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Rating Action:

MOODY'S AFFIRMS XL CAPITAL AND SUBSIDIARIES RATINGS (SENIOR DEBT AT A2); OUTLOOK CHANGED TO NEGATIVE; RATINGS OF FINANCIAL GUARANTEE OPERATIONS REMAIN STABLE

17 Feb 2005
MOODY'S AFFIRMS XL CAPITAL AND SUBSIDIARIES RATINGS (SENIOR DEBT AT A2); OUTLOOK CHANGED TO NEGATIVE; RATINGS OF FINANCIAL GUARANTEE OPERATIONS REMAIN STABLE

$2.7 Billion of Debt Affected

New York, February 17, 2005 -- Moody's Investors Service has affirmed the A2 senior debt rating of XL Capital Ltd [NYSE: XL] and the insurance financial strength ratings of the insurance operating subsidiaries of XL. In the same action, Moody's changed the outlook on all of the debt and insurance financial strength ratings ("IFSR") to negative from stable except for the ratings of the financial guarantee operations. The outlook for the Aaa IFSR of XL Capital Assurance, Inc., XL Capital Assurance (UK) Limited, and XL Financial Assurance Ltd remains stable.

The outlook for XL's ratings was changed to negative primarily because of Moody's view that XL may continue to exhibit relatively modest coverage of interest and preferred stock dividends and common stock dividends compared to peers. XL's operating earnings coverage has shown improvement in 2004 but remains below expectations for the rating level. For example, over the past three years, companies similarly rated to XL have typically generated interest and preferred dividend coverage at least in the high single digits, and generally in excess of 3x when common stock dividends are included. At the same time, XL's interest coverage has consistently been in the mid-single digits range and coverage including common stock dividends has persisted well below the 3x level.

In addition, Moody's notes that uncertainty remains around the resolution of a post closing reserve seasoning process between XL and Winterthur Swiss Insurance Company ("Winterthur") concerning the amount of net recoverables claimed by XL from Winterthur. However, Moody's believes that if the company suffered an unexpectedly adverse outcome, they would take appropriate capital management actions to maintain its excellent financial strength and financial leverage appropriate to its rating level.

Moody's said the rating affirmation reflects an expectation of continued improvements in terms of the key financial metrics; but the negative outlook signals that XL will be challenged to improve its profitability sufficient enough to achieve peer-consistent operating coverage in light of the softening commercial lines market. As a result, the ratings could be lowered in the event that XL's operating performance and financial profile are not sufficiently improved and sustained. The rating agency added that the current ratings also continue to reflect the expectation that adjusted financial leverage will moderate to below 25% of total capital and that operating leverage will moderate over the next year.

The current ratings of XL are based on the overall strong market positions of the group's principal operating segments - insurance, reinsurance and specialty financial services including financial guaranty insurance and reinsurance, as well as by its diversified earnings streams, and its diversification by geography and line of business. These fundamental strengths are tempered by the intrinsic volatility of some of XL's reinsurance businesses and certain insurance lines, the company's moderate fixed charge coverage, as well as, restrictive capital requirements/rating triggers within the company's credit facilities and certain debt obligations that may constrain the holding company's financial flexibility.

Moody's noted that the Aaa ratings and stable outlooks of XL Capital's financial guaranty subsidiaries, primarily XL Capital Assurance Inc. and XL Financial Assurance Ltd, are not affected by today's actions.

The following ratings have been affirmed with a negative outlook:

XL Capital Ltd -- senior unsecured debt at A2; preferred stock at Baa1; senior unsecured shelf at (P)A2; subordinated unsecured shelf at (P)A3; preferred stock shelf at (P)Baa1;

XL Capital Trust I, II, III -- trust preferred securities shelf at (P)A3;

XL Finance (UK) plc -- senior unsecured shelf at (P)A2;

XL Finance (Europe) plc -- senior unsecured shelf at (P)A2;

NAC Re Corporation -- senior unsecured at A3;

Mangrove Bay Pass-Through Trust -- preferred stock at Baa1;

Premium Asset Trust Series 2003-7 -- senior secured at Aa2;

Premium Asset Trust Series 2004-1 -- senior secured at Aa3;

Premium Asset Trust Series 2004-6 -- senior secured at Aa3;

Premium Asset Trust Series 2004-9 -- senior secured at Aa3;

XL Insurance (Bermuda) Ltd -- insurance financial strength ratings at Aa2;

XL Insurance Company Limited -- insurance financial strength ratings at Aa2;

XL Insurance Switzerland -- insurance financial strength ratings at Aa2;

XL Life Insurance and Annuity Company -- insurance financial strength ratings at Aa3;

XL Re Ltd -- insurance financial strength ratings at Aa3;

XL Reinsurance America, Inc. -- insurance financial strength ratings at Aa3;

Indian Harbor Insurance Company -- insurance financial strength ratings at Aa3;

Greenwich Insurance Company -- insurance financial strength ratings at Aa3;

XL Specialty Insurance Company -- insurance financial strength ratings at Aa3;

XL Insurance Company of New York, Inc. -- insurance financial strength ratings at Aa3.

The following ratings have been affirmed with a stable outlook:

Twin Reefs Pass-Through Trust -- preferred stock at Aa2;

XL Capital Assurance, Inc. -- insurance financial strength ratings at Aaa;

XL Capital Assurance (UK) Limited-- insurance financial strength ratings at Aaa;

XL Financial Assurance Ltd-- insurance financial strength ratings at Aaa.

XL Capital Ltd, located in Hamilton, Bermuda, is a leading provider of insurance and reinsurance coverages and financial products and services through its operating subsidiaries to commercial enterprises and insurance companies on a worldwide basis. As of December 31, 2004, XL Capital Ltd had consolidated assets of approximately $49.0 billion and consolidated shareholders' equity of approximately $7.7 billion. For the full year 2004, XL reported net premiums written of $8.9 billion and net income of $1.1 billion.

Moody's Insurance Financial Strength Ratings are opinions of the ability of insurance companies to repay punctually senior policyholder claims and obligations. For more information, visit our website at www.moodys.com/insurance.

New York
Jeffrey S. Berg
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Robert Riegel
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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