XL Capital has been hit with a downgrade of its financial strength ratings, a step Standard & Poor?s said was tied to news the company expected to record an $830 million loss in the fourth quarter, questioning management?s ability to manage earnings volatility. S&P, which rates insurers and reinsurers on their ability to pay claims, said the ?paramount issue is one of XL?s management?s ability to deliver consistent earnings without negative surprises?.

XL, a Bermuda-based global insurance and reinsurance company, saw the financial strength ratings on its main subsidiaries lowered from ?A+? to ?AA-?, S&P said in a statement.

Specifically, the ratings firm lowered its ratings on XL because of the unexpected hit the company will take in the fourth quarter because an arbitration decision tied to a 2001 acquisition will bring in $575 million, not the $1.45 billion XL expected.

And S&P said it lowered the counterparty credit ratings on XL Capital Ltd. and other holding companies America Inc. and NAC Re Corp. to ?A-? from A.

The outlook on the ratings are stable, meaning any further changes are unlikely. XL had been holding out for an additional $1.45 billion from Credit Suisse, the financial services firm that sold it the property and casualty segments of Winterthur Swiss in 2001.

The dispute over how much CS should pay XL arose from questions over the ultimate dollar amount of claims from the old policies XL acquired responsibility for under the deal. An independent actuary hired to decide how much should be set aside for claims on prior-year claims decided the amount was closer to the bid Credit Suisse made, meaning it will have to pay XL $575 million, which includes interest.

S&P said the fact that the arbitration was going in Credit Suisse?s favour was ?a significant departure from our expectations, and those expectations were factored into our previous ratings,? credit analyst Mohammed Ashab said. The ratings agency said the development also called into question XL?s risk-management capabilities, with management at the insurance giant having told investors and clients it was certain it would win the arbitration. The ratings, which still remain higher than on numerous peer companies hit badly by third-quarter storm claims, reflect XL?s strong competitive position and global market presence, S&P said.

XL Capital shares fell $1.19, or 1.76 percent, to $66.38 on the NYSE yesterday.