Fitch Downgrades SCA; XL Comments

March 28, 2008

Fitch Ratings has downgraded the insurer financial strength (IFS) to ‘BB’ from ‘A’ for the following ratings on Security Capital Assurance Ltd. (SCA) and its financial guaranty insurance subsidiaries:
XL Capital Assurance Inc. (XLCA)
XL Capital Assurance (U.K.) Ltd. (XLCA-UK)
XL Financial Assurance Ltd. (XLFA)
Security Capital Assurance Ltd.
Fitch also lowered a number of related debt ratings, and removed the affected ratings from its Rating Watch Negative list. The rating outlooks are, however, negative.

Fitch explained that the downgrade of SCA and its financial guaranty subsidiaries centers on an “updated assessment of the company’s capital position, a review by Fitch of the company’s current capital enhancement plans, and an update on Fitch’s current views of U.S. subprime related risks. The downgrade also reflects what Fitch views as the material erosion in SCA’s franchise value and competitive business position following downgrades to well below ‘AAA’ by each of the three major rating agencies.”

The rating agency added that it “believes that SCA’s current level of capital and claims paying resources is no longer consistent with Fitch’s guidelines for an investment grade IFS rating. Fitch currently believes that expected losses on SCA’s structured finance collateralized debt obligations (SF CDO) backed by subprime residential mortgage backed securities (RMBS) will ultimately fall within a range of about $3 to $4 billion. This compares to SCA’s modeled claims paying resources and committed external reinsurance coverage of $4.2 billion as of Dec. 31, 2007.”

Fitch continued its detailed analysis in an extended report, available on its web site at:

XL Capital Ltd. released a bulletin in reaction to the decision, in what it described as a means of clearing up “confusion in the media” and “erroneous press reports,” regarding Fitch’s March 26 downgrading of ratings on Security Capital Assurance Ltd. and its operating subsidiaries.

XL Capital Assurance Inc. (XLCA), XL Capital Assurance (U.K.) Ltd. (XLCA-UK), and XL Financial Assurance Ltd. (XLFA). XLCA, XLCA-UK, and XLFA are not subsidiaries of XL,” the bulletin said. The Company noted that “the substantial majority of the structured finance collateralized debt obligations (CDOs) referred to in the Fitch release were written by XL Capital Assurance Inc. following SCA’s IPO in August 2006.

“The CDOs written subsequent to the IPO are not covered by XL’s guarantees to subsidiaries of SCA. As previously reported the Company has reduced the reported value of its investment in SCA from $117 million to zero.”

XL further explained that “pursuant to a transition agreement entered into at the time of the IPO, SCA is permitted to use the “XL” name until August 2008. XL owns approximately 46 percent of the common equity interest of SCA. As Fitch’s actions relate to SCA and its operating subsidiaries, any questions regarding this matter should be referred directly to SCA.”

Further information regarding XL’s relationship with SCA may be found in XL’s Form 10-K (and 10-K/A) for the year ended December 31, 2007 on file with the Securities and Exchange Commission as well as the Investor Relations section of the Company’s web site located at

Sources: Fitch Ratings and XL Capital

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