Bermuda bond insurer Security Capital Assurance Ltd.'s XL Capital Assurance Inc. and XL Financial Assurance Ltd. units had their financial strength ratings cut three levels to BBB- by Standard & Poor's (S&P) on Friday.

The downgrade reflects S&P's assessment of potential losses on residential-mortgage backed securities (RMBS) created from 2005 to 2007, the New York-based unit of McGraw-Hill Cos. said on Friday.

"The downgrade reflects our current assessment of potential losses on the companies' 2005-2007 vintage RMBS exposure, direct and indirect, which is higher than previous estimates," said S&P in a statement.

The ratings agency said it believes XL Capital Assurance and XL Financial's combined capital cushion is inadequate at the previous rating level to absorb those losses, resulting in a shortfall of about $500 million.

S&P kept the ratings on CreditWatch as there is execution risk in the companies' restructuring plan and strategy for increasing claims-paying resources.

But there was better ratings news for another Bermuda-based financial guarantor, Assured Guaranty Re, as S&P affirmed its AA financial strength and financial enhancement ratings. The company is a subsidiary of Assured Guaranty Ltd.

The agency assigned a stable outlook, reflecting what it called the company's conservative underwriting and investment policy, limited sub-prime mortgage risks and strong capital profile.

S&P said that although bond insurer rating volatility and housing and mortgage issues have disrupted the primary bond insurance market, it believes Assured Guaranty Re and its subsidiaries are "well positioned to offer reinsurance on existing portfolios where a primary company looks to secure capital relief."

Shares of Assured Guaranty fell nine cents (0. 4 percent) to $23.94, while SCA fell four cents (5.6 percent) to close on $0.67.