Rating Action on XL Group

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A.M. Best Co. reiterated the issuer credit ratings (“ICR”) of ‘bbb’ of XL Group plc (XL). Concurrently, the rating agency reiterated the financial strength rating (“FSR”) of A (Excellent) and ICR of ‘a' of the property/casualty subsidiaries of the company. Additionally, it reiterated the ICR of ‘bbb’ of XLIT Ltd.

The rating affirmation came on the back of sturdy risk-based capitalization, dominant international footprint and completion of the de-risking of the investment portfolio. The underwriting results of the subsidiaries have also been strong with combined ratio of 93% in the first half of 2012. Combined ratio averaged 95% over the past five years.

A.M. Best noted that management remains focused on managing risk and also on delivering favorable underwriting numbers. As such, the company increased the count of senior underwriters. Also, de-risking of its investment portfolio helped curb the instability factor in investment results.

The rating agency expects solid earnings to augment capital and hence debt-to-capital ratio to be in the band of 15%–25%. Additionally, in the near term, the fixed charge ratio is estimated to hover close to the current level.

The ratings might be upgraded if the company is able to deliver sustained robust underwriting and net earnings and is able to increase its retained earnings.

The ratings could be subject to downgrade is the company fails to meet market expectations over a number of years or capital level deteriorates attributable to poor performance or instable investment results.

Rating affirmations or upgrades from credit rating agencies play an important part in retaining investor confidence in the stock as well as maintaining creditworthiness in the market. We believe the company’s strong score with the credit rating agencies will help it write more business going forward.

XL Group currently carries a Zacks Rank #2, reflecting short term Buy rating. ACE Limited (ACE) and American International Group, Inc. (AIG), which closely compete with XL Group, share the same Zacks Rank.

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