XL Capital Ltd. had the claims-paying ability of subsidiaries downgraded by Fitch Ratings after the company said its fourth-quarter net loss was as much as $1.2 billion.

XL's issuer default rating was revised to A from A+, as Fitch said in a statement released last night that it viewed "XL's volatility of earnings to be much greater than comparably rated peers".

Fitch also downgraded the insurer financial strength (IFS) rating of subsidiaries XL Insurance (Bermuda) Ltd and XL Re Ltd. to A+ from AA-. The agency said the rating outlook is stable. The rating action follows Wednesday's announcement that the company will be recording a fourth-quarter charge of $1.5 billion to $1.7 billion related to credit market conditions.

Fitch said the charges "reflect poorly on the company's enterprise risk management capabilities and reduces Fitch's confidence in XL's overall earnings potential.

"Fitch had previously stated that XL would have to demonstrate consistent operating profitability in order to maintain the current ratings. Given the recent charges, Fitch views XL's volatility of earnings to be much greater than comparably rated peers and more than we would expect from a AA-rated company."

Fitch also pointed to other significant losses suffered by XL over the past six years, after claims resulting from catastrophe losses, the September 11, 2001 terrorist attacks and an arbitration settlement with Winterthur.

"Fitch believes these charges have hurt the company's ability to grow its capital position as much as other competitors have during the recent hard market." Fitch added.

Offsetting those factors were XL's "strong competitive position with worldwide capability in commercial insurance and reinsurance, recent strong operating results of the company's core property/casualty and life operations, reasonable financial leverage and adequate capitalisation" of its subsidiaries.

Fitch believes that despite softening market conditions across many lines of business, XL's capital position, underwriting franchise and financial flexibility should enable the company to produce adequate earnings on its core operations going forward. Fitch believes there could be some future uncertainty related to asset valuations within the investment portfolio given continued credit market volatility.

On Wednesday XL said it expects to take a charge of at least $550 million on the reduced value of its 46 percent stake in Security Capital Assurance Ltd. XL also set aside $300 million for claims on reinsurance obligations tied to the firm.

XL has been in talks with rating firms regarding capital levels and doesn't presently intend to raise cash, director of investor relations David Radulski said yesterday on a conference call.

"We thought that we were decoupled from Security Capital Assurance, and had to some degree," chief executive officer Brian O'Hara told analysts yesterday in a conference call. "This was a very surprising disappointment."

XL declined $1, or 2.1 percent, to $45.30 in New York Stock Exchange composite trading yesterday.

"The sizable charge represents yet another misstep for XL and its management," Seth Glasser, an analyst at Barclays Capital Inc. in New York, said yesterday in a research note.

Security Capital, founded by XL, has lost 90 percent of its market value in the 12 months through yesterday.

SCA insures around $154 billion worth of various types of bonds. XL's involvement in SCA means that around $78 billion, all business written before SCA floated on the stock marketin August 2006, is subject to guarantee by XL.

However chief operating officer Henry Keeling said during yesterday's conference call that, based on analysis of the underlying loss exposures, it was "highly unlikely" there would be any losses under those guarantees.