Bermuda-based XL Capital Ltd. expressed disappointment last night after the financial strength rating of the insurer's core operating companies was downgraded to A from A+ by Standard & Poor's.

In a statement released after the markets closed yesterday, S&P suggested that XL might lose clients after posting third-quarter losses and that it believed prospective realised investment losses would "largely offset operating income through 2009".

The rating agency also said it believed XL's capital adequacy would "remain strong for the forseeable future" and that it had a "strong liquidity position" with $7.2 billion in cash and short-term investments as of September 30 this year.

S&P lowered its counterparty credit rating on XL to BBB+ from A-. It maintained a negative outlook.

In a company statement, XL chief executive officer Michael McGavick said: "We are very disappointed with S&P's decision, particularly in light of the many positive comments S&P made about XL in its release.

"While economic uncertainty continues to exist, at this time we have no need or intent to seek additional capital and will continue to focus on what we do best: serving our customers and operating our franchise.

"As a company rated A (strong) by S&P, we expect to remain a strong competitor in both insurance and reinsurance. We will also continue the enhancement of our enterprise risk management, the de-risking of our investment portfolio, as well as the ongoing strategic review of our life reinsurance operations."

XL also separately confirmed that it does not have any investments in any funds managed by Bernard L. Madoff Investment Securities LLC, the company at the centre of an alleged $50 billion fraud.

S&P credit analyst Steven Ader said: "These rating actions reflect our belief that XL's prospective competitive position and resulting underwriting performance have diminished because of perceived franchise issues stemming from a string of material earnings and capital charges over the past several years."Although XL remedied many of these issues this past summer, the material deterioration in the unrealised position of XL's investment portfolio in the third quarter has again pressured XL's market presence."XL said in a regulatory filing in November that a cut below A- would trigger cancellation clauses in a "significant amount" of its assumed reinsurance contracts and may require the company to return portions of the premiums to the insurance companies that bought the protection.In addition, such a cut may require the firm to post collateral to back bank lines it had drawn, the regulatory filing said.Yesterday, XL's shares climbed 22 cents (8.2 percent) to $2.90, before the ratings action was announced. Last week, Bloomberg reported that the company was seeking a buyer, according to four people with knowledge of the situation.