Fitch affirms XL's ratings
The rating outlook is stable.
Fitch said XL's ratings reflect its strong competitive position with world-wide capability in commercial insurance and reinsurance, recent improvements in operating results, reasonable financial leverage, solid capitalisation of its insurance and reinsurance subsidiaries and conservative investment portfolio.
Business Wire reported that, according to Best, offsetting these positives is XL's earnings volatility and weak operating performance in recent years which was primarily attributable to catastrophe losses, losses from the events of September 11 2001, and adverse prior-year loss reserve development.
XL has consolidated assets of $62.1 billion. It reported an operating return on equity of 20.1 percent in 2006, above XL's guidance for this metric. XL reported net income after preference share dividends of $1.7 billion in 2006 following a record net loss after preference share dividends of $1.3 billion in 2005.
Over the past 18 months, XL has taken several measures to reduce its catastrophe exposure and earnings volatility. Going forward, solid operating performance is also dependent on minimal prior-period adverse loss reserve development. XL posted favourable reserve development in 2006 and thus far in 2007, following adverse development totalling nearly $2.9 billion from 2001-2005.
Overall, Fitch believes that loss reserves are stronger than in recent years but some uncertainty remains regarding certain lines, particularly in casualty reinsurance and professional liability.
To sustain the current ratings, it is important for XL to demonstrate consistent operating profitability, according to Fitch, which believes that despite softening market conditions across many lines of business, XL's capital position, underwriting franchise and financial flexibility should enable the company to produce favourable earnings.
