Fitch Affirms XL Capital Ltd; Outlook Negative

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings affirms and removes from Rating Watch Negative the ratings of XL Capital Ltd (XL) and its property/casualty (re)insurance subsidiaries, including the Issuer Default Rating (IDR) for XL at 'BBB+', and the Insurer Financial Strength (IFS) rating of its core operating companies at 'A'. (See the full list below.) The Rating Outlook is Negative.

The rating action follows XL's release of second quarter and year-to-date 2009 earnings. The company reported net income of $258 million for the first six months of 2009. XL's GAAP equity totaled $7.5 billion at June 30, 2009 up $1.4 billion or 22% from year-end 2008. During the second quarter, XL had a mark-to-market increase of $1 billion which was driven by the tightening of credit spreads on both corporate and structured credit assets that more than offset the impact of rising interest rates.

Resolution of the Negative Watch was contingent upon the successful execution of XL's plans to de-risk its investment portfolio, stabilization of investment performance and completion of its strategic review of life operations. During 2009 XL completed asset sales associated with the $400 million restructuring charge it took in the fourth quarter of 2008. Through June 30, 2009 XL has reduced its exposure to corporate credit, commercial mortgage backed securities, consumer asset backed securities, non-agency residential mortgage backed securities, alternatives and equities by $3.5 billion. Additionally, XL sold a portion of the renewal rights to its European life, health and accident business in late 2008 and successfully completed the sale of its U.S. life business in July 2009. The remaining U.K. and Irish annuity and mortality and critical illness books of business will be actively run-off over the next several years.


The ratings affirmation reflects Fitch's belief that XL's core (re)insurance underwriting results remain reflective of the current rating category. XL's gross written premiums (GWP) are down commensurate with the company's previously forecasted reduction in GWP and is largely driven by the company's decision to exit certain areas, foreign exchange movements, lower levels of long-term agreements and changes in retention rates, limits and attachment points. Fitch views XL's solid renewal retention and improving rates across most lines coupled with low employee turnover as an indication that the company has retained its franchise value.

XL's GAAP combined ratio in the first half of 2009 was 92.6%, which includes 1.1 points of catastrophe losses offset by 6.9 points of favorable reserve development. Since late 2005 XL has reduced its catastrophe exposure and Fitch believes the company's overall loss reserve position is stronger than in recent years. Additionally the company has significantly enhanced its enterprise risk management capabilities along with simplifying its management structure.

The Negative Outlook reflects XL's exposure to investment market conditions, particularly in the asset portfolio of its run-off life operations, as well as the uncertain uneconomic environment. If the company suffers significant losses, the ratings could be lowered. However, if the company is able to continue to stabilize its earnings and continue to generate consistent internal capital growth, the Outlook could return to Stable.

XL is a Bermuda headquartered holding company with subsidiaries providing insurance and reinsurance on a worldwide basis. XL reported consolidated GAAP assets of $45.4 billion and shareholders equity of $7.5 billion at June 30, 2009. XL's equity-adjusted debt-to-total capital, excluding any FAS 115 adjustment for unrealized losses, was approximately 25% on June 30, 2009, down from 30% at year-end 2008.

Fitch has affirmed and removed from Rating Watch Negative XL and its subsidiary XL Capital Finance (Europe) PLC as follows:

XL Capital Ltd

--IDR at 'BBB+';

--$600 million 5.25% senior notes due 2014 at 'BBB';

--$350 million 6.375% senior notes due 2024 at 'BBB';

--$325 million 6.25% senior notes due 2027 at 'BBB';

--$575 million 10.75% equity units at 'BBB';

--6.375% series E preferred ordinary shares at 'BBB-';

--$182.673 million series C preference ordinary shares at 'BBB-'.

XL Capital Finance (Europe) PLC

--IDR at 'BBB+';

--$600 million 6.5% guaranteed senior notes due 2012 at 'BBB'.

The Rating Outlook is Negative.

Fitch also has affirmed at 'A' and removed from Rating Watch Negative the IFS ratings of the following XL Capital Ltd (re)insurance subsidiaries:

--XL Insurance (Bermuda) Ltd;

--XL Re Ltd;

--XL Insurance Switzerland;

--XL Re Latin America Ltd;

--XL Europe Ltd;

--XL Insurance Company Limited;

--XL Insurance America, Inc.;

--XL Reinsurance America Inc.;

--XL Re Europe Limited;

--XL Insurance Company of New York, Inc.;

--XL Specialty Insurance Company;

--Indian Harbor Insurance Company;

--Greenwich Insurance Company;

--XL Select Insurance Company.

The Rating Outlook is Negative.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.





Fitch Ratings

Tana M. Higman, +1-312-368-3122

James B. Auden, CFA, +1-312-368-3146 (Chicago)

Media Relations:

Brian Bertsch, +1-212-908-0549 (New York)

brian.bertsch@fitchratings.com



Source: Fitch Ratings