S&P Puts XL Capital On Watch

Standard & Poor's Ratings Services has placed Bermuda-based XL Capital Group on CreditWatch with negative implications citing reinsurance arrangements XL has with downgraded bond insurer Security Capital Assurance.

A company spokesperson did not immediately respond when asked for comment.

Standard & Poor's credit analyst Steven Ader, in a statement issued Friday, said S&P has a "concern that earnings, capitalization and financial flexibility might be adversely affected by the uncertainty surrounding XL's outstanding reinsurance agreements" and guarantee of business underwritten by the operating subsidiaries of SCA.

He said the concern involved business underwritten prior to the August 2006 SCA initial public offering by XL.

"The continued uncertainty of this exposure and the potential for material impairments in the investment portfolio support the rating action," said Mr. Ader.

On June 17 S&P lowered its financial strength rating on SCA's operating subsidiaries to "triple-B-minus" based, it said, on a $500 million capital shortfall relative to the prior rating level. The shortfall is based on the current assessment of potential losses on the company's 2005-2007 residential mortgage-backed security exposure.

The credit volatility of the RMBS exposure materially raises the likelihood that XL will face additional obligations under these arrangements, S&P said.

"Although XL is proactively addressing a resolution of these exposures," Mr. Ader said, "we believe the uncertainty of the cost and resultant effect on earnings, capital and financial flexibility is a risk to the rating."

The rating firm said in addition that credit market conditions continue to adversely affect the investment portfolio.

XL, S&P noted, has a structured credit investment portfolio of $11.8 billion, which includes residential mortgage backed securities exposure of $1.6 billion ($1.2 billion was rated "triple-A" as of March 2008.

S&P said it believes uncertainty in the financial markets has adversely affected XL's investment portfolio more than the portfolios of XL's property/casualty-focused peers.

Without a replenishment of capital, a formal or perceived charge exceeding $500 million, S&P said it could lower XL ratings one notch at the operating company level and up to two notches at the holding company level if financial leverage exceeds 40 percent.