XL Capital said it will slash 10 percent of its workforce tobalance a 2009 budget that reduces its premium targets in the rangeof 20-to-25 percent.

Ten percent of the 4,000 employees that the firm lists worldwidewould amount to 400 jobs.

The job cuts were revealed as the Bermuda-based company reporteda $1.4 billion loss for fourth-quarter 2008, or $4.36 per share.For the full year, the net loss totaled $2.6 billion, or $11.02 pershare.

XL had also reported over $1 billion of red ink infourth-quarter 2007, with a net loss of $1.2 billion on its bottomline, while reporting income for the full year in 2007 of just over$200 million.

Key drivers of the fourth-quarter 2008 result were twoaccounting charges--a goodwill impairment charge of $990 millionand a $400 million charge to account for restructuring thecompany's investment portfolio.

Chief Executive Officer Michael McGavick explained during aconference call this morning that XL continues to de-risk itsinvestment portfolio as part of a strategy outlined last year, andthat fourth-quarter restructuring charge allows the company toaccelerate the portfolio's repositioning.

The non-cash goodwill charge, he said, primarily relates to XL's1998 acquisition of MidOcean Re. "This is a great business [and] XLis the better for having bought it," but generally acceptedaccounting principles "require that we recognize current marketconditions in how we carry the goodwill that came with MidOcean,"he said, noting that reinsurance franchises like MidOcean "werevalued more highly in days gone by."

(Goodwill generally refers to the value of intangible assets inan acquisition, typically accounted for initially as the amountpaid for a target company over book value.)

Mr. McGavick said the job cuts at XL are a consequence ofmeaningful reductions in premium being planned for 2009, althoughhe said the cuts would not be to underwriting talent. They will be"focused on corporate and functional support areas overwhelmingly,"he said.

"Obviously, if you're going to see top lines come down, you'regoing to have to do real work on your expenses to meet returnsexpected by shareholders," he said, noting that some $100-to-$120million in annual expense savings are expected from the staff cutsfor 2010 and beyond.

Explaining the premium reductions, he said they reflectmanagement's decision to "concentrate firepower" on thosebusinesses that deliver appropriate returns. "We must focus XL'sresources in those places where we compete best in the marketplace,on those places [where] in this particular [set of] globalconditions we can deliver the best results," he said.

He said XL's near-term emphasis will be on shorter-tail linesand that the company is reducing long-term insurance agreements inorder to capture benefits of hardening market. While actions toreduce premiums will mean some areas are de-emphasized, the companyis not exiting any property-casualty insurance or reinsurancebusinesses it's currently in, he said.

Mr. McGavick said the premium reductions also "to a lesserextent, reflect rating agency reality," referring to rating agencyactions last year to push the financial strength ratings of XL'soperating companies down to "A" from "A-plus."

When A.M. Best made the move in January of last year, severalanalysts noted that the drop might put XL at a competitivedisadvantage in writing primary long-tailed casualty andprofessional and management liability lines for largecompanies.

Mr. McGavick reported this morning that the actions to cutexpenses have been reviewed with rating agencies, also reportingthat A.M. Best will not go to committee to review the ratingsagain. A.M. Best's last action on the ratings was an affirmation inmid-October 2008.

As Mr. McGavick spoke today, Standard & Poor's, which hadlowered XL from "A-plus" to "A" on Dec. 15, released a statementannouncing a rating affirmation but maintaining a negativeoutlook.

"If, in the next two years, XL continues to develop its ERM[enterprise risk management], there are no additional investmentlosses that more than offset operating income, and no negativesurprises arise that dampen consolidated results, we could revisethe outlook to stable," the New York-based rating agency said.

Mr. McGavick, responding to questions about XL's workforce,countered reports of an "exodus" of employees leaving to join otherfirms, noting that turnover last year was slightly below historicalnorms.

"We have done some work with some of our more high-profilepeople to make sure they have incentives to stay," he added.

Recognizing that some current and potential employees may stillwonder what they should do next given "all the tumult going on atXL," he advised, "I'd rather be at a firm that's already got [the]tough work done behind it, then a firm that has yet to recognizehow difficult this economic crisis is," referring specifically toactions to de-risk the investment portfolio and strengthen thecompany.

Mr. McGavick noted that the fourth-quarter combined ratio of89.4 was 4 points better than fourth-quarter 2007 and that thefull-year combined ratio of 95.7 indicated an underwritingprofit.

Underwriting results benefited from favorable prior-perioddevelopment of $268 million, according to financial schedulesreleased by XL.

(Susanne Sclafane can be reached at [email protected],201-526-1246)