Best Assigns ‘bbb’ Rating to XL’s Stoneheath Re Sidecar

December 14, 2006

A.M. Best Co. has assigned a debt rating of “bbb” to the $350 million of non-cumulative perpetual preferred securities (issuer preferred securities) issued by Stoneheath Re, a Cayman Islands exempted company. The rating outlook is stable.

“The issuer is licensed as a restricted Class B reinsurer under the laws of Cayman Islands and was formed to provide multi-year reinsurance capacity to certain insurance and reinsurance subsidiaries (ceding insurers) of XL Capital Ltd (XL Capital) (Bermuda),” Best explained. “The issuer’s business activities will be limited to the following: issuing the issuer preferred securities; investing in eligible assets; entering into the reinsurance agreement, the securities issuance agreement, the asset swap agreement, the interest swap agreement and related agreements; and other necessary activities related to the performance of the aforementioned documents.”

In describing how the arrangement works, Best noted that the “proceeds from the issuance of the issuer preferred securities will be deposited into a trust account and will be available to satisfy obligations of the issuer to the ceding insurers under the reinsurance agreement. Upon a payment by the issuer to the ceding insurer under the reinsurance agreement or upon the occurrence of certain other events, XL Capital, pursuant to the securities issuance agreement entered into between XL Capital and the issuer, will issue and deliver to the issuer series D preference ordinary shares (XL preferred securities) of XL Capital in an amount equal to the payment made by the issuer.

“The terms of the reinsurance agreement between Stoneheath Re and XL Capital provide XL Capital the flexibility to amend the attachment point, which is the trigger event for XL Capital to issue preferred shares, without affecting any other terms and conditions. As a result, A.M. Best has assigned XL Capital’s preferred share debt rating to Stoneheath Re’s perpetual preferred shares.”

Best also pointed out that the “issuer preferred securities have been structured as perpetual securities with no fixed maturity date and not subject to redemption at the option of either the issuer or the holder of the securities. However, upon the termination of the reinsurance agreement, whether by scheduled expiration or payment of the full policy limits to the ceding insurers or triggered by an early termination event, the issuer will be required to liquidate the company and redeem all outstanding issuer preferred securities. The issuer will distribute to the holders of the issuer preferred securities, on a pro rata basis, all remaining cash in the trust and its general assets and any XL preferred securities, issued pursuant to the securities issuance agreement, held by the trust plus any accrued but unpaid dividend applicable to the then current dividend period.”

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