Moody's Downgrades XL Capital to A3 Moody's Downgrades XL Capital To A3, Citing Erosion of Capital

XL Capital Assurance Inc. was downgraded by Moody's Investors Service yesterday to A3, from Aaa, based on the erosion of the monoline insurer's already weak capital cushion because of increased losses in the subprime mortgage-backed securities the insurer guarantees.

Moody's had placed the company, a subsidiary of Security Capital Assurance Ltd., on review for possible downgrade in December.

"In our initial placement of the company on review for downgrade in December we had identified a pretty significant capital shortfall to the triple-A stress loss level," Moody's analyst James Eck said. "The update to the [residential mortgage-backed security] loss assumptions increased that shortfall a bit."

Eck said that the capital shortfall combined with Moody's view that the company would not likely raise the capital to keep it at a triple-A level.

"We currently see the capital position as consistent with the single-A rating," Eck said.

Based on the risks in SCA's portfolio, capitalization required to cover losses at the triple-A level would exceed $6 billion. This compares to Moody's estimate of SCA's claims paying resources of $3.6 billion, Moody's said in the release.

Moody's further noted that it estimates SCA's insured portfolio will incur lifetime expected losses of approximately $1.2 billion in present value terms.

XL Capital has already been downgraded by Fitch Ratings to A, and Standard & Poor's has the insurer on credit watch with negative implications.

Fitch said the company needed to raise roughly $2 billion to keep its triple-A, while Standard & Poor's on Jan. 17 said the company needed to raise between $600 and $650 million.

According to a release, Moody's said they evaluated SCA along five key rating factors: franchise value and strategy, insurance portfolio characteristics, profitability, financial flexibility, as well as capital adequacy.

Of these factors, the Moody's release said capital adequacy was given particular emphasis.

"While certainly capital and other more qualitative aspects are both important parts of our rating analysis, really you have to have the capital as a prerequisite or a foundation on which to look at some of the other more qualitative aspects," Eck said. "So without adequate levels of capital you can't have certain ratings." q

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