10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission file number 1-10804

XL CAPITAL LTD
(Exact name of registrant as specified in its charter)

CAYMAN ISLANDS	98-0191089
(State or other Jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

XL House, One Bermudiana Road, Hamilton, Bermuda HM 11
(address of principal executive offices and zip code)

(441) 292-8515
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [  ]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [x] No [  ]

     As of November 3, 2004, there were 138,655,676 outstanding Class A Ordinary Shares, $0.01 par value per share, of the registrant.

XL CAPITAL LTD

INDEX TO FORM 10-Q

	PART I. FINANCIAL INFORMATION	Page No
Item 1.	Financial Statements:
	Consolidated Balance Sheets as at September 30, 2004 (Unaudited) and      December 31, 2003	3
	Consolidated Statements of Income for the Three Months Ended      September 30, 2004 and 2003 (Unaudited) and the Nine Months      Ended September 30, 2004 and 2003 (Unaudited)	5
	Consolidated Statements of Comprehensive Income for the      Three Months Ended September 30, 2004 and 2003 (Unaudited)      and for the Nine Months Ended September 30, 2004 and      2003 (Unaudited)	6
	Consolidated Statements of Shareholders’ Equity for the Nine Months      Ended September 30, 2004 and 2003 (Unaudited)	7
	Consolidated Statements of Cash Flows for the Nine Months Ended      September 30, 2004 and 2003 (Unaudited)	8
	Notes to Unaudited Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and      Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	57
Item 4.	Controls and Procedures	62
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	63
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	64
Item 6.	Exhibits	65
Signatures		66

2

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

XL CAPITAL LTD
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands)

	(Unaudited)
	September 30,	December 31,
	2004	2003
ASSETS
Investments:
Fixed maturities, at fair value (amortized cost: 2004, $22,740,136;             2003, $18,990,670)	$23,197,964	$19,494,356
Equity securities, at fair value (cost: 2004, $728,181; 2003, $473,112)	803,194	583,450
Short-term investments, at fair value (amortized cost: 2004, $1,697,816;             2003, $696,798)	1,705,865	697,450
Total investments available for sale	25,707,023	20,775,256
Investments in affiliates	1,987,544	1,903,341
Other investments	237,091	142,567
Total investments	27,931,658	22,821,164
Cash and cash equivalents	2,267,198	2,403,121
Accrued investment income	313,392	294,615
Deferred acquisition costs	935,869	777,882
Prepaid reinsurance premiums	1,156,912	977,595
Premiums receivable	4,141,499	3,487,322
Reinsurance balances receivable	1,223,739	1,359,486
Unpaid losses and loss expenses recoverable	6,071,186	5,779,997
Goodwill and other intangible assets	1,832,643	1,845,507
Deferred tax assets, net	268,887	310,077
Other assets	679,967	707,449
Total assets	$46,822,950	$40,764,215
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Unpaid losses and loss expenses	$18,252,435	$16,558,788
Deposit liabilities	5,112,045	4,050,334
Future policy benefit reserves	4,096,002	3,233,845
Unearned premiums	5,644,257	4,729,989
Notes payable and debt	2,730,990	1,905,483
Reinsurance balances payable	1,644,753	1,525,739
Net payable for investments purchased	244,051	96,571
Other liabilities	1,670,039	1,666,397
Minority interest	56,659	60,154
Total liabilities	$39,451,231	$33,827,300

See accompanying Notes to Unaudited Consolidated Financial Statements

3

XL CAPITAL LTD
CONSOLIDATED BALANCE SHEETS
(U.S. dollars in thousands, except share amounts)

	(Unaudited)
	September 30,	December 31,
	2004	2003
Commitments and Contingencies
Shareholders’ Equity:
Series A preference ordinary shares, 9,200,000 authorized,             par value $0.01, issued and outstanding: 2004, 9,200,000;             2003, 9,200,000	$ 92	$ 92
Series B preference ordinary shares, 11,500,000 authorized,             par value $0.01, issued and outstanding: 2004, 11,500,000;             2003, 11,500,000	115	115
Series C preference ordinary shares, 20,000,000 authorized,             par value $0.01 Issued and outstanding 2004 and 2003, nil	—	—
Class A ordinary shares, 999,990,000 authorized, par value $0.01,             issued and outstanding: 2004, 138,622,650; 2003, 137,343,232	1,386	1,373
Additional paid in capital	3,928,360	3,949,421
Accumulated other comprehensive income	343,423	490,195
Deferred compensation	(78,071)	(46,124)
Retained earnings	3,176,414	2,541,843
Total shareholders’ equity	$ 7,371,719	$ 6,936,915
Total liabilities and shareholders’ equity	$46,822,950	$40,764,215

See accompanying Notes to Unaudited Consolidated Financial Statements

4

XL CAPITAL LTD
CONSOLIDATED STATEMENTS OF INCOME
(U.S. dollars and shares in thousands, except per share amounts)

