Proposed new entity XL Catlin, the result of a $4.1 billion takeover, has been well received by rating agencies despite potential risks.
Some of the agencies have noted a potential deterioration of XL’s credit profile and the risks inherent in an acquisition of this size and scope but remain positive about the potential acquisition.
XL Catlin will boast some $10 billion of total net premiums, more than $3 billion of net reinsurance premiums and make it one of the ten biggest reinsurance groups globally.
Moody’s affirmed XL’s ratings, with a stable outlook, but added that the transaction is incrementally negative on XL's overall credit profile.
Moody’s said: “Although the strategic benefits of the combination are likely to accelerate XL's business objectives, enhance its franchise and improve future profitability, they are somewhat uncertain due to numerous challenges and risks associated with the integration of an acquisition of this size and scope.”
“Given the competitive market conditions that currently exist in specialty insurance and reinsurance, we believe these attributes improve XL's ability to maintain, or possibly increase, its relevance with clients and brokers in this challenging market cycle,” said the rating agency.
Standard & Poor’s (S&P) also affirmed XL’s ratings and noted that the consolidated group will maintain an extremely strong capital adequacy redundant at the ‘AAA’ after the deal closes.
Taoufik Gharib, S&P credit analyst, said: "However, we expect its financial leverage and coverage metrics will slightly deteriorate in 2015, and anticipate the combined entity's financial leverage will rise above 25 percent--but remain under 30 percent--with fixed-charge coverage of 4x. But we also expect these metrics to improve in 2016 as acquisition costs are absorbed."
AM Best has placed the insurance subsidiaries of Catlin under review with positive implications. The rating agency said that should risk-adjusted capitalisation improve as a result of the transaction, there may be positive pressure on the ratings.
However, it has placed under review with negative implications the financial strength rating and the issuer credit ratings of the on-going property/casualty subsidiaries of XL. It said that the under review status reflects its concern associated with the complexity of an acquisition of this size and scope.
"Furthermore, in order to achieve the greatest efficiencies and long-term gains, a successful integration must be achieved within a reasonable time period," said AM Best.
Fitch said it views the transaction as an overall near-term credit negative to XL given the execution and integration risk inherent in the acquisition, as well as the increased financial and operating leverage post-merger.
"However, successful execution of this acquisition could provide longer term positive credit benefits relating to further diversification of earnings and business profile, leveraging the benefits of a larger organisation," said the rating agency.
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