XL Capital Ltd. chief operating officer Henry Keeling said last night there was no reason for concern over the company's future, after the global insurer suffered its second ratings downgrade in successive days.

Rating agency AM Best downgraded XL's financial strength rating to A from A+ yesterday afternoon.

The news came hard on the heels of Fitch Ratings' decision to downgrade XL's issuer default rating to A from A+ on Thursday.

The decisions follow XL's announcement this week that it expects to post a loss of up to $1.2 billion for the fourth quarter of last year.

XL has been hit by exposure to the US sub-prime mortgage crisis, particularly through its 46-percent stake in bond insurer Security Capital Assurance (SCA).

Widespread mortgage and loan delinquencies in the US have damaged the value of mortgage-backed securities that SCA insures.

On Wednesday, XL announced that it would take charges of between $1.2 billion and $1.5 billion related to credit-market conditions.

Those charges include $550 million with respect to XL's investment in SCA and another $300 million through a reinsurance agreement with SCA.

In its commentary on the rating revision, AM Best said it believed the charges did not eliminate XL's sub-prime exposure and added that XL's "risk management controls are below expectations".

Another credit rating agency Standard & Poor's, said it would not downgrade XL because of the announced charges.

The company has an A- rating from S&P, which said XL's underlying performance remains strong, as it was able to earn $1.5 billion during the first nine months of 2007.

Ratings are of crucial importance to insurance companies as they give potential clients an indication of the insurer's ability to pay out on claims. Downgrades into the B levels can impact seriously on a company's ability to write new business.

Mr. Keeling told The Royal Gazette: "We are disappointed with Best's decision, but an A from Best is still an excellent rating." Under AM Best's classification system, A+ is "superior" and A is "excellent".

XL has strong underlying finances, Mr. Keeling added, and its core lines of business were still performing well. Excluding the charges, the company made a net income of between $425 million and $475 million for the last three months of last year, he added.

And even after the fourth-quarter loss, XL expects to record a full-year profit of between $200 million and $400 million for 2007.

"There is no reason for people to be concerned about the future of the company," Mr. Keeling stressed. "We have a 21-year track record of paying customers' claims and we shall continue to do that.

"Ratings are very important and while everybody would rather have an A+ from Best, A is still excellent."

AM Best said it did not have immediate concerns about the company's "capital adequacy", that is its ability to meet its obligations as an insurer.

But the agency did point to potential further sub-prime liability related to XL's directors and officers (D&O) and errors and omissions (E&O) insurance business. Some investors are suing executives and board members of companies, whose earnings and stock prices have dipped during the sub-prime debacle, and this is triggering claims on professional liability insurance policies. Mr. Keeling said many insurers besides XL shared such exposure.

AM Best warned: "This exposure gives rise to concerns that there may be a potential resurgence in claims for these lines as they relate to sub-prime issues in the future. Adverse development charges relating to these lines that are beyond A.M. Best's expectations will result in further rating actions.

"Following the May 2007 ratings review, it was A.M. Best's expectation that the likelihood of unanticipated large loss events would be curtailed, given management's previous representations concerning enhancements to risk controls and processes. Due to the magnitude of the charge and the fact that the sub-prime debacle to this point has had minimal impacts on the property/casualty industry in total, A.M. Best has concluded that while the above fourth-quarter 2007 capital charges have not caused an immediate concern toward the company's capital adequacy, XL Capital's earnings inconsistency and enterprise risk management are not indicative of a superior-rated company."