Rating agency Moody's Investors Service yesterday lifted its negative outlook on XL Capital Ltd. and affirmed its debt ratings on the Bermuda business insurer.

Moody's said XL's credit profile had improved and its business franchise had stabilised.

The agency affirmed the company's A2 insurance financial strength rating. A year ago, Moodys downgraded XL from A1 to A2 and declared a negative outlook. Yesterday it changed the outlook to stable.

XL made a net loss of some $2.6 billion in 2008, after paying its way out of its exposure to bond insurer Syncora Holdings Ltd.

This year, it has returned to profitability and its book value has soared 35 percent on the rebound of global financial markets. Its shares have risen more than 400 percent in the year to date, making it 2009's biggest climber in the S&P 500 Index.

"The rating outlook on XL and its subsidiaries has been changed to stable from negative, reflecting its improved capitalisation and financial flexibility, as well as the stabilisation of the company's business franchise," Moody's said yesterday in a statement.

According to Moody's, while XL still faces some challenges, the company's overall credit profile has "significantly improved during the past 12 months", resulting in the stabilisation of the company's business franchise.

"XL's shareholders' equity has meaningfully rebounded as financial markets have recovered — to approximately $9.2 billion at September 30, 2009, up 50 percent over year end 2008 levels — primarily due to significantly reduced unrealised losses on investments and good underwriting profitability in its core P&C insurance and reinsurance operations," Moody's added.

Moody's noted that XL's "refocused attention" to its core Moody's noted that XL's "refocused attention" to its core property and casualty insurance operations was a credit positive.

"Moody's notes, however, that realised investment losses and impairments are likely to remain a drag on XL's profitability during 2010 as the company continues to de-risk its investment portfolio through targeted sales of RMBS (residential mortgage-backed securities) and other asset-backed securities," the rating agency stated.

"As a result, the company's interest and preferred dividend coverage metrics are likely to remain weak relative to its peers until such investment losses abate."

James Eck, Moody's vice-president and lead analyst for XL Capital, said: "While Moody's expects additional investment losses to be realised by XL over time, we believe these losses will be manageable within the context of the company's core earnings power and capitalisation."