	(Unaudited)		(Unaudited)
	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2004	2003	2004	2003
Revenues:
Net premiums earned	$2,021,133	$1,785,448	$6,603,875	$4,912,888
Net investment income	253,076	190,763	716,599	573,218
Net realized gains (losses) on investments	57,015	(8,693)	181,115	80,331
Net realized and unrealized (losses) gains on             derivative instruments	(19,587)	(28,346)	34,150	(26,110)
Net income from investment affiliates	47,283	26,240	144,392	87,344
Fee income and other	10,811	3,920	25,870	25,989
Total revenues	$2,369,731	$1,969,332	$7,706,001	$5,653,660
Expenses:
Net losses and loss expenses incurred	$1,609,126	$1,173,558	$3,672,980	$2,996,387
Claims and policy benefits	127,947	99,954	1,268,519	302,737
Acquisition costs	341,010	323,913	965,688	862,775
Operating expenses	271,852	213,311	764,868	597,738
Exchange (gains) losses	(27,837)	(4,076)	(22,648)	(30,130)
Interest expense	71,712	49,671	166,730	142,093
Amortization of intangible assets	3,256	375	9,770	1,125
Total expenses	$2,397,066	$1,856,706	$6,825,907	$4,872,725
Income (loss) before minority interest, income tax       and Net (income) loss from insurance and       financial affiliates	$ (27,335)	$ 112,626	$ 880,094	$ 780,935
Minority interest	1,097	763	8,041	5,791
Income tax	10,342	14,890	76,875	45,929
Net (income) loss from insurance and             financial affiliates	(71,326)	(12,078)	(73,307)	12,487
Net income	$ 32,552	$ 109,051	$ 868,485	$ 716,728
Preference share dividends	(10,081)	(10,080)	(30,241)	(30,241)
Net income available to ordinary shareholders	$ 22,471	$ 98,971	$ 838,244	$ 686,487
Weighted average ordinary shares and ordinary share       equivalents outstanding — basic	138,043	136,826	137,800	136,744
Weighted average ordinary shares and ordinary share       equivalents outstanding — diluted	138,932	138,423	138,511	138,170
Earnings per ordinary share and ordinary share       equivalent — basic	$ 0.16	$ 0.72	$ 6.08	$ 5.02
Earnings per ordinary share and ordinary share       equivalent — diluted	$ 0.16	$ 0.71	$ 6.05	$ 4.97

See accompanying Notes to Unaudited Consolidated Financial Statements

5

XL CAPITAL LTD
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(U.S. dollars in thousands)

	(Unaudited)		(Unaudited)
	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2004	2003	2004	2003
Net income	$ 32,552	$109,051	$868,485	$ 716,728
Change in net unrealized appreciation of investments,       net of tax	329,976	(87,261)	(139,965)	321,713
Foreign currency translation adjustments, net	9,295	(10,077)	(530)	80,969
Unrealized derivatives loss and amortization of       cash flow hedge	(6,277)	—	(6,277)	—
Comprehensive income (loss)	$365,546	$ 11,713	$721,713	$1,119,410

See accompanying Notes to Unaudited Consolidated Financial Statements

6

XL CAPITAL LTD
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(U.S. dollars in thousands)

	(Unaudited)
	Nine Months Ended
	September 30,
	2004	2003
Series A and B Preference Ordinary Shares:
Balance — beginning of year	$ 207	$ 207
Issue of shares	—	—
Balance — end of period	$ 207	$ 207
Class A Ordinary Shares:
Balance — beginning of year	$ 1,373	$ 1,360
Issue of shares	6	5
Exercise of stock options	7	7
Balance — end of period	$ 1,386	$ 1,372
Additional Paid in Capital:
Balance — beginning of year	$3,949,421	$3,979,979
Issue of shares	51,789	33,224
Stock option expense	10,112	3,748
Contingent capital costs	—	(109,931)
Equity units/debt value	(104,466)	—
Repurchase of shares	(3,196)	—
Exercise of stock options	24,700	33,925
Balance — end of period	$3,928,360	$3,940,945
Accumulated Other Comprehensive Income:
Balance — beginning of year	$ 490,195	$ 184,814
Net change in unrealized gains on investment portfolio, net of tax	(124,188)	316,358
Net change in unrealized gains on investment portfolio of affiliates	(15,777)	5,355
Derivative loss on cash flow hedge	(6,277)	—
Currency translation adjustments	(530)	80,969
Balance — end of period	$ 343,423	$ 587,496
Deferred Compensation:
Balance — beginning of year	$ (46,124)	$ (31,282)
Issue of restricted shares	(51,707)	(33,291)
Amortization	19,760	12,301
Balance — end of period	$ (78,071)	$ (52,272)
Retained Earnings:
Balance — beginning of year	$2,541,843	$2,434,511
Net income	868,485	716,728
Dividends on Series A and B preference ordinary shares	(30,241)	(30,241)
Dividends on Class A ordinary shares	(202,629)	(197,295)
Repurchase of ordinary shares	(1,044)	(241)
Balance — end of period	$3,176,414	$2,923,462
Total Shareholders’ Equity	$7,371,719	$7,401,210

