XL Capital yesterday suffered ratings downgrades on the heels of its announcement that it would take a $694 million charge to boost reserves for casualty business written in North America between 1997 and 2001.

Rating agencies Moody?s and A.M. Best Co. each issued statements saying they had downgraded the company?s debt ratings, which will make it more expensive for the company to raise the money it needs to cover the reserve charge. XL?s financial strength ratings were also put under review.

Meanwhile, Standard& Poor?s lowered XL?s counterparty credit and financial strength ratings for the core operating companies of the group.

A.M. Best Co. downgraded all XL debt, which will affect approximately $2.4 billion of securities issued or guaranteed by the company.Subsequently, A.M. Best also put the company?s A+ (Superior) financial strength rating under review with negative implications.

It said XL Capital?s ratings would ?remain under review with negative implications until additional capital has been successfully raised insufficient amounts to place risk-adjusted capitalisation well within the superior level, supportive of its current financial strength ratings?.

A.M. Best warned that ?should this not be accomplished within a reasonable timeframe, it is likely that the current financial strength ratings will be downgraded a notch to the excellent level?.

XL?s expected charge of $694 million follows a previous boost to its reserves in the third-quarter of last year, when it posted a pre-tax charge of $184 million.

The rating agency said: ?Cumulatively, these reserve charges have exceeded A.M. Best?s expectation and have caused the company?s risk- adjusted capital to fall below levels required for its current financial strength ratings. However, XL Capital plans to raise additional capital during the first half of 2004 to replenish its capital base.

?The downgrade of the debt securities reflect the declining trend in XL Capital?s fixed charge coverage ratios over the last three years and the anticipation of elevated debt to capital leverage ratios following the completion of the 2004 capital injection plan.

?Notwithstanding, A.M. Best expects XL Capital?s leverage and coverages to improve as projected earnings increase shareholders? equity and holding company liquidity.?

Standard & Poor?s said its financial strength rating for XL had gone from ?AA? to ?AA-?, but the company was no longer on credit watch.

At the same time, the ratings agency lowered XL?s counterparty credit rating from ?A+? to ?A?, also removing it from credit watch.

In addition, S&P lowered its counterparty credit and financial strength ratings on the subsidiaries of XL Group, which had not been on CreditWatch, to ?AA-? from ?AA? because these companies are considered core to the group. The outlook on all these companies is stable, or unlikely to change.

S&P said its rating actions would not affect the ?AAA? financial strength ratings on XL Capital Assurance Inc. and XL Financial Assurance Ltd.

Moody?s also downgraded XL?s debt rating, and also lowered the financial strength ratings for its reinsurance companies.

XL?s senior unsecured debt rating fell to A2 from A1, and the financial strength rating of XL?s reinsurance subsidiaries went from Aa2 from Aa3.

The downgrade was said to reflect ?concerns over the magnitude of XL Capital?s fourth quarter reserve charge?.