Fitch last night announced it had placed the ratings of Bermuda business insurer XL Capital Ltd. on a Rating Watch Negative, after the company released preliminary results last week indicating an expected third-quarter loss of some $1.6 billion.

The company has an A+ insurer strength rating from Fitch, as well as an A issuer default rating.

Last week, XL estimated net third-quarter realised investment losses of between $290 million and $315 million.

In August, a capital raise produced more than $3 billion, some $1.8 billion of which XL used to virtually eliminate its exposure to bond insurer Syncora Holdings (formerly known as Security Capital Assurance).

In its commentary, Fitch said it had believed at the time that the more than $1 billion of excess capital raised "provided some cushion to absorb future investment or large catastrophe losses".

Fitch added: "Given the extraordinarily challenging credit market environment since August, XL has essentially depleted this additional capital cushion."

XL is "de-risking" its investment portfolio and Fitch said the selling or impairment of assets over time may "create a drag on earnings".

The insurer and reinsurer is also conducting a review of its life operations, which may be sold. Fitch said it believes "the disposition of this business would reduce asset leverage and volatility in the investment portfolio while freeing up capital to support XL's core property/casualty operations".

Fitch added: "XL's liquidity remains adequate as the company held approximately $5.6 billion in cash and cash equivalents at September 30, 2008. Additionally, the company has revolving credit facilities of $7.3 billion available for letter of credit issuance with up to $1.1 billion available for direct borrowing. No debt is outstanding under these facilities."

Fitch's action comes after Standard & Poor's affirmed XL's A+ financial strength rating and AM Best left the company's A ratings unchanged.