See accompanying Notes to Unaudited Consolidated Financial Statements

7

XL CAPITAL LTD
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)

	(Unaudited)
	Nine Months Ended
	September 30,
	2004	2003
Cash flows provided by operating activities:
Net income	$ 868,485	$ 716,728
Adjustments to reconcile net income (loss) to net cash provided by (used in)       operating activities:
Net realized gains on investments	(181,115)	(80,331)
Net realized and unrealized gains on derivative instruments	(34,150)	26,110
Amortization of premiums on fixed maturities	62,582	24,880
Net income from investment, insurance and financial affiliates	(217,699)	(74,857)
Amortization of deferred compensation	19,760	12,301
Accretion of convertible debt	21,797	18,989
Accretion of deposit liabilities	85,678	74,391
Unpaid losses and loss expenses	1,693,647	1,959,084
Future policy benefit reserves	862,157	141,385
Unearned premiums	914,268	1,133,194
Premiums receivable	(654,177)	(855,691)
Unpaid losses and loss expenses recoverable	(291,189)	(353,846)
Prepaid reinsurance premiums	(179,317)	(214,299)
Reinsurance balances receivable	135,747	(206,184)
Deferred acquisition costs	(157,987)	(121,204)
Reinsurance balances payable	119,014	49,775
Deferred tax asset	41,190	17,692
Other	(31,885)	(36,180)
Total adjustments	$ 2,208,321	$ 1,515,209
Net cash provided by operating activities	$ 3,076,806	$ 2,231,937
Cash flows used in investing activities:
Proceeds from sale of fixed maturities and short-term investments	$ 19,095,791	$ 21,035,695
Proceeds from redemption of fixed maturities and short-term investments	3,582,855	10,595,397
Proceeds from sale of equity securities	356,498	1,004,284
Purchases of fixed maturities and short-term investments	(27,330,505)	(36,423,057)
Purchases of equity securities	(466,683)	(667,636)
Investments in affiliates, net of dividends received	23,724	(30,330)
Acquisition of subsidiaries, net of cash acquired	—	(161,181)
Other investments	(12,750)	(2,893)
Proceeds from purchase and sale of leasehold property	—	45,307
Net cash used in investing activities	$ (4,751,070)	$ (4,604,414)
Cash flows provided by financing activities:
Proceeds from exercise of stock options	24,707	33,932
Repurchase of shares	(4,241)	(241)
Dividends paid	(232,870)	(227,536)
Proceeds from notes payable and issuance of equity units	1,097,141	—
Repayment of notes payable and debt	(316,757)	—
Deposit liabilities	969,629	1,067,533
Net cash provided by financing activities	$ 1,537,609	$ 873,688
Effects of exchange rate changes on foreign currency cash	732	583
Decrease in cash and cash equivalents	(135,923)	(1,498,206)
Cash and cash equivalents — beginning of period	2,403,121	3,557,815
Cash and cash equivalents — end of period	$ 2,267,198	$ 2,059,609

See accompanying Notes to Unaudited Consolidated Financial Statements

8

XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.   Basis of Preparation and Consolidation

     These unaudited consolidated financial statements include the accounts of the Company and all of its consolidated subsidiaries and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these unaudited financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of financial position and results of operations as at the end of and for the periods presented. The results of operations for any interim period are not necessarily indicative of the results for a full year. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from these estimates.

     To facilitate period-to-period comparisons, certain reclassifications have been made to prior period consolidated financial statement amounts to conform to current period presentation. There was no effect on net income from these changes in presentation.

     Unless the context otherwise indicates, references herein to the Company include XL Capital Ltd and its consolidated subsidiaries.

2.   Significant Accounting Policies

     Effective January 1, 2003, the Company has adopted the fair value recognition provisions of FAS 123, as amended by FAS 148, under the prospective method for options granted subsequent to January 1, 2003. Prior to 2003, the Company accounted for options under the disclosure-only provisions of FAS 123 and no stock-based employee compensation cost was included in net income as all options granted had an exercise price equal to the market value of the Company’s ordinary shares on the date of the grant. Awards under the Company’s stock plans vest over periods ranging from three to four years. If the fair value based method had been applied to all awards since the original effective date of FAS 123, the cost related to employee stock based compensation included in the determination of net income would have been higher. The following table illustrates the net effect on net income and earnings per ordinary share if the fair value method had been applied to all outstanding and unvested awards in each period presented:

