XL Capital yesterday announced plans to raise rates across all lines, restructure capacity and reduce volatility as well as further details about a quota share reinsurance treaty it is entering with a new reinsurer in the wake of the company?s $1 billion third quarter loss due to hurricanes.

With ratings agencies raising capital requirements in recognition of the new risk parameters for the industry, XL chief executive officer Brian O?Hara said: ?In this environment, we must raise our margins in order to generate accessible returns.

?Among the components required for enduring success in our industry are both diversification and depth of market presence, increased risk adjusted returns and creative capital structures which can allow for growth while limiting volatility.?

The Bermuda-based company plans to enter into a quota share reinsurance treaty with a newly formed reinsurance company to take advantage of opportunities emerging from the quarter?s catastrophes. XL will transfer some of the property catastrophe risks it takes on, and also portions of its retrocessional business, to the firm as a short term way of raising capital.

During the company?s conference call yesterday, executives declined to reveal the identity of the new insurer or the lead investor, described as an alternative asset management firm that XL has worked with for a long time, citing concerns about violating securities laws.

When an analyst questioned why XL would enter the agreement and apparently gear down on the property cat and retro markets when they appear to be one of the most profitable lines going forward, Henry Keeling, executive vice president and chief executive for reinsurance operations replied that the initiative, combined with other risk reduction steps, was a ?smart way for managing potential volatility and recent and ongoing increases in capital being required by ratings agencies?.

He said: ?We expect to be able to increase our gross writing to some extent, we also will reduce net exposures, reduce our volatility and reduce our expected capital charges and in turn we will earn a commission stream in return for our underwriting skills,? he said. The time period is intended to be flexible but is for a minimum period of two years.

XL will also retain substantial cat exposure on its books for the benefit of shareholders, chief financial officer Jerry de St. Paer said, adding: ?This isn?t an exit, it is simply a strategy to participate in growth.?

The dedicated nature of the capital will allow the company to maintain its market presence and perhaps increase or enhance its leadership position in the property cat market with the combination of ceding commissions and profit commissions enhancing return to shareholders, the executives said.

Mr. O?Hara also said the company remains confident that it will prevail in the independent actuarial process with Winterthur Swiss Insurance Co. regarding settlement of a reserve seasoning agreement related to XL?s July 2001 purchase of Winterthur International. If XL is unsuccessful in the independent actuary review process, the company could face a net pre-tax reserve increase of approximately $900 million. A decision is expected next month.

?The resolution of this process will allow us to raise capital necessary to maintain our financial strength,? Mr. O?Hara said, later explaining to analysts that the company had shared its plan with ratings agencies and they agree that the company will get ?dramatically better market execution if XL goes to market with a clear resolution on Winterthur?.

XL Capital shares closed five percent or $3.27 higher yesterday to close at $67.33 on the New York Stock Exchange.