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20 Jun 2008
Moody's downgrades Security Capital Assurance subs XLCA and XLFA to B2; outlook is negative
New York, June 20, 2008 -- Moody's Investors Service has downgraded to B2, from A3,
the insurance financial strength ratings of XL Capital Assurance Inc.
("XLCA"), XL Capital Assurance (U.K.)
Limited and XL Financial Assurance Ltd ("XLFA"). In
the same rating action, Moody's also downgraded the debt ratings
of Security Capital Assurance Ltd (NYSE: SCA -- preference
shares to Ca from B3) and a related financing trust. Today's
rating action concludes a review for possible downgrade that was initiated
on March 4, 2008, and reflects the company's severely
impaired financial flexibility and the company's proximity to minimum
regulatory capital requirements relative to our estimations of expected
case losses. The outlook for the ratings is negative.
Moody's ratings on securities that are guaranteed or "wrapped" by a financial
guarantor are generally maintained at a level equal to the higher of a)
the rating of the guarantor or b) the published underlying rating.
However, as XLCA and XLFA's ratings are downgraded below the
investment grade level, and reflecting current rating agency policy,
Moody's will withdraw ratings on XLCA and XLFA-wrapped securities
for which there is no published underlying rating. Should the guarantors'
ratings subsequently move back into the investment grade range or should
the agency subsequently publish the underlying rating, Moody's would
reinstate the rating to the wrapped instruments. For further information
please see Moody's recently published special comment entitled:
Assignment of Wrapped Ratings When Financial Guarantor Falls Below Investment
Grade (May 6, 2008).
SCA has recorded approximately $750 million in cumulative losses
arising from its mortgage-related exposures, primarily from
ABS CDOs and to a lesser extent, second-lien RMBS transactions.
At 1Q2008, XLCA had $167 million of statutory surplus,
which is approximately $102 million above the statutory minimum
regulatory requirement. Moody's notes that XLCA cedes a majority
of premiums and losses to XLFA under a quota share reinsurance arrangement,
which substantially increases the amount of resources XLCA may draw upon
to pay claims. At 1Q2008, XLFA had approximately $1.2
billion of capital. During 4Q2007, XLCA entered into various
additional reinsurance arrangements with XLFA designed to maintain XLCA's
statutory surplus above the minimum threshold. SCA has stated that
it could incur adverse case basis loss reserve development of up to approximately
80% of its established case basis reserves at 1Q2008 (net of reinsurance),
and still maintain compliance with its regulatory solvency requirements.
However, Moody's has estimated expected case losses on the
firm's mortgage risks to be in the range of $2 billion,
suggesting that meaningful further losses may be recognized and regulatory
capital further depleted.
The rating agency added that if XLCA's capital were to fall below
the regulatory minimum, there could be material adverse effects
on the firm's financial condition. A meaningful portion of XLCA's
credit exposure was written in credit default swap (CDS) form, and
contains a clause that exposes the firm to mark to market termination
in the event of insolvency. A breach of minimum regulatory capital
requirement heightens the risk of regulatory intervention, which
could trigger a market value termination of the CDS contracts.
Moody's has re-estimated expected and stress loss projections
on SCA's insured portfolio, focusing on the company's
mortgage-related exposures, as well as other sectors of the
portfolio potentially vulnerable to deterioration in the current environment.
Based on Moody's revised assessment of the risks in SCA's
portfolio, estimated stress-case losses would approximate
$6.6 billion at the Aaa rating threshold. This compares
to Moody's estimate of SCA's total claims paying resources of approximately
$3.5 billion, a capital position more consistent with
a rating in the single-B category.
According to Moody's, the negative outlook on SCA's
ratings reflects continued uncertainty with respect to the amount of losses
that will ultimately arise from the company's insured portfolio
and attendant risks that could occur if losses develop adversely,
including the potential of regulatory intervention. SCA has stated
that it continues to work toward mitigating the financial stresses impacting
the company, including the commutation, restructuring or settlement
of its obligations with its CDO counterparties and the commutation or
settlement of various reinsurance arrangements with XL Capital Ltd.
Moody's will continue to evaluate SCA's ratings in the context
of changes to the company's strategic and capital management plans,
as well as the future performance of the company's mortgage-related
exposures relative to expectations and resulting capital adequacy levels.
The rating agency noted that upward rating pressure could occur if SCA
is able to successfully execute on its restructuring plans, although
there is considerable uncertainty about the outcome and timing of those
efforts. Conversely, downward rating pressure could occur
if minimum regulatory capital requirements are breached.
LIST OF RATING ACTIONS
The following ratings have been downgraded:
XL Capital Assurance Inc. -- insurance financial strength
to B2 from A3;
XL Capital Assurance (U.K.) Limited -- insurance financial
strength to B2 from A3;
XL Financial Assurance Ltd -- insurance financial strength to B2
Security Capital Assurance Ltd -- provisional rating on senior debt
to (P)Caa3 from (P)Ba1, provisional rating on subordinated debt
to (P)Ca from (P)Ba2 and preference shares to Ca from B3; and
Twin Reefs Pass-Through Trust -- contingent capital securities
to Caa2 from Ba1.
OVERVIEW OF SECURITY CAPITAL ASSURANCE
Security Capital Assurance Ltd is a Bermuda-domiciled holding company
whose primary operating subsidiaries, XL Capital Assurance Inc.
and XL Financial Assurance Ltd, provide credit enhancement and protection
products to the public finance and structured finance markets throughout
the United States and internationally. For the three months ended
March 31, 2008, SCA reported a net loss available to common
shareholders of $97 million. As of March 31, 2008,
SCA had shareholders' equity of approximately $348 million.
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service
Financial Institutions Group
Moody's Investors Service
No Related Data.
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