XL Capital this week announced that it had completed "a capital market transaction" that effectively sets aside $500 million should the Bermuda-based insurance giant be faced with a need for capital in the future.

Gavin Arton, XL's senior vice-president for investor relations, told The Royal Gazette that the structure of the transaction - which was underwritten by Merrill Lynch and set up through a separate entity, the Mangrove Bay Pass-Through Trust - was "an innovative way of ensuring access to capital in the future".

With the transaction, XL obtained an unconditional right to put up to $500 million of its preference ordinary shares to a high quality asset-backed trust for a period of up to 30 years.

Meanwhile, the transaction can also be used as necessary, for collateral purposes, by XL's US operations.

A company Press release said it would "increase its capital resources and capacity to provide reinsurance financial statement credit to its US property and casualty insurance operations".

The securities issued by the trust - which sources close to the industry said had the characteristics of convertible bond in structure - were given strong ratings by both Standard & Poors (S&P) and Moody's: an "A-" from S&P and an A3 rating by Moody's Investor Services.

The transaction was privately placed primarily with institutional investors, according to the company.