Catlin faces setbacks that materially affect the consolidated group performance; or if the combined enterprise risk management program is not holistically integrated to support a more-complex risk profile.

“We may also consider affirming the current ratings if XL were to experience unexpected adverse events such as material-realized investment losses, large underwriting losses, or other material charges outside of the group’s risk tolerances.”

Source: Standard & Poor’s Ratings Services

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