	(Unaudited)		(Unaudited)
(U.S. dollars in thousands, except per share amounts)	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2004	2003	2004	2003
Net income available to ordinary       shareholders — as reported	$ 22,471	$ 98,971	$838,244	$686,487
Add: Stock based employee compensation expense       included in reported net income, net of related tax	4,072	1,660	10,230	3,748
Deduct: Total stock based employee compensation       expense determined under fair value based method       for all awards, net of related tax effects	(10,634)	(11,675)	(32,391)	(37,362)
Pro forma net income available to
ordinary shareholders	$ 15,909	$ 88,956	$816,083	$652,873
Earnings per ordinary share:
Basic — as reported	$ 0.16	$ 0.72	$ 6.08	$ 5.02
Basic — pro forma	$ 0.12	$ 0.65	$ 5.92	$ 4.77
Diluted — as reported	$ 0.16	$ 0.71	$ 6.05	$ 4.97
Diluted — pro forma	$ 0.11	$ 0.64	$ 5.89	$ 4.73

9

XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

3.   Recent Accounting Pronouncements

     In April 2004, the FASB issued Staff Position No. FAS 129-1, “Disclosure Requirements under FASB Statement No. 129, Disclosure of Information about Capital Structure, Relating to Contingently Convertible Securities” (“FSP FAS 129-1”). The purpose of FSP FAS 129-1 is to interpret how the disclosure provisions of Statement 129 apply to contingently convertible securities and to their potentially dilutive effects on earnings per share. The Company has provided the required disclosures related to its contingently convertible securities that are required by FSP FAS 129-1 in its December 31, 2003 financial statements.

     In March 2004, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 03-16, “Accounting for Investments in Limited Liability Companies” (the “Issue”). In EITF Abstracts, Topic No. D-46, “Accounting for Limited Partnership Investments,” the Securities and Exchange Commission (“SEC”) staff clarified its view that investments of more than three to five percent are considered to be more than minor and, therefore, should be accounted for using the equity method. Limited liability companies (“LLCs”) have characteristics of both corporations and partnerships, but are dissimilar from both in certain respects. Due to those similarities and differences, diversity in practice exists with respect to accounting for noncontrolling investments in LLCs. This Issue addresses whether an LLC should be viewed as similar to a corporation or similar to a partnership for purposes of determining whether a noncontrolling investment should be accounted for using the cost method or the equity method of accounting. The EITF reached a consensus that an investment in an LLC that maintains a “specific ownership account” for each investor, similar to a partnership capital account structure should be viewed as similar to an investment in a limited partnership for purposes of determining whether a noncontrolling investment in an LLC should be accounted for using the cost method or the equity method. This EITF applies to all investments in LLCs and is effective for reporting periods beginning after June 15, 2004. The adoption of this Issue did not have a material effect on the Company’s financial condition or results of operations.

     In June 2004, the FASB issued Staff Position No. FAS 97-1, “Situations in Which Paragraphs 17(b) and 20 of FASB Statement No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses From the Sale of Investments, Permit or Require Accrual of an Unearned Revenue Liability” (“FSP FAS 97-1”). FSP FAS 97-1 clarifies whether it is appropriate to recognize an unearned revenue liability to compensate the insurer for services to be performed over future periods when future profits are expected to decline from the current level, or only when current profits are expected to be followed by future losses (consistent with SOP 03-1). The adoption of FSP FAS 97-1 did not have a material effect on the Company’s financial condition or results of operations.

     EITF Issue No. 02-14, “Whether an Investor Should Apply the Equity Method of Accounting to Investments Other than Common Stock if the Investor Has the Ability to Exercise Significant Influence Over the Operating and Financial Policies of the Investee” (“EITF 02-14”), addresses the issue as to whether the equity method of accounting applies when an investor does not have an investment in voting common stock of an investee but exercises significant influence through other means (such as convertible debt, preferred equity securities, options, warrants and interests in unincorporated entities). In July 2004, the EITF reached a consensus that investors should apply the equity method when they have an investment in either common stock or “in-substance common stock.” The consensus reached in EITF 02-14 is effective for reporting periods beginning after September 15, 2004. The Company is currently reviewing its investments in affiliates and other investments, however, the adoption of EITF 02-14 is not expected to have a material effect on the Company’s financial condition or results of operations.

     Statement of Position (“SOP”) 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer” addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. This SOP limits the yield that may be accreted (accretable yield) to the excess of the investor’s estimate of undiscounted expected principal, interest, and other cash flows (cash flows expected at acquisition to be collected) over the investor’s initial investment in the debt security. This SOP is

10

XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

3.   Recent Accounting Pronouncements (continued)

effective for loans acquired in fiscal years beginning after December 15, 2004. The Company is currently reviewing adoption of the SOP, but it is not expected to have a material effect on the Company’s financial condition or results of operations.

