XL Capital Ltd. suffered its third downgrade in a week on Friday, when Moody's cut the company's senior debt rating to Baa2 from Baa1.

The ratings agency also downgraded the Bermuda-based business insurer's insurance financial strength rating to A2 from A1, with a negative outlook.

In a statement released after the markets closed on Friday, Moody's said: "The negative outlook reflects Moody's concerns regarding XL's ability to sustain its position as a leading global insurance and reinsurance provider, given market stress, and to generate consistent profitability to cover its high fixed charges."

Earlier last week, both S&P and Fitch had downgraded XL's financial strength rating from A+ to A. XL announced last Tuesday that AM Best had left its A financial strength rating unchanged on the company.

Downgrades can damage an insurer's competitiveness. In XL's case, if its S&P and AM Best ratings were to fall another two notches — below A- — that could trigger cancellations on some of its reinsurance contracts and collateral calls on some of its debt facilities.

XL's A rating from both those agencies is still on a par with, or stronger than, many of its Bermuda rivals. But the negative outlook poses the threat that further huge investment losses or diminished underwriting profitability could lead to a further downgrade.

Moody's said its action was the culmination of a review of the company it started in October, after the company announced preliminary third-quarter results indicating a loss of more than $1.6 billion, which included a charge of $1.4 billion related to the elimination of 98 percent of XL's exposure to troubled bond insurer Syncora Holdings Ltd.

Although the Syncora problem is now behind XL, all three rating agencies which downgraded the company last week expressed concerns about the company's investment portfolio and the decline in its value this year.

Virtually all insurers have suffered similarly, as turmoil in world markets has caused the value of investment portfolios plunge. XL has mounted an ongoing effort to "de-risk" its portfolio.

Moody's said it had three chief concerns about XL. The first was that unrealised investment losses could lead to reduced financial flexibility and pressure on the capital adequacy of its operating subsidiaries. Second, an anticipated weakness in profitability over the medium term and third was an elevated risk of a deterioration in market position.

However, Moody's added that XL's ratings reflected "sound liquidity and capitalisation at its flagship Bermuda operating subsidiaries" and it had shown "solid core underwriting performance".

Further ratings downgrades could occur if XL suffers decreased profitability leading to a return on equity "in the mid single digits", said Moody's, and if additional realised investment losses and impairments are sustained — "in excess of $1 billion pretax" — and if the company's franchise value in terms of winning and retaining business weakens.

Earlier this month, XL said it was retaining Goldman Sachs to explore "value-enhancing opportunities" amid rumours, reported by Bloomberg, that the company was "seeking a buyer".

Another rumour, circulating on Wall Street last week, was that Warren Buffett's Berkshire Hathaway was interested in buying a position in XL.