Moody's upgrades Union Pacific

Moody's Investors Service upgraded Union Pacific Corp. including raising its senior unsecured debt to Baa2 from Baa3 and trust preferreds to Baa3 from Ba1. The outlook is stable.

Moody's said the upgrade reflects the successful reduction of adjusted debt of approximately $1.6 billion from the high point following the Southern Pacific acquisition; Union Pacific's improved financial performance, with a record of strong free cash flow while maintaining sufficient capital investment; solid and sustainable railroad operations; and strong liquidity with a manageable debt maturity profile.

The stable outlook reflects Moody's expectations of: free cash flow generation that will remain solidly positive after adequate investment in the railroad infrastructure; conservative financial policies with a very substantial portion of free cash flow directed towards further debt reduction; intense emphasis on continuous productivity gains and cost conscious operations; and, the prospects for cash proceeds from the potential near-term IPO of Overnite Trucking.

The debt reduction achieved over the last several years is about equal to Moody's estimate of the cash cost of integrating the former Southern Pacific and Chicago and North Western railroads (which were acquired in 1996 and 1995, respectively). Debt was repaid through cash from operations as well as proceeds from asset sales. Union Pacific's indebtedness is now about equal to Moody's expectation at this point following the acquisitions.

Importantly, Moody's noted that Union Pacific continued its high level of capital investment throughout the merger integration process, and despite the industrial slow down. Moody's views this consistent investment positively, suggesting the railroad is well positioned to participate at the moment any industrial recovery is realized, as well as provide the consistently higher service levels necessary to penetrate the long-haul transportation markets.

Moody's believes that Union Pacific has yet to achieve all of the revenue synergies expected from the mergers, and is not likely to recognize these gains until the industrial economy recovers solidly. Greater free cash flow, and the potential for accelerated debt repayment from that cash flow, is possible.

Fitch cuts XL

Fitch Ratings downgraded XL Capital Ltd. including cutting its senior debt to A from A+ and preferred stock to A- from A.

XL recently announced that it would report approximately a $160 million after-tax reduction in third quarter 2003 earnings due to adverse reserve development in its North American casualty reinsurance operations for the 1997-2000 underwriting period, Fitch noted. XL is conducting a complete claims review and audit of this business, which Fitch believes will likely lead to additional charges in the fourth quarter of 2003.

Fitch believes that the earnings impact of these actions will move fixed charge coverage to levels below Fitch's current guidelines for XL's debt ratings. Earnings and coverage were below this threshold in 2001 and 2002 as well. XL's financial leverage, with a debt-to-total capital ratio of 20% currently is also somewhat high for the previous debt ratings.

The ratings continue to reflect XL's position within the global insurance and reinsurance markets, history of favorable underwriting and earnings performance, strong operating cash flow and adequate capital position at the parent and subsidiary level, Fitch said.

Besides this adverse reserve development experience, XL is experiencing favorable results on current business as demonstrated by reported net income of $588 million and a combined ratio of 89.2% in the first half of 2003. The company is likely to benefit from continued favorable property/casualty market conditions going forward.

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