A.M. Best Affirms Ratings of XL Capital Ltd and Downgrades Ratings of Its Subsidiary.

OLDWICK, N.J. -- A.M. Best Co. has affirmed the financial strength rating (FSR) of A+ (Superior) and the issuer credit ratings (ICR) of "aa-"of XL Capital Ltd's (XL Capital) (Bermuda) [NYSE: XL] operating subsidiaries. Additionally, A.M. Best has affirmed the ICR of "a-" and the existing debt ratings of "a-" on senior debt, "bbb+" on subordinated debt and "bbb" on preferred shares of XL Capital.

A.M. Best has also affirmed the FSR of A (Excellent) and ICR of "a" of XL Re Life America Inc. (Simsbury, CT). Concurrently, A.M. Best has downgraded the FSR to A (Excellent) from A+ (Superior) and the ICR to "a" from "aa-" of XL Life Insurance and Annuity Company (XLLIAC) (Schaumburg, IL). In addition, A.M. Best has downgraded to "a" from "aa-" the rating of the funding agreement-backed securities (FABS) program established by XLLIAC and the debt ratings to "a" from "aa-" on the outstanding notes issued under the program. The outlook for all the ratings is stable.

These rating actions reflect XL Capital's record earnings reported for 2006, with consolidated net income of $1.763 billion as the group's diversified portfolio of risks and lack of catastrophe activity enabled it to nearly recoup the $1.970 billion in pre-tax net losses incurred related to the 2005 natural catastrophes. Enhancing net income is a growing asset base, which has increased the contribution of net investment income to operating results. Although market conditions are softening within the global reinsurance industry, A.M. Best believes that XL Capital is well positioned to manage the current underwriting cycle, albeit at potentially reduced operating margins given rate softening and increased global capacity.

In 2007, XL Capital raised capital of $1.325 billion, including a $1.0 billion preferred security issuance, the proceeds from which are to be used primarily for the purchase of approximately $830 million of XL Capital's Class A ordinary shares, and a $325 million senior note offering, which together with available cash, was used to retire $825 million in senior notes due in 2009, which comprised part of the equity security units of XL Capital that settled in May 2007. In connection with the settlement of the forward purchase contract portion of the equity security units in May 2007, XL Capital received $825 million.

A.M. Best 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 30% and to maintain fixed charge coverage in the mid to upper single-digit range.

As part of its enterprise risk management process, XL Capital continually assesses its overall risk position across its major risk categories and runs various scenarios to highlight any potential correlation exposure. XL Capital has taken steps to reduce its susceptibility to shock losses through discontinuing some of its catastrophe-related programs and through certain other arrangements. Considered in A.M. Best's rating evaluation is XL Capital's agreement with Cyrus Re that began in 2006 in which XL Capital retroceded 50% of its property catastrophe premiums to Cyrus Re to reduce volatility while, at the same time, improving the quality of the its risk-adjusted returns. Also considered was XL Capital's securities issuance agreement and the excess of loss reinsurance agreement entered into by certain of its insurance and reinsurance subsidiaries with Stoneheath Re. The net effect of these agreements to XL Capital is the creation of a contingent put option in the amount of $350 million in the aggregate. The agreements provide XL Capital's operating subsidiaries with a reinsurance collateral account in support of certain covered perils named in the reinsurance agreement.

The rating downgrades of XLLIAC reflect the announced discontinuance of new business and the continued run off of its existing liabilities. Through its $4 billion global medium-term note (GMTN) program, XLLIAC Global Funding, a Delaware statutory trust, issued various series of notes to certain institutional investors on a private placement basis. Each series of notes is secured by one or more funding agreements issued by XLLIAC, which is domiciled under the laws of Illinois. The performance of all obligations under the reinsurance program is guaranteed by a core subsidiary of XL Capital. In the event of an insolvency of an Illinois domestic insurance company, claims under funding agreements would be treated pari passu with life insurance policy and annuity claims. Thus, the ICR of the FABS program reflects A.M. Best's belief that all investors in the GMTN program are exposed to the inherent credit, liquidity and business risks of the sponsoring insurance company, XLLIAC.

For a complete listing of XL Capital Ltd's FSRs, ICRs and debt ratings, please visit www.ambest.com/press/052404xlcapital.pdf.

Founded in 1899, A.M. Best Company is a full-service credit rating organization dedicated to serving the financial services industries, including the banking and insurance sectors. For more information, visit www.ambest.com.