     The FASB has issued an Exposure Draft, Earnings per Share (an amendment of FASB Statement No. 128) (the “Exposure Draft”), which would amend the computational guidance in FASB Statement No. 128, Earnings per Share, for calculating the number of incremental shares included in diluted shares when applying the treasury stock method. Also, it eliminates the provisions that allow an entity to presume that contracts with the option of settling in either cash or stock will be settled in cash and would require that shares that will be issued upon conversion of a mandatory convertible security be included in the weighted-average number of ordinary shares outstanding used in computing basic earnings per share from the date on which conversion becomes mandatory. If the Exposure Draft is adopted as proposed, it will be effective for financial statements for both interim and annual periods beginning after December 15, 2004. Subsequent to the issuance of the Exposure Draft, the FASB decided that retrospective application will not be permitted for contracts for which the option to settle in cash or shares no longer exists at the date of adoption because the contract has been either settled in cash or amended to remove the share settlement option prior to the date of adoption.

     In September 2004, the EITF reached a tentative conclusion regarding Issue No. 04-8, Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings per Share (“EITF 04-8”), that contingently convertible securities should be included in diluted earnings per share in all periods regardless of whether the contingency is met and regardless of whether the market price contingency is substantive. EITF 04-8 is effective for reporting periods ending after December 15, 2004. Prior period earnings per share amounts presented for comparative purposes must be restated unless (i) the securities are settled in cash before the end of the effective reporting period in which the consensus is first applied or (ii) the agreement is amended such that the entire contract must be settled in cash.

     In the event that the Company’s Zero Coupon Convertible Debentures due 2021 (“CARZ”) are still outstanding on December 31, 2004, the dilutive effect of the Exposure Draft and EITF 04-8 will be reflected in the calculation of the Company’s earnings per ordinary share. The increase in diluted weighted average ordinary shares outstanding related to CARZ would be 6,011 ordinary shares. This dilutive effect would be partially offset by the adding back of the related interest expense to net income available to ordinary shareholders.

4.   Segment Information

     The Company is organized into three operating segments — insurance, reinsurance and financial products and services — in addition to a corporate segment which includes the general investment and financing operations of the Company.

     General, life and annuity, and financial operations are disclosed separately by segment. General operations include property and casualty lines of business.

     The Company evaluates the performance of each segment based on underwriting results for general operations, net income from life and annuity operations and contribution from financial operations. Other items of revenue and expenditure of the Company are not evaluated at the segment level. In addition, the Company does not allocate assets by segment for its general operations. Investment assets related to the Company’s life and annuity and financial operations are held in separately identified portfolios. Net investment income from these assets is included in net income from life and annuity operations and contribution from financial operations, respectively.

11

XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4.   Segment Information (continued)

     Certain lines of business within general operations written by the Company have loss experience generally characterized as low frequency and high severity. This may result in volatility in both the Company’s results and operational cash flows.

     The following is an analysis of results by segment together with a reconciliation to net income:

Three months ended September 30, 2004:
(U.S. dollars in thousands)
(Unaudited)

			Financial
			Products and
	Insurance	Reinsurance	Services	Total
General Operations:
Net premiums earned	$1,068,946	$798,338	$ —	$1,867,284
Fee income and other	9,269	(148)	—	9,121
Net losses and loss expenses	888,953	667,966	—	1,556,919
Acquisition costs	146,242	170,984	—	317,226
Operating expenses (1)	146,128	44,849	—	190,977
Exchange losses (gains)	(19,444)	(7,305)	—	(26,749)
Underwriting profit (loss)	$ (83,664)	$ (78,304)	$ —	$ (161,968)
Life and Annuity Operations:
Life premiums earned	$   —	$ 72,943	$ 24,435	$ 97,378
Fee income and other	—	—	317	317
Claims and policy benefits	—	99,163	28,784	127,947
Acquisition costs	—	14,239	5,957	20,196
Operating expenses (1)	—	3,662	2,267	5,929
Exchange (gains) losses	—	(966)	—	(966)
Net investment income	—	57,166	22,254	79,420
Interest (income) expense	—	(94)	14,815	14,721
Net income (loss) from life and             annuity operations	$ —	$ 14,105	$ (4,817)	$ 9,288
Financial Operations:
Net premiums earned			$ 56,471	$  56,471
Fee income and other			1,373	1,373
Net losses and loss expenses			52,207	52,207
Acquisition costs			3,588	3,588
Operating expenses (1)			18,707	18,707
Exchange (gains) losses			(122)	(122)
Underwriting profit (loss)			$(16,536)	$ (16,536)
Investment income — financial guarantee			$ 9,773	$ 9,773
Net realized and unrealized gains (losses) on             credit derivatives			(1,919)	(1,919)
Net realized and unrealized gains (losses) on weather             and energy derivatives			(186)	(186)
Operating expenses — weather and energy (1)			6,702	6,702
Net income from financial affiliates			10,162	10,162
Minority interest			1,247	1,247
Contribution from financial operations			$ (6,655)	$ (6,655)

See footnotes on following page.

