XLIT Ltd., a subsidiary of
XL Group plc
) has priced the offering of its $600 million senior notes.
While A.M. Best Co. assigned a debt rating of "bbb" with a
positive outlook, Moody's Investors Service of
) assigned a Baa2 rating to the senior notes.
The notes will be offered in two tranches - 2.30% $300 million
senior notes with maturity scheduled in 2018 and 5.25% 300
million senior notes with maturity scheduled in 2043. The notes
are guaranteed by XL Group.
The estimated net proceeds of $592.96 million will be deployed to
pay back $600 million 5.25% senior notes due 2014 at maturity.
XL Group's debt-to-equity ratio at third-quarter end was 16.9%,
up 100 basis points (bps) from 2012-end level. With the new
issuance, the ratio is expected to move up by 600 bps.
Nonetheless, it is a prudent approach to issue notes with lower
coupon rate to pay back notes with higher coupon rates that will
in turn cushion interest expense. Interest expense for the
company inched up 0.1% in the third quarter of 2013 to $37.9
With respect to other rating actions, Moody's retained the
insurance financial strength at A2 of XL Group's principal
operating subsidiaries. Ratings carry stable outlook. The ratings
account for solid market presence of property and casualty
insurance and reinsurance operating units' of XL Group. A
diversified earnings stream, sturdy capitalization of
Bermuda-operating subsidiaries, solid financial position,
reasonable financial leverage, improved core underwriting
performance and moderate catastrophe risk profile also accounted
for the rating.
However, unstable reinsurance businesses and certain insurance
lines, moderate profitability in recent years and exposure to
natural and man-made catastrophes weigh on these positives.
Nevertheless, improving profitability, returns on capital in the
low double digit percentage, financial leverage of 20% or below,
and sustained coverage of interest and preferred dividends of
greater than 5x might lead to rating upgrades.
However, the ratings might be subject to a downgrade if
shareholders' equity moves down by 10% or more; financial
leverage crosses 30%; and profitability erodes with returns on
capital below the mid-single digit range.
Rating affirmations or upgrades from credit rating agencies play
an important part in retaining investor confidence in the stock
along with maintaining credit worthiness in the market.
Therefore, rating downgrades adversely affect the business, apart
from increasing the costs of future debt issuances. We believe
that strong ratings will help XL Group retain investor confidence
and help it write more businesses going forward.
XL Group presently carries a Zacks Rank #3 (Hold). However,
property and casualty insurers,
Cincinnati Financial Corp.
HCI Group, Inc
) look attractive. These stocks carry a Zacks Rank #1 (Strong
CINCINNATI FINL (CINF): Free Stock Analysis
HCI GROUP INC (HCI): Free Stock Analysis
MOODYS CORP (MCO): Free Stock Analysis Report
XL GROUP PLC (XL): Free Stock Analysis Report
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