XL Capital Assurance Inc., XL Financial Assurance Ltd. Lowered To ‘BBB-‘; On CreditWatch Neg

On June 6, 2008, Standard & Poor's Ratings Services lowered its financial  
strength ratings on XL Capital Assurance Inc. (XLCA) and XL Financial  
Assurance Ltd. (XLFA) to 'BBB-' from 'A-'. The ratings remain on CreditWatch  
with negative implications. 
 
The downgrade reflects our current assessment of potential losses on the  
companies' 2005-2007 vintage RMBS exposure, direct and indirect, which is  
higher than previous estimates. In our view, XLCA and XLFA's combined capital  
cushion is inadequate at the previous rating level to absorb those losses,  
resulting in a shortfall of approximately $500 million. The companies have  
presented various strategies to address the capital shortfall, but in our  
opinion, management has been unsuccessful in its efforts. 
 
The companies' franchise, in our view, is impaired due to their scaled-back  
underwriting activity and concerns about the companies' ability to address  
prospective capital needs. Management, however, is in the early stages of  
working toward restructuring the companies with a near-term business strategy  
of participating in the financial guarantee reinsurance market and selected  
areas of the primary insurance market. In our view, the success of the  
reinsurance strategy is dependent upon the ability of the companies to attract  
willing cession partners in a crowded financial guarantee reinsurance market. 
 
The CreditWatch reflects our view that there is execution risk in the  
companies' restructuring plan and strategy for increasing claims-paying  
resources. Should the companies prove unsuccessful in their restructuring and  
increasing claims-paying resources, we believe that XLCA and XLFA would  
effectively be in runoff, in which case the ratings could go lower. 
 
Lists of the ratings that have changed as a result of these actions will be  
posted at www.spviews.com. Go to the left-hand navigation bar and click on  
"Deals Affected" to view or download the lists. Our analysis of the impact of  
the ratings actions announced today is ongoing; we may publish additional  
ratings changes. 
 
Ratings List 
 
Downgraded 
To From 
XL Capital Assurance Inc.  
XL Capital Assurance (U.K.) Ltd.  
XL Financial Assurance Ltd.  
Issuer Credit Rating 
Local Currency BBB-/Watch Neg/-- A-/Watch Neg/-- 
Financial Strength Rating 
Local Currency BBB-/Watch Neg/-- A-/Watch Neg/-- 
Financial Enhancement Rating 
Local Currency BBB-/Watch Neg/-- A-/Watch Neg/-- 
 
Complete ratings information is available to subscribers of RatingsDirect, the  
real-time Web-based source for Standard & Poor's credit ratings, research, and  
risk analysis, at www.ratingsdirect.com. All ratings affected by this rating  
action can be found on Standard & Poor's public Web site at  
www.standardandpoors.com; select your preferred country or region, then  
Ratings in the left navigation bar, followed by Credit Ratings Search. 
 
Primary Credit Analyst: 
 
David Veno, New York (1) 212-438-2108; 
david_veno@standardandpoors.com 
 
Secondary Credit Analyst: 
 
Dick P Smith, New York (1) 212-438-2095; 
dick_smith@standardandpoors.com