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TEXT - S&P revises XLIT Ltd outlook to positive
December 11, 2012 / 10:12 PM / 5 years ago

TEXT - S&P revises XLIT Ltd outlook to positive

Overview
     -- Management has successfully defended XLIT's franchise, which was under 
significant pressure following the financial market crisis in 2008.
     -- Management has significantly de-risked the group's balance sheet 
during the past few years while improving its consolidated operating results.
     -- We are revising our outlook to positive from stable on XLIT and its 
operating subsidiaries.
     -- We expect strong earnings to result from the continuation of strong 
business fundamentals.

Rating Action
On Dec. 11, 2012, Standard & Poor's Ratings Services revised its outlook to 
positive from stable on XLIT Ltd. and its operating subsidiaries (collectively 
referred to as XL). At the same time, we affirmed our 'BBB+' long-term 
counterparty credit and senior unsecured debt ratings and our 'BBB-' preferred 
stock ratings on XLIT Ltd. In addition, we affirmed our 'A' long-term 
counterparty credit and financial strength ratings on XL's core operating 
subsidiaries.

Rationale
The outlook revision reflects our view that management has successfully 
defended XL's franchise, which was under significant pressure following the 
financial market crisis in 2008. This was accomplished by divesting its 
financial guarantee business, deleveraging its balance sheet, and managing 
down the risk in its investment portfolio. Furthermore, management has renewed 
XL's focus on property and casualty (P/C) insurance and reinsurance 
operations, and has placed the life reinsurance operations in run-off.

The ratings affirmation is based on the group's strong competitive position 
with a strong global market presence, strong property and casualty 
(re)insurance operating performance, strong enterprise risk management (ERM), 
and strong risk-adjusted capitalization. Partially offsetting these strengths 
are the group's investments' susceptibility to mark-to-market volatility and 
realized losses relative to peers--attributed to sizable allocation in 
non-agency structured products--and the potential for losses from run-off 
businesses.

XL has drastically de-risked its investments and is successfully bringing its 
portfolio in line with P/C and Bermudian peers. Although efforts continue to 
reduce this risk, XL's investments remain susceptible to mark-to-market 
volatility and realized and unrealized losses, as the group still has sizable 
exposure in structured investments. Its $4.2 billion exposure to nonagency 
structured products as of Sept. 30, 2012, though markedly reduced from a peak 
of $13.6 billion as of June 30, 2007, is sizable, but the potential 
realized/unrealized losses' impact is somewhat contained.

Since the financial crisis, XL has capitalized on the momentum for enhancing 
its ERM framework, which we view as strong. The group has cultivated a strong 
risk culture throughout the organization and has demonstrated improvements in 
capital modeling, strategic risk management, and controls. Given the 
complexity of the group and the earnings volatility inherent in the nature of 
its business, ERM is important to the rating on XL, and we expect the group to 
maintain this momentum.

XL's underwriting performance from its core P/C (re)insurance segments has 
been strong with an average combined ratio of 95.9% during the past five years 
(2007-2011). However, it is materially stronger in the reinsurance segment 
than in the insurance segment. In the first nine months of 2012, XL generated 
strong underwriting performance as it reported a non-life combined ratio of 
92.7% compared with 107.2% in the same period in 2011. Both insurance and 
reinsurance segments' loss ratios improved. Excluding prior-year favorable 
reserve development, the insurance and reinsurance loss ratios decreased by 
12.4 and 23.8 percentage points, respectively, primarily because of lower 
catastrophe and large loss activity.

XL's risk-adjusted capitalization is strong and redundant as of year-end 2011 
and Sept. 30, 2012, supported by the recovery of its investments and improving 
earnings. This gives the group the ability to support its growth initiatives 
and absorb potential large losses. In addition, we expect capitalization to 
remain strong and redundant in 2012 and 2013.

Outlook
The outlook is positive. We expect strong earnings to result from the 
continuation of strong underwriting performance, further optimization of the 
investment portfolio, and the materially reduced risk profile of the run-off 
businesses. More importantly, we expect the continued focus and recent 
enhancement of ERM to a strong level to reduce the frequency and severity of 
unanticipated losses.

Hurricane Sandy will create a drag on XL's full-year earnings. However, we 
expect these losses to be an earnings event rather than a capital event and we 
 estimate that XL will likely report a combined ratio in the 95%-100% for 
2012. Based on our view of pricing and loss-cost trends, we expect a combined 
ratio in the 90%-95% range, assuming a catastrophe load of 5% in 2013 and a 
return on revenue in the mid-teens.

P/C gross premiums written will likely be flat to up 3% in 2012 and increase 
5% to 10% in 2013, as a result of management's strategic growth initiatives 
and somewhat favorable rate trends across various short-tail classes of 
business. XL will continue to focus on underwriting profitability over volume 
as it builds its underwriting expertise and reach as a way to increase its 
business in the next favorable market cycle. We expect XL's financial leverage 
to remain less than 25% and fixed-charge coverage to be at least 5x in 2013.

We could raise the ratings within the next 12 to 24 months if XL were to 
sustain its improving operating performance, reduce the potential for adverse 
charges from the investment and run-off businesses, and further improve its 
fixed-charge coverage to at least 5x. Conversely, we could lower the rating if 
the group does not meet our performance expectations, particularly if there 
were a significant shortfall in underwriting results (absent a significant 
catastrophe, in which event, we would expect XL's results to be consistent 
with the industry as a whole). We could also consider a downgrade if 
unexpected adverse events--such as additional realized investment losses, 
large underwriting losses, or other material charges--were to occur.

Related Criteria And Research
     -- Hurricane Sandy Brings Unexpected Risks But Limited Credit Impact For 
(Re)Insurers, Dec. 6, 2012
     -- Global Reinsurers Have A Material Cushion Until Sandy Becomes A 
Capital Event, Nov. 13, 2012
     -- Analysis Of Nonlife Insurance Operating Performance, April 22, 2009
     -- Interactive Ratings Methodology, April 22, 2009

Ratings List
Ratings Affirmed

XLIT Ltd.
 Senior Unsecured                       BBB+               
 Preferred Stock                        BBB-               

Ratings Affirmed; Outlook Action
                                        To                 From
XLIT Ltd.
X.L America Inc.
 Counterparty Credit Rating
  Local Currency                        BBB+/Positive/--   BBB+/Stable/--

Greenwich Insurance Co.
XL Specialty Insurance Co.
XL Select Insurance Co.
XL Reinsurance America Inc.
XL Re Ltd.
XL Re Latin America Ltd.
XL Re Europe Ltd.
XL Insurance Switzerland
XL Insurance Co. of New York Inc.
XL Insurance America Inc.
XL Insurance (Bermuda) Ltd.
XL Insurance Co. Ltd.
Indian Harbor Insurance Co.
 Counterparty Credit Rating
  Local Currency                        A/Positive/--      A/Stable/--

Greenwich Insurance Co.
XL Specialty Insurance Co.
XL Select Insurance Co.
XL Reinsurance America Inc.
XL Re Ltd. - U.K.
XL Re Ltd.
XL Re Latin America Ltd.
XL Re Europe Ltd.
XL Insurance Switzerland
XL Insurance Co. of New York Inc.
XL Insurance Co. Ltd.
XL Insurance America Inc.
XL Insurance (Bermuda) Ltd.
Indian Harbor Insurance Co.
 Financial Strength Rating
  Local Currency                        A/Positive/--      A/Stable/--

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