Best Affirms XL’s ‘A+’ Ratings; Removes from Review; Outlook Stable

December 22, 2005

A.M. Best Co. announced that it has affirmed the financial strength rating (FSR) of “A+” (Superior) and the issuer credit ratings (ICR) of “aa-” of XL Capital Ltd’s operating subsidiaries. Best also assigned a debt rating of “a-” to $745 million 7 percent adjustable conversion rate equity security units, recently issued by XL Capital.

Additionally, Best said it has affirmed the ICR of “a-” of XL Capital and its existing debt ratings of “a-” on senior debt, “bbb+” on subordinated debt and “bbb” on preferred shares. Best has also affirmed the FSR of “A+” (Superior) and the ICR of “aa-” to XL Life Insurance and Annuity Company (XLLIAC).

All of the ratings have been removed from under review and assigned a stable outlook.

“These rating actions reflect XL Capital’s recently raised capital of $3.2 billion, including $2.4 billion in common equity, in early December and steps taken by the group to reduce its exposure to catastrophe losses,” said Best. “This capital was necessary following the group incurring $1.8 billion in losses in the 3rd and 4th quarters of 2005 from hurricanes and the unfavorable resolution in its dispute with Winterthur Swiss Insurance Company, relating to its acquisition of Winterthur International in 2001, which will result in a fourth quarter net charge of $830 million.”

Best explained that despite these losses, “XL Capital continues to maintain a diverse earnings base, and well recognized position as a leading worldwide provider of coverage for insurance, reinsurance and financial products and services. XL Capital has taken steps to reduce its susceptibility to shock losses through discontinuing some of its catastrophe related programs and through entering a quota share agreement for its property catastrophe business with Cyrus Re, a newly formed Bermuda reinsurer.”

Best also indicated that even though the arbitrator’s decision in the Winterthur valuation case wenT against XL, the “acquisition of Winterthur was of strategic importance for the group’s global expansion and that it has significantly benefited from the strong market conditions immediately following the acquisition.”

Best said it “recognizes the magnitude of the recently raised capital but believes that XL Capital continues to maintain solid financial flexibility with strong access to both debt and equity markets. The group’s market capitalization remains above its book value and well above its tangible book value. A.M. Best expects XL Capital to maintain financial leverage as measured by debt and preferred-to-total capital below 35 percent and to maintain fixed charge coverage in the mid to upper single digit range.”

Concerning the assignment of a “stable outlook,” Best said it reflects its “belief that with the Winterthur settlement, all significant uncertainties surrounding XL Capital’s business position are now behind it and that prospectively, the company is extremely well positioned to generate a level of earnings commensurate with its assigned ratings.”

Best warned, however, that if XL does not meet its “expectations as regards to earnings and/or risk-adjusted capital, it is likely the group’s ratings will be downgraded.”

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