12

XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4.   Segment Information (continued)

Three months ended September 30, 2004 (continued):
(U.S. dollars in thousands, except ratios)
(Unaudited)

			Financial
			Products and
	Insurance	Reinsurance	Services	Total
Net investment income — general operations				$163,883
Net realized and unrealized gains on investments
and derivative instruments (3)				39,533
Net income from investment and insurance             affiliates				108,447
Interest expense (2)				56,991
Amortization of intangible assets				3,256
Corporate operating expenses				49,537
Minority interest				(150)
Income tax				10,342
Net Income				$ 32,552
General Operations:
Loss and loss expense ratio (4)	83.2%	83.7%		83.4%
Underwriting expense ratio (4)	27.3%	27.0%		27.2%
Combined ratio (4)	110.5%	110.7%		110.6%

   (1)   Operating expenses exclude corporate operating expenses, shown separately.

   (2)   Interest expense excludes interest expense related to life and annuity operations, shown separately.

   (3)   Includes net realized gains on investments of $57.0 million and net realized and unrealized losses on investment derivatives of $17.5 million, but does not include unrealized appreciation or depreciation on investments, which are included in “accumulated other comprehensive income (loss)”.

   (4)   Ratios are based on net premiums earned from general operations. The underwriting expense ratio excludes exchange gains and losses.

13

XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4.   Segment Information (continued)

Three months ended September 30, 2003:
(U.S. dollars in thousands)
(Unaudited)

			Financial
			Products and
	Insurance	Reinsurance	Services	Total
General Operations:
Net premiums earned	$995,857	$667,856	$ —	$1,663,713
Fee income and other	2,648	1,865	—	4,513
Net losses and loss expenses	611,617	558,047	—	1,169,664
Acquisition costs	154,549	152,978	—	307,527
Operating expenses (1)	119,184	33,411	—	152,595
Exchange gains	(6,477)	(247)	—	(6,724)
Underwriting profit (loss)	$119,632	$ (74,468)	$ —	$ 45,164
Life and Annuity Operations:
Life premiums earned	$ —	$ 62,600	$ 23,828	$ 86,428
Fee income and other	—	—	62	62
Claims and policy benefits	—	81,460	18,494	99,954
Acquisition costs	—	6,880	4,537	11,417
Operating expenses (1)	—	2,012	2,083	4,095
Exchange (gains) losses	—	2,648	—	2,648
Net investment income	—	35,446	7,690	43,136
Interest expense	—	—	3,304	3,304
Net income from life and annuity operations	$ —	$ 5,046	$ 3,162	$ 8,208
Financial Operations:
Net premiums earned			$ 35,307	$ 35,307
Fee income and other			(655)	(655)
Net losses and loss expenses			3,894	3,894
Acquisition costs			4,969	4,969
Operating expenses (1)			10,467	10,467
Underwriting profit			$ 15,322	$ 15,322
Investment income — financial guarantee			$ 5,461	$ 5,461
Net realized and unrealized losses on
credit derivatives			(1,752)	(1,752)
Net realized and unrealized (losses) gains on weather             and energy derivatives			(10,528)	(10,528)
Operating expenses — weather and energy (1)			4,771	4,771
Net income from financial affiliates			12,078	12,078
Minority interest			2,588	2,588
Contribution from financial operations			$ 13,222	$ 13,222

See footnotes on following page.

14

XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4.   Segment Information (continued)

Three months ended September 30, 2003 (continued):
(U.S. dollars in thousands, except ratios)
(Unaudited)

			Financial
			Products and
	Insurance	Reinsurance	Services	Total
Net investment income — general operations				$142,166
Net realized and unrealized (losses) gains on
investments and derivative instruments (3)				(24,759)
Net income from investment and
insurance affiliates				26,240
Interest expense (2)				46,367
Amortization of intangible assets				375
Corporate operating expenses				41,383
Minority interest				(1,825)
Income tax				14,890
Net Income				$109,051
General Operations:
Loss and loss expense ratio (4)	61.4%	83.6%		70.3%
Underwriting expense ratio (4)	27.5%	27.9%		27.7%
Combined ratio (4)	88.9%	111.5%		98.0%

   (1)   Operating expenses exclude corporate operating expenses, shown separately.

   (2)   Interest expense excludes interest expense related to life and annuity operations, shown separately.

   (3)   Includes net realized losses on investments of $8.7 million and net realized and unrealized losses on investment derivatives of $16.1 million, but does not include unrealized appreciation or depreciation on investments, which are included in “accumulated other comprehensive income (loss)”.

   (4)   Ratios are based on net premiums earned from general operations, excluding fee income and other. The underwriting expense ratio excludes exchange gains and losses.

