An alert reader tipped us off to the latest development on the bond insurer front. As Reuters tells us, while XL’s insurance subsidiaries are not bond insurers, the are exposed to bond insurer Security Capital via a reinsurance/investment relationship.
XL’s senior debt was downgraded one level to Baa1.
Moody’s Investors Service on Friday cut its ratings on XL Capital Ltd, citing losses from the company’s reinsurance of and investment in Security Capital Assurance.
The Bermuda insurer said last week it expects a net loss in the fourth quarter of $1.0 billion to $1.2 billion, blaming charges connected to its investment in SCA. SCA is under stress due to mortgage exposures of its bond guarantee arm, XL Capital Assurance Inc.
Moody’s cut XL Capital’s senior debt rating one notch to “Baa1,” the third-lowest investment grade, from “A3.” The outlook is stable, indicating an additional rating change is not anticipated over the next 12 to 18 months.
“The downgrade reflects the company’s relatively weak profitability and related coverage of interest and preferred dividends, most recently stemming from losses associated with its reinsurance of and investment in Security Capital Assurance,” Moody’s said in a statement.
The cost to insure XL Capital’s debt with credit default swaps fell 2 percent on Friday to around 260 basis points, or $260,000 per year for five years to insure $10 million in debt, according to Markit Intraday.
The Wall Street Journal gave more detail on the downgrades:
Moody’s downgraded ratings of XL’s insurance units, including XL Insurance (Bermuda) Ltd. and XL Re Ltd., one notch to A1 from Aa3. It also cut XL Capital’s senior debt rating Baa1 from A3. The outlook on the ratings is now stable.