Bermuda insurance giant, XL Capital Ltd., announced on Friday that its chief executive officer, Brian O'Hara, would take a 61 percent pay cut for 2003 following the huge reserve charge the company took on its American operations.

And the company received another blow on Friday when ratings agency A.M. Best affirmed its good ratings - but gave them a negative outlook. This “negative outlook” will stay in place until a review of the company is completed in the second quarter of this year, said Best.

Last year XL Capital Ltd. discovered an $878 million shortfall in reserves and set up an investigation to get to the bottom of the matter - and took heavy multi-million dollar-related charges.

XL Capital showed a loss in the fourth quarter of 2003 of $314.8 million after taking a pre-tax charge of $694 million mainly for potential North American reinsurance claims.

And as a result last week XL announced it had cut Mr. O'Hara's pay to $1.23 million in 2003 in an Securities and Exchange Commission filing.

Mr. O'Hara, 55, received no bonus and no restricted stock during the financial year after he asked the board for the reduction because of the reserve expense, XL said.

The reserve shortfall stemmed from a reinsurance company XL bought in 1999, NAC Re Corp., in relation to problems with a whole host of policies written from 1997 through 2001.

The expense led to a fall in the stock price at XL and Mr. O'Hara and his executives were put through the mill by analysts and investors.

The SEC filing said Mr. O'Hara received a $1 million salary, unchanged from 2002, and $234,428 in other compensation. In 2002, he was paid $3.19 million, including a $1 million bonus and $862,500 of restricted stock. XL increased Mr. O'Hara's stock option grant to 185,000 shares last year from 140,000 in 2002. And ratings agency Best affirmed the financial strength ratings of A plus (Superior) of XL Capital Group (Hamilton, Bermuda) and its affiliated companies.

“All ratings have been removed from under review and assigned a negative outlook,” said a report from Best.

At the same time Best affirmed all existing debt ratings, including “a minus” senior debt, “bbb plus” subordinated debt and “bbb” preferred shares.

Best said that the removal of the ratings from under review follows the successful issue of XL Capital Ltd.'s $750 million 6.5 percent adjustable conversion rate Equity Security Units, which were previously assigned an “a minus” senior debt rating. Proceeds from the ESU were used to replenish the capital of the group and certain of its core operating subsidiaries.

Best said the negative outlook was based on its concern with the sufficiency of XL Capital's consolidated capital base for the group's current rating given the recent premium growth and market expansion into insurance lines of business.

“The outlook will remain negative until A.M. Best completes its due diligence process during the second quarter of 2004,” said the report.

Reserve problems for XL began in the third quarter of last year, when tort and malpractice claims started to affect XL Re. In October, XL took a $160 million after-tax charge against third-quarter earnings to pay for potential claims in its North American business for medical malpractice and professional liability.

Then XL made the announcement that it was to take a further hit on January 13 after reviewing contracts sold between 1997 and 2001 by NAC Re Corp., an American reinsurance company XL bought for $1 billion in 1999.

Claims against North American reinsurance contracts written in the late 1990s have mounted recently, forcing reinsurers such as XL to pay out more than they had expected, and since November Mr. O'Hara has been dealing with the problems, trying to make sure that his company would come out as unscathed as it could from the troubles.

In a recent interview he said that the reserve problems were now behind the company and that they were focusing on their insurance and reinsurance business.