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Moody's cuts XL's outlook to negative

Ratings agency Moody’s Investor Services has cut its outlook on XL Capital to negative due to the company’s exposure to the sub-prime crisis through its bond insurer affiliate Security Capital Assurance (SCA).

The change in outlook came as Moody’s affirmed XL Capital’s Baa1 senior debt rating and A1 insurance financial strength ratings of its subsidiaries.

The agency said: “The negative outlook on XL reflects further stress on the company’s capital and financial flexibility resulting from the downgrades of XL Capital Assurance (XLCA) and XL Financial Assurance (XLFA).”

XLCA and XLFA are wholly-owned subsidiaries of SCA, which is about 46 percent-owned by XL.

The rating agency said it expects XL’s ratings could be downgraded if additional losses in excess of $1bn were to result from XL’s exposure to SCA or its investment portfolio of structured mortgage securities deteriorates further.

The bond insurer has already been downgraded to junk status by rival agency Fitch Ratings.

SCA had reserved for $632.3mn relating to the disputed CDS contracts in its full-year 2007 results, with $215mn relating to a net unrealised mark-to-market loss, and $417.3mn representing the provision of case basis reserves for losses and loss adjustment expenses.

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