XL Group upgraded by AM Best following AXA takeover
AM Best has removed from “under review with developing implications” and upgraded the credit ratings of XL Group.
In March 2018, the ratings of XL had been placed under review with developing implications following AXA’s announcement that it had entered into an agreement to acquire 100 percent of XL for a cash consideration of $15.3 billion (€12.4 billion). The latest rating actions follow the completion of this transaction on Sept. 12, 2018, and the conclusion of AM Best’s assessment of its impact on the credit fundamentals of the group and its rated subsidiaries.
AM Best has removed from under review with developing implications and upgraded the Financial Strength Rating (FSR) to A+ (Superior) from A (Excellent) and the Long-Term Issuer Credit Rating (Long-Term ICR) to “aa-” from “a+” of the property/casualty subsidiaries of XL Group Ltd (XL) (Bermuda).
In AM Best’s opinion, the execution risk associated with the acquisition has been partially alleviated, as completion of the transaction and integration to date has been in line with expectations. Furthermore, although the transaction has resulted in an increase in financial leverage for AXA, AM Best expects this situation to be temporary, as the group has presented a clear plan to reduce leverage over the coming years. AXA is expected to maintain a very strong balance sheet, strong operating performance, although the XL business has the potential to introduce some volatility, a very favourable business profile and very strong enterprise risk management (ERM), the agency noted.
The ratings of XL reflect the organization’s balance sheet strength, which AM Best categorizes as very strong, as well as its adequate operating performance, favourable business profile and appropriate ERM. The rating upgrades reflect XL’s strategic importance to, and strategic alignment with, AXA, in enhancing the group’s position in the commercial global property & casualty (P&C) insurance sector, with the company receiving rating enhancement as a result. XL is considered well-integrated within the AXA group, and AM Best expects that prompt and sufficient operational and financial support will be made available from the AXA group to XL should it be required.
XL’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), is categorized as strongest and AM Best expects it to remain at a similar level in prospective years. Balance sheet strength also considers the company’s good liquidity profile, conservative investment strategy and disciplined reserving approach.
XL’s operating earnings have been somewhat volatile and marginally adequate over the past five years (2013-2017), resulting in a five-year average return on equity (ROE) of 4.4 percent, the agency noted. In 2017, natural catastrophe losses amounting to approximately $2 billion, after reinsurance, led to a negative annual ROE of -4.6 percent. Although XL recorded a combined ratio of 95.5 percent as of June 30, 2018, AM Best expects these results to deteriorate due to the company’s exposure to catastrophic events during the second half of the year.
Nevertheless, AM Best noted that XL maintains a favourable business profile due to its extensive distribution network, strong franchise and well-diversified book of business by both product type and geography. In 2019, businesses from AXA are anticipated to contribute approximately $3 billion in gross written premiums to the new AXA XL division. The company continues to operate in challenging competitive conditions that consistently drive negative pressure on pricing. XL’s risk management capabilities are viewed as appropriately aligned with its risk profile.
