XL Capital Ltd.'s financial strength rating was yesterday downgraded to A from A+ by Fitch Ratings, on concerns over the company's invesment portfolio.

It is the second downgrade for the Bermuda-based business insurer since it gave guidance last week on fourth quarter investment losses. Standard & Poor's also downgraded XL from to A from A+ on Monday.

XL is in the process of "de-risking" its portfolio and is looking at options, including sale, for the future of its life reinsurance unit.

"Given the challenging credit market environment that grew increasingly more volatile in the fourth quarter, Fitch believes it will be difficult for XL to complete the realignment of its investment portfolio or the strategic review of its life operations in the near-term," Fitch said in its commentary.

"Due to the long duration of the life operations' assets which are used to support its long-duration liabilities, Fitch believes this business has been a significant driver of the rate and credit spread volatility in XL's investment portfolio."

Last week XL announced that the estimated decline in the value of its investment portfolio through November to be "largely in line with" the $1.1 billion unrealised and realised losses the company incurred in the third quarter. It also estimated more than $200 million in net investment fund affiliate losses from its alternative investment portfolio for the fourth quarter.

"Fitch believes the continued drag from investment portfolio issues has made it marginally more difficult for XL's insurance subsidiaries to compete with higher-rated peers," Fitch commented. "As such, Fitch remains concerned that XL's underwriting performance going forward could show deterioration."

Fitch said that with $12 billion in cash or government-related securities, XL's liquidity was adequate. It also noted the enhancement of the comopany's enterprise risk management capabilities, simplification of its management structure, resolution of its problems with financial guarantor Syncora and reduction in exposure to corporate credit and commercial mortgage backed securities.

"Additionally, XL has reduced its catastrophe exposure and Fitch believes the company's overall loss reserve position is stronger than in recent years," Fitch added.

Fitch also downgraded XL's issuer default rating (IDR) to BBB+ from A and put the company on ratings watch negative.

Last week, Bloomberg reported that XL was "seeking a buyer". XL announced on Tuesday that AM Best had decided to leave the company's A (excellent) rating unchanged.