XL Expects Q3 Results to be $184 Million lower on NAC Re Claims – S&P Puts Company on CreditWatch

October 20, 2003

Bermuda’s XL Capital Ltd. announced on Friday that its third quarter results will be lower than anticipated due to higher than expected losses in its North American reinsurance operations primarily from new casualty claims for the 1997 to 2000 underwriting years.

As a result it expects “third quarter 2003 net income to be reduced by approximately $184 million pre-tax or $160 million after-tax, or approximately $1.16 per ordinary share, compared to analysts’ current expectations.”

Standard & Poor’s Ratings Services reacted almost immediately by placing XL’s ‘A+’ counterparty credit, ‘A+’ senior unsecured debt, and ‘A-‘ preferred stock ratings on CreditWatch with negative implications. The action also included XL’s other core holding companies and the ‘AA’ counterparty credit and financial strength ratings on the members of the XL America Pool.

S&P said its action was a direct result of the “further reserve strengthening at XL Reinsurance America Inc. (formerly known as NAC Reinsurance Corp. [North American Casualty Re]) of $214 million in the first three quarters of 2003 (including $184 million in the third quarter).” It added, “the strengthening related to additional claims development in core casualty lines was outside of expectations and existing loss trends.”

XL CEO Brian M. O’Hara was plainly concerned. “I am personally leading a review of this book of business, which will include an intensive claims audit and review of the ceding company claims files that will be completed by year end,” he stated.

S&P said it expected the review would lead XL to “replenish the reserve losses through capital markets activity following the completion of the study.” It added that the ratings of the parent company were “placed on CreditWatch negative because the amount and type of capital raised could lead to a widening of the notching between the financial strength ratings on the other core operating companies and the debt ratings on the holding company.” The rating agency’s announcement added that it doesn’t “expect the impact on the debt ratings to be greater than one notch., ” and it added that “if the nonstandard notching remains, the ratings will be affirmed.”

O’Hara noted: “The underwriting years in the late 1990’s were among the worst in the industry’s history for North American casualty business. Many primary insurers are continuing to see loss development beyond historical patterns due to the marked expansion of liability in the U.S. tort system. The claims stem from the former NAC Re book, primarily from general liability, medical malpractice, professional lines and surety.

“I intend to fully address our exposure to the 1997 through 2000 North American casualty reinsurance book written by the former NAC Re so that it will not adversely affect our financial results in 2004 and beyond,” he continued.

XL will hold an analysts’ conference call at 9:00 a.m. EDT on Monday, October 20, 2003, to discuss these developments. The call will be simultaneously webcast and can be accessed through XL’s website at www.xlcapital.com.

The Company will report third quarter results after the close of market trading on October 29, 2003.

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