Storm clouds continue to gather above XL Capital, Bermuda's second biggest insurer and reinsurer, after one of the leading rating service company's placed a negative outlook on the company's financial and credit ratings.

Another investor service also warned it may downgrade XL's senior debt rating, while a third offered some hope by viewing XL's counterparty credit rating of "a-" as stable.

XL Capital, which has a market capitalisation of more than $14 billion, is under pressure as a result of the subprime credit crunch and the growing likelihood that its spin-off Security Capital Assurance will not be able to find around $2 billion of excess capital in time to avoid a ratings downgrade.

XL has a 46 percent stake in SCA. Its investment in the company has lost $500 million in value since September as SCA shares have freefallen to around $4 each, having been above $32 in May.

Yesterday, AM Best revised the outlook to negative from stable on XL Capital's financial strength rating of A+ (Superior) and the issuer credit ratings of "aa-" for the XL Capital Group and its members.

AM Best also changed from stable to negative the outlook on the issuer credit ratings of "a-" and all existing debt ratings of XL Capital.

In a statement, the rating company said the revised rating outlook reflects its "concerns regarding the financial pressures being experienced by Security Capital Assurance and the potential financial and operational impacts to XL Capital due to its 46 percent ownership of SCA.

"Additionally, XL Capital provides SCA with reinsurance support and guarantees certain SCA obligations, which further expose XL Capital to SCA's financial situation.

"XL Capital also has exposure to related subprime issues through its underlying investment and liability portfolios, which could compound the current situation."

The insurer and reinsurer has not been helped, in the eyes of AM Best, by it past history.

The rating company said: "XL Capital's risk management abilities have been below expectations after experiencing significant losses from NAC Re reserve charges, the valuation charge related to the Winterthur acquisition and $1.6 billion of 2005 hurricane losses."

Last month XL chief executive Brian O'Hara resigned from the board of SCA. That was viewed as a signal that XL Capital was preparing to bail out its spin-off by injecting cash.

However, no such undertaken has been announced and a UBS analyst last week warned XL Capital to keep out of the trouble that is surrounding SCA.

Another market observer, Moody's Investors Service, yesterday warned that it may downgrade the senior debt rating of XL Capital.

The company's A3 senior debt rating has been placed on review for possible downgrade, Moody's said.

There is increased pressure on XL's profitability, capital adequacy and financial flexibility from the company's investment in SCA and reinsurance agreements XL has with the bond insurer, Moody's explained.

The rating agency also said its review will focus on XL's $1.3 billion of direct investments in subprime mortgage assets and their impact on the company's earnings and capital adequacy.

However, a credit analysis by Standard & Poor's, released yesterday but primarily focused on XL's status as at September 30, rated the company's counterparty credit as "a-" and stable, noting: "Based on the company's very strong global market presence, very strong interest and fixed-charge coverage, and a diversified earnings stream."

In Wall Street trading yesterday shares of XL fell 6.6 percent to $49.23, while shares in SCA fell 11 percent to $4.