AM Best considers change in light of company's links with XL Capital subsidiaries

AM Best has placed the debt rating of Stoneheath Re’s preferred securities under review with negative implications.

There securities, known as non-cumulative perpetual preferred securities, are valued at $350m and currently rated at “bb+”.

Stoneheath Re, which is licensed as a restricted Class B reinsurer in the Cayman Islands, was formed to provide multi-year reinsurance capacity to certain insurance and reinsurance subsidiaries of XL Capital (Cayman Islands).

The under review status is to align the rating of Stoneheath Re’s preferred securities with the rating of XL Capital’s existing preferred stock issuances. The change in review status follows XL Capital’s recently announced agreement with Security Capital Assurance Ltd (SCA) (Bermuda) and XL Capital’s subsequent capital action plan.

The terms of the reinsurance agreement between Stoneheath Re and XL Capital provide that upon a payment by the issuer to the ceding insurers, triggered by a catastrophic event, XL Capital will issue and deliver to Stoneheath Re Series D preference ordinary shares of XL Capital (XL preferred securities) in an amount equal to the payment made by Stoneheath Re. Cash from the issuance of preferred securities by Stoneheath Re, which previously had been deposited into a trust account and subsequently disbursed as claim payments, will be replaced by the XL preferred securities.

The agreement provides for XL Capital to pay $1.775bn in cash and issue eight million Class A ordinary shares to SCA in exchange for the commutation of certain reinsurance agreements and as a result, the elimination of certain guarantees from XL Capital to SCA. Concurrently, XL Capital plans to issue ordinary shares and equity security units totaling approximately $2.5bn to offset the SCA payment, with any excess expected to be injected as capital into certain XL Capital members.

Accordingly, the rating will remain under review with negative implications pending the successful completion of XL Capital’s capital action plan and further assessment of additional negative effects, if any occur.