The securities that are guaranteed or "wrapped" by the insurers could also be downgraded, warns Moody's

Moody's Investors Service has placed the A3 insurance financial strength ratings of the operating subsidiaries of Security Capital Assurance Ltd, including XL Capital Assurance, XL Capital Assurance (UK) Limited ("XLCA-UK") and XL Financial Assurance Ltd on review for possible downgrade.

Moody's is also reviewing for possible downgrade the debt ratings of the holding company, Security Capital Assurance Ltd (senior debt at (P)Baa3), and a related financing trust. This rating action was prompted by SCA's recent SEC filing which stated that the company was delaying the filing of its 2007 Form 10-K and that the company's independent auditor is evaluating the need to include a going concern explanatory paragraph in its audit opinion with respect to SCA's audited financial statements for the year ended December 31, 2007.

As a result of this review for possible downgrade, the Moody's-rated securities that are guaranteed or "wrapped" by XLCA, XLCA-UK and XLFA are also placed on review for possible downgrade, except those securities with public underlying ratings of A3 or higher.

SCA has noted that it expects to incur approximately $1.5bn of net mark-to-market losses on its credit derivative portfolio, including approximately $645m in net credit impairment charges, as well as $44m in net losses arising from its direct RMBS exposures, primarily from transactions backed by second lien mortgage collateral.

Moody's stated that the magnitude of credit impairments announced by SCA falls within the range of losses previously considered by Moody's in its rating action of February 7, 2008, when the insurance financial strength rating was downgraded from Aaa to A3.

According to Moody's, the ratings review will focus on developments related to the potential issuance of a going concern explanatory paragraph by SCA's auditor, as well as additional details related to SCA's capital plans and strategic direction.