XL Capital Group’s (XL) financial strength rating (FSR) of “A” (Excellent) and issuer credit ratings (ICR) of “a” were reaffirmed today by the rating agency A.M. Best. The outlook for all ratings is “stable”.

The rating reaffirmation is followed by XL’s efforts to restructure its investment portfolio by settling with Syncora Holdings. The company had a disappointing run last year, dragged down by structured-finance losses recorded by Syncora Capital, a bond insurer, of which it was the majority owner. Last October, XL severed its ties with Syncora, a big step in setting a track to recovery.

On a year-to-date basis, XL has reduced its exposure to more volatile asset classes by $3.5 billion. XL also implemented expense reduction initiatives in the second half of 2008. It has been streamlining processes across all geographic locations, with a primary emphasis on corporate functions. The company has also been working towards developing a reliable infrastructure that will improve operational efficiency, standardize processes and optimize costs.

XL continues to attract new talent including significant additions to its underwriting teams around the world.

In the near term, the company’s leverage ratio is expected to remain in the mid 20% range and fixed charge ratio is expected to stabilize at 3–5% range.

During July, XL reported operating income of $163 million or $0.47 on a per share basis. The results were negatively affected by a decline in net investment income.

The company plans to focus on lines of business within its insurance and reinsurance operations that provide the best return on capital over the pricing cycle. As such, XL Capital has been highly selective in new business, emphasizing short-tail lines in the company’s reinsurance operations, exiting other businesses (such as the casualty facultative business), not renewing certain insurance programs, as well as continuing to reduce long-term agreements (within the insurance operations) in order to capture the benefit of improving pricing.

We recommend a Neutral rating on the shares for now.
Read the full analyst report on “XL”
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