Fitch Downgrades XL’s Debt Ratings to ‘A’

October 21, 2003

Fitch Ratings announced that it has downgraded XL Capital Ltd.’s long-term issuer and senior debt rating to ‘A’ from ‘A+’, and the preferred stock rating to ‘A-‘ from ‘A’.

It has, however affirmed the ‘AA’ insurer financial strength rating of XL’s property/casualty insurance subsidiaries, led by XL Insurance Ltd. and XL Re Ltd. Fitch also said that all the ratings have a stable outlook.

The downgrade follows the company’s announcement that it would report approximately a $160 million after-tax reduction in third quarter 2003 earnings due to adverse reserve development in its North American casualty reinsurance operations for the years 1997-2000. (See IJ Website Oct. 20). XL CEO Brian O’Hara is heading a review of the situation, and Fitch said it believes that this “will likely lead to additional charges in the fourth quarter of 2003.”

The rating agency added that it believes the “earnings impact of these actions will move fixed charge coverage to levels below Fitch’s current guidelines for XL’s debt ratings. Earnings and coverage were below this threshold in 2001 and 2002 as well. XL’s financial leverage, with a debt-to-total capital ratio of 20% currently is also somewhat high for the previous debt ratings.”

Fitch said that its “ratings continue to reflect XL’s position within the global insurance and reinsurance markets, history of favorable underwriting and earnings performance, strong operating cash flow, and adequate capital position at the parent and subsidiary level.

“Besides this adverse reserve development experience, XL is experiencing favorable results on current business as demonstrated by reported net income of $588 million and a combined ratio of 89.2% in the first half of 2003. The company is likely to benefit from continued favorable property/casualty market conditions going forward.”

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