XL chairman Esposito resigns
Bermudian (re)insurer XL Capital Ltd has announced the earlier than expected departure of its chairman Michael Esposito.
Esposito had initially indicated he would stay in his position until a successor had been appointed to group chief executive Brian O’Hara, who announced in October his intention to retire from his post in mid-2008.
In an announcement Friday, XL said the former Chase Manhattan Bank CFO Esposito will continue as chairman of its 46 percent-owned Security Capital Assurance (SCA), stating that the troubled monoline bond insurer needed his full attention in “addressing its current challenges”.
The move could be seen as an attempt by XL to distance itself from SCA, sources have suggested.
“While I am saddened by my decision to retire from XL earlier than I had planned, I can reflect proudly on the past 21 years as a founding XL director on what has become a leading global franchise in the insurance and reinsurance industry and look forward to assisting SCA in addressing its current challenges,” Esposito said.
At the same time, Alan Senter, a director of XL, announced his resignation from the board of SCA. O'Hara, who stepped down from the SCA board last month and Senter had served on the SCA board following a transition services agreement between the two companies at the time of SCA's initial public offering in August 2006.
XL’s sub-prime woes have deepened recently, with ratings agency Moody’s Investor Service placing the Bermudian (re)insurer’s ratings on review for possible downgrade. This was compounded by the news on 20 December that AM Best had revised its outlook on XL’s Bermudian operating subsidiary’s A+ financial strength rating and aa- issuer credit ratings from stable to negative.
The moves were prompted by XL’s 46 percent ownership stake in SCA - which Moody’s and Fitch placed on negative outlook in December and S&P reviewed on 19 December due to its sub-prime exposures - and exposures within XL’s own investment portfolio.
Moody’s cited the reasons for its review on XL as reflecting “the increased pressure on XL’s profitability, capital adequacy, and financial flexibility stemming from its reinsurance of and investment in SCA, as well as XL’s sub-prime exposure within its investment portfolio”.
AM Best warned: “Additionally, XL Capital provides SCA with reinsurance support and guarantees certain SCA obligations, which further expose XL Capital to SCA’s financial situation.”
And on Friday, Fitch compounded concerns over the future of SCA’s treasured AAA rating, by placing 19 residential mortgage backed securities (RMBS) insured by SCA on Rating Watch Negative.
Fitch said in a statement: “The RMBS classes will remain on Rating Watch Negative while Fitch conducts a review to determine which classes will be able to maintain their AAA ratings based on subordination, over-collateralisation or additional forms of credit enhancement which are not dependent on the guaranty [from XL]. The ratings of bonds determined to be dependent on the guaranty of XL Capital due to insufficient additional credit enhancement will remain on Rating Watch Negative until rating action is taken on SCA’s IFS rating.”
Esposito’s departure, the recent investor uncertainty – XL shares hit a 52 week low of $48.16 on 21 December - and actions from ratings agencies have added to speculation about the extent of the sub-prime exposures at XL. At time of writing, XL shares were trading at $50.05 after opening at $49.99.
To date, XL has been tight-lipped on its exposure to the sub-prime debacle, both in its investment portfolio and from its large book of directors’ and officers’ (D&O) and professional liability (PL) business.
Speaking on the release of the firm’s third quarter earnings in October, XL COO Henry Keeling – who is a contender for the future group chief executive role - dismissed rumours of significant sub-prime related losses in its financial and professional lines portfolio, stating that the crisis provided “an attractive opportunity” for the class.
Despite Keeling’s statement, in which he said: “I don’t think that we are ‘overweight’ on the [D&O and PL] book”, Moody’s expressed concern over the size of potential losses from the class.
“The review will also focus on XL’s $1.3bn of direct investments in sub-prime mortgage assets and their impact on the company’s earnings and capital adequacy, as well as XL’s exposure to mortgage-related claims in its directors’ and officers’ professional liability (re)insurance line of business,” Moody’s said.
And AM Best noted XL’s exposure to related sub-prime issues “through its underlying investment and liability portfolios, which could compound the current situation”.