Standard & Poor's has assigned its double-`A' financial strength and counterparty credit ratings to XL Mid Ocean Reinsurance Co. Ltd.

S&P said the outlook was stable and that the completed Mid Ocean transaction provided a well-diversified book of business that included minimal overlap and concentration risk to the existing XL Global Reinsurance Co Ltd. portfolio.

EXEL Ltd. this month completed its acquisition of Mid Ocean Ltd. and combined its own reinsurer, XLGRe. and Mid Ocean's operating company, Mid Ocean Reinsurance Co. Ltd.

S&P expects XL Mid Ocean's profit margins to remain strong through new product offerings, marketing and business synergies incurred and the prospective change in business mix to cause combined underwriting ratios to approximate 67%-73% for 1998.

However, they note, prospective growth of XL Mid Ocean's capital base will be entwined with EXEL Limited's capital management strategy.

XL Mid Ocean will operate as a wholly owned subsidiary of EXEL Limited.

S&P withdrew its ratings on both XLGRe (double-`A' financial strength and counterparty credit ratings/Negative) and Mid Ocean Re (double-`A' financial strength and counterparty credit ratings/Negative) at the request of XL Mid Ocean.

The outlook reflects EXEL's completed acquisition of Mid Ocean Limited. and its operating subsidiaries, Mid Ocean and BrockBank Group PLC on August 7, 1998.

The rating also reflects Mid Ocean's good strategic fit with XLGRe while providing strong underwriting personnel and a solid presence within the property catastrophe and global reinsurance arenas.

Additional weights are the aggressive restructuring efforts of EXEL Limited, entrance into new markets and the potential prospective effects to XL Mid Ocean's operations.

Additional rating factors are: Strong capital adequacy: As calculated by Standard & Poor's adequacy model, XL Mid Ocean's pro forma 1997 model yielded a ratio that is considered "very strong''.

Capital quality is enhanced as the company's pro forma total adjusted capital base places limited reliance on reinsurance or credit facilities.

Strong operating results: XLGRe's profit margin, as measured by return on revenue was 62.3% for 1997, averaging 69.6% since inception.

Mid Ocean's return on revenue was 42.4%, topping its 37.6% five year average.

Both companies results compared favourably to their Bermuda peer levels.

Improved product diversification: The acquired Mid Ocean book offers lines of business other than property catastrophe, which have grown to 59% in 1997 from 35% in 1993.

Risk is spread through proportional property, marine, energy, aviation and satellite lines. Brockbank provides the same portfolio through its syndicates, plus direct and broker motor insurance and a composite book of business.

Integration of acquired books of business: Over the last year, EXEL has acquired both Global Capital Reinsurance Co. Ltd. and now Mid Ocean.

Each acquisition provides enhanced product diversification, increased scale and capacity to compete in the present market. However, integration of underwriting practices and procedures, as well as usage of capitalisation tools to write such lines still needs to be absorbed.

Industry risk: Including increased competition and market share pressures, management must exhibit the ability to balance increased risk /capital allocation strategies.

Successful management of components is a challenge of profit maintenance as each new line acquired currently suffers from a declining rate environment.

Aggressive management strategies of parent: EXEL's current investment and capital management strategies concentrates on superior returns for its shareholders.

Such a strategy could subject XL Mid Ocean to increased investment risk and limited internal growth if EXEL's rates of return are intertwined with XL Mid Ocean's future growth and capital management decisions.