15

XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4.   Segment Information (continued)

Nine months ended September 30, 2004:
(U.S. dollars in thousands, except ratios)
(Unaudited)

			Financial
			Products and
	Insurance	Reinsurance	Services	Total
General Operations:
Net premiums earned	$3,066,619	$2,205,815	$ —	$5,272,434
Fee income and other	17,165	5,956	—	23,121
Net losses and loss expenses	2,143,496	1,467,747	—	3,611,243
Acquisition costs	422,620	488,817	—	911,437
Operating expenses (1)	406,549	137,672	—	544,221
Exchange losses (gains)	(7,422)	(13,192)	—	(20,614)
Underwriting profit	$ 118,541	$ 130,727	$ —	$ 249,268
Life and Annuity Operations:
Life premiums earned	$ —	$1,137,279	$ 71,079	$1,208,358
Fee income and other	—	93	454	547
Claims and policy benefits	—	1,201,407	67,112	1,268,519
Acquisition costs	—	26,078	15,952	42,030
Operating expenses (1)	—	10,342	7,819	18,161
Exchange (gains) losses	—	(1,912)	—	(1,912)
Net investment income	—	146,716	60,713	207,429
Interest expense (2)	—	23	35,489	35,512
Net income from life and annuity operations	$ —	$ 48,150	$ 5,874	$ 54,024
Financial Operations:
Net premiums earned			$123,083	$ 123,083
Fee income and other			2,202	2,202
Net losses and loss expenses			61,737	61,737
Acquisition costs			12,221	12,221
Operating expenses (1)			51,909	51,909
Exchange (gains) losses			(122)	(122)
Underwriting profit (loss)			$ (460)	$ (460)
Investment income — financial guarantee			$ 26,778	$ 26,778
Net realized and unrealized gains on             credit derivatives			37,730	37,730
Net realized and unrealized losses on weather and             energy derivatives			(4,802)	(4,802)
Operating expenses — weather and energy (1)			20,643	20,643
Net income from financial affiliates			8,959	8,959
Minority interest			8,334	8,334
Contribution from financial operations			$ 39,228	$ 39,228

See footnotes on following page.

16

XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4.   Segment Information (continued)

Nine months ended September 30, 2004 (continued):
(U.S. dollars in thousands)
(Unaudited)

			Financial
			Products and
	Insurance	Reinsurance	Services	Total
Net investment income — general operations				$482,392
Net realized and unrealized gains on investments             and derivative instruments (3)				182,337
Equity in net income of investment and             insurance affiliates				208,740
Interest expense (2)				131,218
Amortization of intangible assets				9,770
Corporate operating expenses				129,934
Minority interest				(293)
Income tax				76,875
Net Income				$868,485
General Operations:
Loss and loss expense ratio (4)	69.9%	66.5%		68.5%
Underwriting expense ratio (4)	27.0%	28.4%		27.6%
Combined ratio (4)	96.9%	94.9%		96.1%

   (1)   Operating expenses exclude corporate operating expenses, shown separately.

   (2)   Interest expense excludes interest expense related to life and annuity operations, shown separately.

   (3)   Includes net realized gains on investments of $181.1 million and net realized and unrealized gains on investment derivatives of $1.2 million, but does not include unrealized appreciation or depreciation on investments, which are included in “accumulated other comprehensive income (loss)”.

   (4)   Ratios are based on net premiums earned from general operations. The underwriting expense ratio excludes exchange gains and losses.

17

XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4.   Segment Information (continued)

Nine months ended September 30, 2003:
(U.S. dollars in thousands)
(Unaudited)

			Financial
			Products and
	Insurance	Reinsurance	Services	Total
General Operations:
Net premiums earned	$2,747,163	$1,817,957	$ —	$4,565,120
Fee income and other	6,365	19,658	—	26,023
Net losses and loss expenses	1,684,825	1,285,385	—	2,970,210
Acquisition costs	422,828	399,193	—	822,021
Operating expenses (1)	321,977	104,665	—	426,642
Exchange losses (gains)	(5,709)	(23,455)	—	(29,164)
Underwriting profit	$ 329,607	$ 71,827	$ —	$ 401,434
Life and Annuity Operations:
Life premiums earned	$ —	$ 202,442	$ 47,239	$ 249,681
Fee income and other	—	—	112	112
Claims and policy benefits	—	264,996	37,741	302,737
Acquisition costs	—	20,749	5,997	26,746
Operating expenses (1)	—	6,233	6,174	12,407
Exchange (gains) losses	—	(966)	—	(966)
Net investment income	—	100,590	20,239	120,829
Interest expense	—	—	8,231	8,231
Net income from life and annuity operations	$ —	$ 12,020	$ 9,447	$ 21,467
Financial Operations:
Net premiums earned			$ 98,087	$ 98,087
Fee income and other			(146)	(146)
Net losses and loss expenses			26,177	26,177
Acquisition costs			14,008	14,008
Operating expenses (1)			32,773	32,773
Underwriting profit			$ 24,983	$ 24,983
Investment income — financial guarantee			$ 16,134	$ 16,134
Net realized and unrealized losses on             credit derivatives			(23,682)	(23,682)
Net realized and unrealized gains on weather and             energy derivatives			5,105	5,105
Operating expenses — weather and energy (1)			15,581	15,581
Equity in net income of financial affiliates			29,254	29,254
Minority interest			7,886	7,886
Contribution from financial operations			$ 28,327	$ 28,327

See footnotes on following page.

