Moody’s Investors Service raised its ratings outlook on XL Capital Ltd. to stable from negative due to improved capitalization and financial flexibility, as well as the stabilization of the insurer’s business franchise.
XL’s shareholders’ equity has meaningfully rebounded as financial markets recovered–primarily due to significantly reduced unrealized losses on investments and good underwriting profitability in its core operations.
The company’s refocused attention on property-and-casualty insurance was also noted as a positive, as the company continues to make progress reducing risk exposures related to non-core businesses.
Meanwhile, the restructuring actions taken on XL’s investment portfolio have significantly reduced risk on the asset side of the balance sheet.
Moody’s insurance financial strength ratings stands at A2, which is five notches under AAA.
Still, Moody’s said realized investment losses and impairments are likely to remain a drag on XL’s profitability during 2010 as the company continues to de-risk its investment portfolio through targeted sales of real estate mortgage-backed securities and other asset-backed securities. As a result, the company’s interest and preferred dividend coverage metrics are likely to remain weak relative to its peers until such investment losses abate.
In October, the company reported it returned to the black in the third quarter, after big losses a year ago from dealings with Syncora Holdings Ltd. (SYCRF) as XL reported core profit well above analysts’ expectations. XL and its peers have benefited from the mild hurricane season and positive credit and equity markets, although the industry has had difficulty raising rates.
