Buyers stick with XL but keep close watch on developments

[LONDON]—European insurance buyers are keeping a close watch on XL Capital Ltd. as the insurer seeks to reassure the market that it is well-positioned despite recent troubles.

Policyholders are not abandoning Hamilton, Bermuda-based XL, but say there are a few reasons to be concerned about the insurer. Among those concerns are rating agency downgrades, significant losses and XL's reliability as an insurer of long-tail liability risks.

Also bedeviling XL is speculation that the company could be sold. XL acknowledged last month that Goldman Sachs & Co. was assisting it to explore "value-enhancing opportunities," but did not elaborate, which spurred talk that the insurance giant might be for sale.

An executive was unavailable to comment on buyer concerns, but XL has claimed its focus is on business as usual.

Strong competitor

"XL is financially and operationally positioned to deliver for its customers as an independent company, and that's our exclusive focus," said Mike McGavick, chief executive officer of XL, in a letter to brokers and clients. "We expect to continue to be a strong competitor in insurance and reinsurance," he said, without the need to raise additional capital.

Stefan Zemp, regional chief operating officer for continental Europe and Asia with XL Insurance in London, said in an e-mail: "Over the last few months we have heard many rumors about us and our financial situation. In response, we have kept our clients and brokers informed of the continued fundamental strength of our company. Our capital remains very strong; our fixed income portfolio is rated AA; liquidity is also strong, and we have enhanced enterprise risk management—all of which has been independently verified by the ratings agencies."

Mr. Zemp also mentioned that XL Insurance in Europe saw strong Jan. 1 renewal retention rates that were in line with previous years.

XL's difficulties follow those of New York-based American International Group Inc., sources point out, which makes buyers skittish after AIG was led to seek help in the form of a United States government bailout to avoid bankruptcy.

Rating questions

In XL's case, after announcing that it expects around $200 million (€153.3 million) to $220 million (€168.7 million) in net investment fund affiliate losses from its alternative investment portfolio for 2008's fourth quarter, Standard & Poor's Corp. and Fitch Ratings Ltd. issued downgrades. Moody's Investors Service Inc. also has downgraded the insurer, while A.M. Best Co. Inc. has affirmed XL's financial strength rating of A.

XL reported a $1.13 billion (€866 million) loss for the nine months ended Sept. 30, 2008 after showing a $1.49 billion (€1.14 billion) profit for the comparable period a year earlier.

Mr. Zemp pointed out that at the end of last year's third quarter, XL's investment portfolio amounted to around $37 billion (€28.36 billion), much of it in cash and government-backed securities.

Brokers and policyholders say they are concerned not only because of the downgrades, but also because they question the reliability of ratings after the agencies appear to have failed to recognize AIG's problems.

"Ratings are a big issue, particularly after the AIG case," said Leberecht Funk, chairman of broker Funk Gruppe GmbH in Hamburg, Germany.

"So there is some concern," Mr. Funk said of XL's situation. But it is not serious enough for Funk Gruppe to recommend its clients replace XL on any coverages, he said.

Roberto Muscogiuri, risk manager with Enel S.p.A., a Rome-based utility, agreed that buyers are cautious after AIG's troubles and rating agencies' apparent failure to recognize the scope of that company's difficulties.

XL is one of several reinsurers providing reinsurance for Enel's Dublin, Ireland-based captive, Mr. Muscogiuri said.

"After the difficulties with AIG, we are monitoring the situation in case we need to replace them with another reinsurer," he said of XL. Mr. Muscogiuri emphasized that other reinsurers that provide coverage for the captive also are being closely watched for any trouble signs.

A spokesman for Aon Ltd. in London said XL remains an approved market on that broker's list, but potential XL clients are given an advisory that mentions the downgrades.

Mr. McGavick said in the letter that even with the "one-notch" rating agency downgrades, XL is "within the range of many of our peers in the current difficult financial markets."

In fact, the ratings and accompanying commentaries remove significant uncertainty around XL and should reassure buyers, Mr. McGavick said.

XL's problems have led at least one insurer to stop using XL as a co-insurer to underwrite long-tail risks.

Allianz Global Corporate & Specialty said it will no longer call on XL for such partnerships in global programs, because the downgrades mean the insurer does not meet Allianz' criteria for long-tail business, a spokesman for Munich, Germany-based Allianz explained.

Careful consideration

"We would be very careful in considering them for liability and directors and officers insurance]," said Marco Terzago, risk manager for SKF Industrie S.p.A. in Airasca, Italy.

Using XL for other coverages, however, would not be as much of a concern, said Mr. Terzago.

"We asked for a quote from them for property insurance before we knew they had been downgraded," Mr. Terzago said. "Our feeling is that they are a very good insurance company and that is why we have asked them to go ahead with the quote."

Beat Affolter, risk and insurance manager for Die Schweize-rische Post and president of the Swiss Association of Insurance & Risk Managers, said he would have no qualms seeking a quote from XL. "We do not have a policy not to work with XL," he noted. "We think XL is a good market player and if they can cover our needs, we will look at that."

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