Fitch said it affirmed XL’s ratings, by way of XLIT Ltd., a Cayman Island’s subsidiary of XL Group and its property/casualty insurance and reinsurance subsidiaries. Those affirmations include a continued “A+” insurer financial strength rating for XL’s core operating companies, and an “A–” issuer default rating.
In doing so, Fitch noted that XL’s $4 billion merger with Catlin that closed on May 1 created a combination that is “an overall near-term credit negative, given the integration risk inherent in the acquisition.”
At the same time, Fitch said “successful integration of Catlin could provide longer term positive credit benefits relating to further diversification of earnings and business profile, leveraging the benefits of a larger organization.” Fitch also noted that XL’s merger with Catlin “further expands XL into a larger global specialty and property [insurer/reinsurer], with meaningful greater size and scale.”
The combined XL Catlin, for example, booked $979 million in net income through the first nine months of 2015. That in part comes from favorable underwriting results and a $340 million gain from the sale of its investment in ARX Holdings Corp., Fitch noted. But XL also gained from five months of added Catlin earnings. By comparison, Xl produced $188 million in net income in 2014.
In its affirmation of XL’s ratings, Fitch’s positivity continues, noting that it did so because of XL’s strengths including a large diversified market position, “solid capitalization, favorable underwriting results and reasonable financial leverage.”
On a downbeat note, Fitch said that overall earnings volatility and weak fixed charge coverage partially offsets the positives. The ratings additionally reflect Fitch’s negative sector outlook on global insurance, according to the rating entity.
“The current stressful reinsurance market conditions are promoting weaker pricing and more generous terms and conditions,” Fitch said in its ratings affirmation. “This is leading to consolidation in the insurance sector as companies aim to enhance their relative competitive position.”
Fitch said that XL could risk a downgrade from triggers including failure to effectively blend Catlin into its own operations, which could produce underwriting losses or large goodwill impairments. Another trigger: significant charges for reserves that affect equity and the capitalization of insurance subsidiaries.
Source: Fitch Ratings