Moody's Investors Service cut various ratings of Bermuda-based XL Capital Ltd yesterday, including the financial strength ratings of insurance operations to Aa3--pulling those ratings down to the same level as XL's reinsurance operations.
The financial strength ratings of the insurance operating subsidiaries of XL Insurance (Bermuda) Ltd had previously been one notch higher at Aa2.
Moody's also cut the senior debt rating of the holding company to A3 from A2.
The ratings were put on review for possible downgrade on Sept. 13, following XL's announcement about that its estimated losses from Hurricane Katrina would fall within the range of 1-to-3 percent of the industry loss.
Moody's said the downgrade reflects, among other things, the company's relatively weak operating earnings and higher operating leverage compared to its peers.
Moody's also said that substantial losses from the third-quarter hurricanes as a percentage of shareholders' equity increased its concerns about XL's risk-taking appetite.
In total, XL's losses from hurricanes had a $1.5 billion net after-tax impact on third-quarter earnings, representing roughly 18 percent of shareholders' equity at June 30. According to a report on the Bermuda market issued by Moody's earlier this month, comparable percentages for 13 other publicly traded Bermuda companies ranged from 7 percent (for ACE Limited) to 66 percent (for Montpelier).
In explaining the ratings actions yesterday, Moody's noted that the actions harmonize the insurance financial strength ratings of the insurance and reinsurance operations. While the insurance and reinsurance businesses are managed separately, Moody's said, there are substantial intercompany reinsurance arrangements, enabling the group to manage capital and cash flows between operating units.
Listing some positive factors, Moody's said that Aa3 insurance financial strength ratings reflect the group's overall strong market positions in its principal operating segments==insurance, reinsurance and specialty financial products--and its diversified earnings streams by geography and line.
In addition, Moody's noted the company has already committed to raising additional capital and reducing its risk profile following the financial impact of the hurricanes in 2005 in order to further support its Aa3 insurance financial strength ratings.
Late last month, XL announced a third-quarter net loss of $1.049 billion, or $7.53 per share, for the third quarter. At the same time, XL announced its involvement in a strategic initiative which calls for it to cede specified portions of its property catastrophe and retrocessional business to an unnamed start-up company.
The company is to be funded with $500 million to $1 billion of dedicated capital from a parent holding company, which, in turn, will be owned by a group of institutional investors, XL said.
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