Best Reacts to XL Capital’s Reserve Charge Along with Possible Implications for All Reinsurers

July 11, 2005

A.M. Best Co. commented this week that while the most recent after tax reserve charge of $183 million falls within A.M. Best’s anticipated range of adverse loss development for XL Capital Group (XL Capital) (Hamilton, Bermuda), it is indicative that more material charges may be on the horizon for other reinsurers that have not been as proactive as XL Capital in addressing the legacy issues that relate to excess casualty business written in the period of 1997 to 2001.

XL Capital undertook a major North American casualty reinsurance reserve study at the end of 2003 and recorded a substantial reserve strengthening charge in the fourth quarter of 2003 for adverse development for the 1997 to 2001 underwriting years. This charge ranked XL Capital’s incurred losses (on a gross basis) for this period at the upper end of the range as compared to its industry peers.

However, despite the extensive charges, previously taken by XL Capital and management’s credibility in maintaining reserve adequacy relating to excess casualty business, the additional reserve charge further illustrates the systemic nature of reserve inadequacy for the North American reinsurance operations.

Given that North American excess casualty reinsurance is generally a syndicated business, it is reasonable to expect that participants in these classes of business report incurred losses within a reasonable range.

While XL Capital’s management has been proactive in recognizing and addressing adverse development in these lines and underwriting years, A.M. Best is concerned that other participants have not yet fully addressed this situation.

For this reason, as well as the onset of a more competitive environment in reinsurance pricing and contract terms and conditions, A.M. Best revised its outlook to negative from stable on the reinsurance sector in February 2005. This indicates that financial strength and issuer credit ratings for property/casualty reinsurance organizations remain under pressure and that downgrades are expected to continue to outpace positive rating developments for the near term.

XL Capital’s financial strength rating of A+ (Excellent) and its issuer credit ratings of “aa-” remain unchanged with a negative outlook.

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