Bermuda-based XL Insurance group's core business of general and professional liability will fall because of soft pricing and the maturing of very long-tail lines.

S&P said new business from specialty reinsurance and property lines will largely offset the declines. But they believe that the change in the company's earnings mix may lead to slower bottom line growth.

The analysis came as the XL group won an upgrade from S&P in their claims-paying ability ratings from AA- (Double A minus) to AA (Double A). The group is comprised of XL Insurance Co. Ltd., XL Europe Insurance, and XL Reinsurance Co. Ltd.

The ratings on XL Europe and XL Re are based on a quota share reinsurance treaty with XL Insurance.

S&P said the upgrade reflects strong capitalisation, conservative management and an excellent earnings history, offset by a declining market in its core general liability lines and a changing business profile reflecting XL's investments in diversification.

The major rating factors include the fact that XL has produced excellent earnings through its ten years of operation. They have produced a five year average return on revenue of 40.6 percent and a five year average return on equity of 18.2 percent, despite a lingering soft market in its core general and professional liability lines.

Another significant element that factored into the rating is the group's superior capitalisation and good flexibility, as indicated by nominal capital of $2.1 billion and XL's 245 percent capital adequacy ratio (as determined by S&P's capital model) and XL's limited use of financial leverage.

The ratings agency said the group's conservative management approach is indicated by operating performance and reserving practices which have kept loss ratios stable over the past five years along with a high retention of its core client base.

But S&P said XL's entry into new business lines of property and specialty reinsurance is untested and essentially represent start-up operations. The absence of operating history in these lines is partially offset by the company's strong capital and conservative management approach, which has kept operating leverage low and authorised conservative limits in the new lines.

XL's core business of general liability continues to face declining premium on both a nominal and a gross basis, as competition and self insurance remain a potent factor in the market. The relative decline in the core lines encouraged the company to diversify outside of its historical expertise, S&P said.