With expected premium declines in the 20-to-25 percent rangetopping its 2009 budget numbers, XL Capital has announced plans toslash 10 percent of its workforce to keep expenses in line withrevenues. With the company listing just over 4,000 employeesworldwide, that would translate to about 400 jobs lost.

The expected premium drops and the job cuts were revealed as theBermuda-based company reported a $1.4 billion loss forfourth-quarter 2008--or $4.36 per share. For the full year, the netloss totaled $2.6 billion, or $11.02 per share.

XL had also reported over $1 billion of red ink in the fourthquarter in 2007, with a net loss of $1.2 billion on its bottom lineback then, while reporting income for the full year in 2007 of justover $200 million.

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

Chief Executive Officer Michael McGavick explained during aconference call that XL continues to "de-risk" its investmentportfolio as part of a strategy outlined last year, and thatfourth-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 Mid Ocean Re. "This is a great business [and]XL is 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 Mid Ocean,"he explained, noting that reinsurance franchises like Mid Ocean"were valued 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 cutbacks at XL are a consequence ofmeaningful reductions in premium being planned for 2009, althoughhe noted the cuts would not involve underwriting talent, insteadbeing "focused on corporate and functional support areasoverwhelmingly."

"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 explained.

XL's near-term emphasis will be on shorter-tail lines, he said,noting the company is reducing long-term insurance agreements tocapture the benefits of a hardening market. While actions to reducepremiums will mean some areas are de-emphasized, the company is notexiting any property-casualty insurance or reinsurance businessesit's currently in, he added.

"This plan was built with the fresh eyes that this managementteam has," according to Mr. McGavick.

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 2008, several analystsnoted that the drop might put XL at a competitive disadvantage inwriting primary long-tail casualty and professional and managementliability lines for large companies.

Mr. McGavick reported this month 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 during the earnings conference call,Standard & Poor's, which had lowered XL from "A-plus" to "A" onDec. 15, released a statement announcing a rating affirmation butmaintaining a negative outlook.

"If, in the next two years, XL continues to develop its[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.

S&P added, however, that the occurrence of unexpectedadverse events or inadequate progress related to ERM, among otherdevelopments, would likely prompt a rating downgrade.

Characterizing XL's competitive position as "still strong,"S&P said that "perceived franchise issues borne from a stringof material earnings and capital charges over the past severalyears continue to hurt" that position. The current rating, S&Psaid, "incorporates the expectation that XL will sustain itsbusiness profile without compromising pricing or terms."

James Veghte, chief executive of XL's reinsurance operations,and David Duclos, CEO of XL's insurance operations, commented onthe impact of 2008's rating actions on 2009 renewals so far.

Mr. Veghte said that XL had lost 11 percent of its reinsuranceportfolio due to security decisions made by clients as a result ofthe December rating agency actions. "Not surprisingly, the impactwas most significant in Europe, given the timing of the actions andStandard & Poor's significance in that market," he said.

Still, "the Jan. 1 renewal process reconfirmed our status as alead market," he said, noting that XL was asked to provide quoteson 86 percent of property-catastrophe renewals written out ofBermuda and 100 percent of its U.S. casualty reinsurancerenewals.

"Our success in this regard is due to the skill and dedicationof our underwriters. I would like to thank them and to express myappreciation to our customers and brokers for the support andcommitment they continue to show this franchise," he said.

Mr. Duclos said Jan. 1 insurance renewals in Europe averaged 87percent across all product lines, while other regions were "also ator near historical levels," adding the "only significantimpact"--an anticipated downward effect--was on longer lines thatare rating sensitive, such as U.S. professional liability andexcess casualty.

Two days after XL's earnings announcement, Moody's affirmed its"A2" insurance financial strength ratings for the insurance andreinsurance operations while keeping a negative outlook in place toreflect concerns about XL's exposure to further investment losses,as well as the company's earnings and capital generation capacity,among other issues.

The outlook could be revised to stable if XL "stabilizes itsfranchise," Moody's said, adding that the outlook could alsostabilize if XL "successfully transitions under its new managementteam to a simpler organization [or] stabilizes its financialflexibility, earnings and capitalization."

On the other hand, events that might prompt a downgradeinclude:

o "Prospective organic capital generation declines due tomaterially lower profits," such as returns on equity consistentlyin mid-single digits.

o 2009 realized investment losses and impairments in excess of$750 million pre-tax.

o Shareholders' equity dropping below $5.5 billion.

In addition, Moody's said that if "the company's franchise valuein terms of new business and retention of existing business weakensmaterially," that could also spark a downgrade.

Mr. McGavick, responding to further questions about XL'sworkforce during the earnings conference call, countered reports ofan "exodus" of employees leaving to join other firms, noting thatturnover last year was slightly below historical norms. "We havedone some work with some of our more high-profile people to makesure 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, than a firm that has yet to recognizehow difficult this economic crisis is," referring specifically toactions to de-risk the investment portfolio and strengthen thecompany.

"It ain't going to get harder in our view....It's hard toimagine it being more difficult than it was in the fourth quarter,and we continued to deliver," he said,

Highlighting some results that he said pointed to a "solid year"behind all the noise, Mr. McGavick noted that the fourth-quartercombined ratio of 89.4 was four points better than fourth-quarter2007, and that the full-year combined ratio of 95.7 indicated anunderwriting profit.

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

"I know given all the noise, some of these results may surprisesome of you. They may even displease our competitors, and that'sfine with us," Mr. McGavick said, adding that "key metrics"--suchas retention of customers and employees--"point to a franchise atXL that is ready to take on the opportunities that 2009presents."

"In many different parts of the reinsurance and insurance space,rates are improving, [and] we expect with our solid franchise to beable to take advantage of these opportunities," he said.