Fitch Ratings put XL Capital Ltd. on a ratings watch negative yesterday because the Bermuda-based company has entered into an independent valuation process with Winterthur Swiss Insurance Co. regarding settlement of a reserve seasoning agreement related to XL?s purchase of Winterthur International.

Fitch has placed several ratings of XL on Rating Watch Negative including XL?s ?A? long term issuer rating, and the ?AA? insurer financial strength rating of lead (re)insurance companies XL Insurance (Bermuda) Ltd and XL Re Ltd. XL Capital bought Winterthur International in July 2001 from Winterthur Swiss Insurance Co. As part of that purchase, Winterthur Swiss Insurance Co. agreed to replenish Winterthur International?s reserves after three years if they proved inadequate.

Winterthur Swiss and XL do not agree on the extent to which Winterthur International?s reserves need to be replenished, so an independent actuary has been called in to offer an opinion.

Last Thursday, XL and Winterthur submitted their amounts for the independent valuation determination process. President and Chief Executive Officer Brian M. O?Hara said that XL?s submission would result in a net payable to XL of approximately $1.45 billion in aggregate and Winterthur?s submission would result in a net payable to XL of approximately $541 million in aggregate.

The final seasoned reserve amount will be determined through a ?baseball-type? process in which the actual final seasoned reserve amount is whichever of XL?s or Winterthur?s submitted number is closest to the ultimate loss valuation determined by the independent actuary.

If the actuary?s estimate are closer to Winterthur?s than to XL?s, XL could be forced to take a $900 million net pre-tax charge.

Mr. O?Hara said in yesterday?s conference call on earnings: ?The increase from the $1.1b recoverable we had reported at the end of the third quarter stemmed primarily from the completion of relevant actuarial studies in the fourth quarter and the inclusion of certain other balances due under the seasoning process.?

He emphasised that the independent actuarial process is a ?valuation process, not a negotiation or arbitration? where the role of the independent actuary is to determine their own valuation of the seasoned net reserve amount. ?We proposed the baseball type structure in order to avoid a split the difference type resolution,? Mr. O?Hara said adding that there is no predetermined period for the independent actuary to develop their valuation.

He said: ?We have just begun to work with Winterthur Swiss and the independent actuary on the details of the process and at this point we do not know how long it will take committed to however we are committed to solving this as soon as is reasonably possible.?

The submitted portions of the claims relate to coverages and markets with which Mr. O?Hara said XL has had ?twenty years of deep firsthand knowledge of loss emergence?.

?Our submitted amount was developed with support from several leading third party advisors on claims issues including a signed valuation opinion from an outside actuary. We have also had first hand experience with the claims emergence within this runoff book since the acquisition three years ago so we feel confident in our submission,? he said.

Without commenting on the specifics of the Winterthur Swiss claim, Mr. O?Hara said: ?Their reserve submission is substantially less than the paid plus case amounts in our submitted net reserve numbers. Obviously we are looking forward to getting this matter behind us, but I want to reemphasis we are confident in our claim.?

Fitch said in its ratings watch: ?Although it is difficult to predict, it will likely take several quarters for the independent actuary to make a decision. While XL has completed extensive analysis supported by outside actuarial and claims experts to derive its estimates, there is the possibility that the independent actuary may not rule in their favour.?

In this event, Fitch said it would review XL?s capital position and any plans to replenish capital from this potential charge, including retained earnings from operations, and consider the ratings on Rating Watch for a downgrade at that time, ?most likely by one notch?.

If XL is successful in the process, Fitch is likely to affirm the ratings at the current level and remove them from Rating Watch Negative. The placement of XL Capital Ltd. on Rating Watch Negative has no current effect on the ?AAA? insurer financial strength (IFS) ratings of XL Capital Assurance and XL Financial Assurance. The Rating Outlook for XLCA and XLFA remains Stable.

Should the ratings of parent XL ultimately be downgraded, Fitch said :?This may place downward pressure on the financial flexibility afforded to XLCA and XLFA via its parent relationship. XLCA and XLFA has historically been reliant on capital contributions from XL to support business growth.

?That being said, Fitch is confident that management of XLCA and XLFA have the willingness and commitment to manage their capital position within the boundaries necessary to maintain their ?AAA? IFS ratings without further reliance on capital infusions from XL.

?These parameters are particularly relevant while XL?s rating is on Rating Watch,? Fitch concluded.