AM Best said XL Capital?s after-tax reserve charge of $183 million may have potential implications for reinsurers that have not been as proactive in addressing legacy issues.

The Bermuda-based company increased reserves on Friday to pay recently reported claims on professional liability and corporate board coverage sold between 1997 and 2001, among other policies.

Best said that while the recent charge fell within its anticipated range of adverse loss development for XL Capital Group it may be indicative that more material charges may be on the horizon for other reinsurers that have not been as proactive in addressing legacy issues that relate to excess casualty business written in the period of 1997 to 2001.

XL Capital undertook a major North American casualty reinsurance reserve study at the end of 2003 and recorded a substantial reserve strengthening charge in the fourth quarter of 2003 for adverse development for the 1997 to 2001 underwriting years.

While its gross incurred losses for the period now sit at the upper end of the range when compared to industry peers, Best said that ?despite the extensive charges, previously taken by XL Capital and management?s credibility in maintaining reserve adequacy relating to excess casualty business, the additional reserve charge further illustrates the systemic nature of reserve inadequacy for the North American reinsurance operations.?

As North American excess casualty reinsurance is generally a syndicated business, it is reasonable to expect that participants in these classes of business report incurred losses within a reasonable range, Best said.

While XL Capital?s management has been pro-active in recognising and addressing adverse development in these lines and underwriting years, A.M. Best is concerned that other participants have not yet fully addressed this situation.

That concern as well as the onset of a more competitive environment in reinsurance pricing and contract terms and conditions prompted Best to revise its outlook to negative from stable on the reinsurance sector in February.

Best said financial strength and issuer credit ratings for property/casualty reinsurance organisations remain under pressure.

Downgrades are expected to continue to outpace positive rating developments for the near term.

XL Capital?s financial strength rating of A+ (Excellent) and its issuer credit ratings of ?aa-? remain unchanged with a negative outlook.