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Rating Action:

MOODY'S DOWNGRADES XL CAPITAL'S RATINGS (SENIOR DEBT TO A3); FINANCIAL GUARANTEE SUBSIDIARIES AFFIRMED AT Aaa

22 Nov 2005
MOODY'S DOWNGRADES XL CAPITAL'S RATINGS (SENIOR DEBT TO A3); FINANCIAL GUARANTEE SUBSIDIARIES AFFIRMED AT Aaa

$2.7 Billion of Debt Affected.

New York, November 22, 2005 -- Moody's Investors Service has downgraded the senior debt rating of XL Capital Ltd [NYSE: XL] to A3 from A2 and has downgraded the insurance financial strength ratings of XL's leading insurance operating subsidiaries, including XL Insurance (Bermuda) Ltd to Aa3 from Aa2. In addition, the insurance financial strength ratings of XL's leading reinsurance operating subsidiaries, including XL Re Ltd, were confirmed at Aa3. These actions conclude the review for possible downgrade that was initiated on September 13, 2005 following XL's announcement about its estimated losses from Hurricane Katrina. In the same action, the insurance financial strength ratings of XL Capital Assurance Inc., XL Capital Assurance (UK) Limited, and XL Financial Assurance Ltd. were affirmed at Aaa with a stable outlook.

According to Moody's, the downgrade reflects the company's relatively weak operating earnings and related coverage of interest and preferred/common stock dividends, as well as its relatively higher operating leverage compared to its peers. Further, the substantial gross and net losses from the third quarter hurricanes as a percentage of shareholders' equity increase concerns about the risk taking appetite. In addition, the downgrade also positions the rating at a level more reflective of the company's expected financial leverage profile.

The rating agency noted that the above actions harmonize the insurance financial strength ratings of the insurance and reinsurance operations. While the insurance and reinsurance businesses are managed separately, the legal entities underwrite both primary and reinsurance business, and have substantial intercompany reinsurance arrangements, which enables the group to manage capital and cash flows between the Bermuda operating units. The three notch spread between the insurance financial strength ratings and the senior debt rating at the holding company reflects the group's significant stacking of capital in its operating entities. This situation constricts XL's actual ability to upstream significant dividends--despite having legal authority to do so--which offsets to some extent the benefits of a Bermuda-based operating company's dividend flexibility.

The Aa3 insurance financial strength ratings reflect the group's overall strong market positions in its principal operating segments - insurance, reinsurance and specialty financial products and services including financial guaranty insurance and reinsurance, as well as its diversified earnings streams by geography and line of business. In addition, the company has already committed to raising additional capital and reducing its risk profile following the financial impact of the hurricanes in 2005 in order to further support its Aa3 insurance financial strength ratings. These fundamental strengths are tempered by the intrinsic volatility of XL's reinsurance businesses and certain insurance lines, relatively weak profitability, moderate coverage of interest and preferred/common stock dividends, 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 current ratings expect an increase in XL's pretax operating earnings with less volatility (e.g. returns on equity over 10%), adverse reserve development less than 5% of net reserves including limited further development on the 1997 to 2001 US Casualty reinsurance book, and catastrophe losses over a 12 month period not resulting in shareholders' equity declining by more than 10%. Moody's also expects the improvement in earnings to lead to coverage of interest and preferred dividends over 5x and coverage of interest and preferred and common dividends over 3x. The current ratings also reflect adjusted debt to total capital between 20% and 25% (excluding the GAAP equity of the financial guarantee operations) and gross underwriting leverage around 4x.

Moody's notes that uncertainty remains around the resolution of a dispute between XL and Winterthur Swiss Insurance Company ("Winterthur") in regards to a post closing seasoning process and the amount of receivables/payables claimed by XL and Winterthur. However, Moody's believes that the company is committed to maintaining its financial strength and would consider raising additional capital in the event of an adverse outcome for XL. Our rating action today is unaffected by the ultimate outcome of this matter.

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. In addition, the insurance financial strength and debt ratings of XL Life Insurance and Annuity Company, XLLIAC Global Funding and the Premium Asset Trusts (excluding Series 2003-7) remain on review for possible downgrade pending further review of management's plan to strengthen the explicit support provided to those entities by XL affiliates.

The following ratings have been downgraded and now have a stable outlook:

XL Capital Ltd -- senior unsecured debt to A3 from A2; preferred stock to Baa2 from Baa1; senior unsecured shelf to (P)A3 from (P)A2; subordinated unsecured shelf to (P)Baa1 from (P)A3; preferred stock shelf to (P)Baa2 from (P)Baa1;

XL Capital Trust I, II, III -- trust preferred securities shelf to (P)Baa1 from (P)A3;

XL Finance (UK) plc -- senior unsecured shelf to (P)A3 from (P)A2;

XL Capital Finance (Europe) plc -- senior unsecured debt to A3 from A2; senior unsecured shelf to (P)A3 from P(A2);

Mangrove Bay Pass-Through Trust -- preferred stock to Baa2 from Baa1;

XL Insurance (Bermuda) Ltd -- insurance financial strength ratings to Aa3 from Aa2;

XL Insurance Company Limited -- insurance financial strength ratings to Aa3 from Aa2;

XL Insurance Switzerland -- insurance financial strength ratings to Aa3 from Aa2;

Premium Asset Trust Series 2003-7 -- senior secured to Aa3 from Aa2.

The following ratings have been confirmed with a stable outlook:

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.

The following ratings remain on review for possible downgrade:

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

XLLIAC Global Funding -- backed medium term notes at Aa3;

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;

Premium Asset Trust Series 2004-12 -- senior unsecured at Aa3;

Premium Asset Trust Series 2005-2 -- senior unsecured at Aa3.

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 September 30, 2005, XL Capital Ltd had consolidated assets of approximately $54.9 billion and shareholders' equity of approximately $7.0 billion. For the first nine months of 2005, XL reported net premiums written of $8.1 billion and net loss available to ordinary shareholders of $470 million.

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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