The rating action follows XL Capital’s recent announcement concerning $1.5 billion to $1.7 billion fourth quarter 2007 charges for credit related investments, including the company’s exposure to the operations of Security Capital Assurance (SCA) (Bermuda). The charge also includes reserve increases related to reinsurance coverages provided by XL Capital to certain of SCA’s subsidiaries and a write-down of a publicly traded financial affiliate.
The rating downgrade is based on A.M. Best’s opinion that XL Capital’s risk management controls are below expectations as the company takes an unanticipated charge, albeit below the operating line, continuing the trend established by the litany of NAC Re related reserve charges, the Winterthur acquisition charge and higher than anticipated losses stemming from the 2005 catastrophe season.
The aforementioned charges related to SCA do not eliminate XL Capital’s exposures to SCA. Furthermore, it is A.M. Best’s opinion that XL Capital has further subprime exposure through its D&O and E&O liability portfolio on both a primary and reinsurance basis. This exposure gives rise to concerns that there may be a potential resurgence in claims for these lines as they relate to subprime issues in the future. Adverse development charges relating to these lines that are beyond A.M. Best’s expectations will result in further rating actions.
Following the May 2007 ratings review, it was A.M. Best’s expectation that the likelihood of unanticipated large loss events would be curtailed given management’s previous representations concerning enhancements to risk controls and processes. Due to the magnitude of the charge and the fact that the subprime debacle to this point has had minimal impacts on the property/casualty industry in total, A.M. Best has concluded that while the above fourth quarter 2007 capital charges have not caused an immediate concern toward the company’s capital adequacy, XL Capital’s earnings inconsistency and enterprise risk management are not indicative of a Superior-rated company.
For a complete listing of XL Capital Group’s FSRs, ICRs and debt ratings, please visit http://www.ambest.com/press/012506xlcapital.pdf.