In the wake of rumors that XL Capital Ltd. is up for sale–withthe company admitting only to exploring “value-enhancingopportunities available to it”–Standard & Poor's loweredratings on the firm's core operating companies, citing the Bermudainsurer's diminished underwriting performance and competitiveposition.

An outright denial of a potential sale was not part of thecompany's vaguely worded announcement, which noted that while nottypically responding to rumors, XL felt it was appropriate under“the current circumstances.”

The company said it is looking at opportunities and is beingassisted in this effort by Goldman, Sachs & Company.

Meanwhile, XL said it “remains focused on operating its businessand meeting the needs of its customers” while taking action tomaximize shareholder value.

Bloomberg News, citing anonymous sources, reported on Dec. 10that the company is looking for a buyer because it reportedinvestment losses larger than its market value. But XL said itexpects to report fourth-quarter mark-to-market declines in itsinvestment portfolio largely in line with its third-quarterreport.

In a filing with the U.S. Securities and Exchange Commission, XLreported a net loss of more than $1.6 billion for the third quarter(compared to net income of $372 million for the third quarter of2007)–in line with what it reported in a preliminary announcementin mid-October.

For the first nine months, the company reported a net loss ofmore than $1.13 billion, compared to net income of $1.5 billion theprevious year.

The loss was primarily the result of a $1.4 billion chargerelated to an Aug. 5 payment to Syncora Holdings Ltd. to terminate,commutate or restructure financial guaranty and reinsurancearrangements with Syncora–a former subsidiary of XL dealing inguaranty insurance.

The company also reported losses from Hurricanes Gustav and Iketotaling $221.8 million, net of reinsurance recoveries andreinstatement premiums.

XL reported in the same filing that as of Sept. 30 it had cashand cash equivalents of approximately $5.6 billion, and that it“maintains credit facilities which provide additionalliquidity.”

Noting that the financial markets are in flux, XL said thesemovements will affect the ultimate worth of its investmentportfolio. The company added that it estimates it will reportapproximately $200-to-$220 million in net investment fund affiliatelosses from its alternative investment portfolio for the fourthquarter.

During a conference call in October, XL Chief Executive OfficerMichael S. McGavick condemned rumors at the time that painted ableak financial picture of the company. He also said during thecall that XL was undertaking a strategic review of its lifereinsurance operations.

Meanwhile, Standard & Poor's Ratings Services last weeklowered the financial strength and counterparty credit ratings onXL Capital Ltd.'s core operating companies.

S&P lowered XL's financial strength rating to “A” from“A-plus,” and its counterparty credit rating to “triple-B-plus”from “A-minus.” S&P's outlook for the companies isnegative.

“Perceived franchise issues stemming from a string of materialearnings and capital charges over the past several years” have ledto the diminished competitive position and underwritingperformance, according to S&P analyst Steven Ader.

“Although XL remedied many of these issues this past summer, thematerial deterioration in the unrealized position of XL'sinvestment portfolio in the third quarter has again pressured XL'smarket presence,” he added.

While XL maintains a strong liquidity position, S&P said itbelieves there will be a reduction in new business opportunitiesfor XL, and that renewal activity will be modestly below historicalnorms.

“This would hamper prospective underwriting performance, which,though strong, is inconsistent with what we typically expect forthe prior rating,” said the ratings firm.

Mr. McGavick issued a statement disagreeing with S&P'sannouncement. “We are very disappointed with S&P's decision,particularly in light of the many positive comments S&P madeabout XL in its release,” he said.

S&P called XL's capitalization strong, and also mentionedXL's initiatives to refocus operations on the company's solidproperty-casualty insurance and reinsurance operations whilereducing non-core risks.

S&P also said continuation of XL's “adequate” focus onenterprise risk management will help it going forward. “If, in thenext two years, ERM continues to develop, additional investmentlosses fail to materialize and no negative surprises arise thatdampen consolidated results, we could revise the outlook tostable,” Mr. Ader said.

However, he warned, “if more unexpected adverse eventsoccur”–citing unexpected additional realized investment losses,large underwriting losses, or large operational related risk–”ifthe company does not meet our financial tolerance levels, or ifthere is inadequate progress related to XL's ERM, another downgradewould most likely result.”

Mr. McGavick issued an additional comment later, noting that“based on very recent discussions with A.M. Best in which wereviewed our business and financial condition, A.M. Best is leavingour 'A' Excellent/Stable outlook rating on our core operatingsubsidiaries unchanged.”

“As we indicated…XL has no need or intent to seek additionalcapital at this time,” he said. “We are pleased with the results ofour discussions with A.M. Best and believe it is indicative of ourfinancial strength and the power of our franchise.”

(With additional reporting by Phil Gusman.)