18

XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4.   Segment Information (continued)

Nine months ended September 30, 2003 (continued):
(U.S. dollars in thousands, except ratios)
(Unaudited)

			Financial
			Products and
	Insurance	Reinsurance	Services	Total
Net investment income — general operations				$436,255
Net realized and unrealized gains on investments             and derivative instruments (3)				72,798
Equity in net income of investment and             insurance affiliates				45,603
Interest expense (2)				133,862
Amortization of intangible assets				1,125
Corporate operating expenses				110,335
Minority interest				(2,095)
Income tax				45,929
Net Income				$716,728
General Operations:
Loss and loss expense ratio (4)	61.3%	70.7%		65.1%
Underwriting expense ratio (4)	27.1%	27.7%		27.3%
Combined ratio (4)	88.4%	98.4%		92.4%

   (1)   Operating expenses exclude corporate operating expenses, shown separately.

   (2)   Interest expense excludes interest expense related to life and annuity operations, shown separately.

   (3)   Includes net realized gains on investments of $80.3 million, net realized and unrealized losses on investment derivatives of $7.5 million, but does not include unrealized appreciation or depreciation on investments, which are included in “accumulated other comprehensive income (loss)”.

   (4)   Ratios are based on net premiums earned from general operations, excluding fee income and other. The underwriting expense ratio excludes exchange gains and losses.

19

XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4.   Segment Information (continued)

The following tables summarize the Company’s net premiums earned by line of business:

Three months ended September 30, 2003:
(U.S. dollars in thousands)
(Unaudited)

			Financial
			Products and
	Insurance	Reinsurance	Services
General Operations:
Professional liability	$ 350,671	$ 93,336	$ —
Casualty	270,431	269,228	—
Property catastrophe	7,859	91,161	—
Other property	172,108	196,582	—
Marine, energy, aviation and satellite	230,351	57,022	—
Accident and health	(1,331)	11,900	—
Other (1)	38,857	79,109	—
Total General Operations	$1,068,946	$798,338	$ —
Life and Annuity Operations	—	72,943	24,435
Financial Operations	—	—	56,471
Total	$1,068,946	$871,281	$80,906

   (1)   Other, includes political risk, surety, bonding, warranty and other lines.

Three months ended September 30, 2003:
(U.S. dollars in thousands)
(Unaudited)

			Financial
			Products and
	Insurance	Reinsurance	Services
General Operations:
Professional liability	$ 262,183	$ 43,331	$ —
Casualty	270,345	217,297	—
Property catastrophe	—	72,904	—
Other property	157,894	192,216	—
Marine, energy, aviation and satellite	155,114	59,385	—
Accident and health	10,456	10,669	—
Other (1)	139,865	72,054	—
Total General Operations	$ 995,857	$667,856	$ —
Life and Annuity Operations	—	62,600	23,828
Financial Operations	—	—	35,307
Total	$ 995,857	$730,456	$59,135

(1)   Other, includes political risk, surety, bonding, warranty and other lines.

20

XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4.   Segment Information (continued)

The following tables summarize the Company’s net premiums earned by line of business:

Nine months ended September 30, 2004:
(U.S. dollars in thousands)
(Unaudited)

			Financial
			Products and
	Insurance	Reinsurance	Services
General Operations:
Professional liability	$ 997,943	$ 231,792	$ —
Casualty	748,051	736,883	—
Property catastrophe	34,833	237,146	—
Other property	450,044	580,757	—
Marine, energy, aviation and satellite	689,379	156,017	—
Accident and health	6,756	32,044	—
Other (1)	139,613	231,176	—
Total General Operations	$3,066,619	$2,205,815	$ —
Life and Annuity Operations	—	1,137,279	71,079
Financial Operations	—	—	123,083
Total	$3,066,619	$3,343,094	$194,162

   (1)   Other, includes political risk, surety, bonding, warranty and other lines.

Nine months ended September 30, 2003:
(U.S. dollars in thousands)
(Unaudited)

			Financial
			Products and
	Insurance	Reinsurance	Services
General Operations:
Professional liability	$ 678,126	$ 96,957	$ —
Casualty	756,162	618,289	—
Property catastrophe	—	185,943	—
Other property	420,644	562,806	—
Marine, energy, aviation and satellite	573,665	153,946	—
Accident and health	47,335	22,617	—
Other (1)	271,231	177,399	—
Total General Operations	$2,747,163	$1,817,957	$ —
Life and Annuity Operations	—	202,442	47,239
Financial Operations	—	—	98,087
Total	$2,747,163	$2,020,399	$145,326

   (1)   Other, includes political risk, surety, bonding, warranty and other lines.

21

XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5.   Notes Payable and Debt and Financing Arrangements

     In March 2004 the Company issued 33 million 6.5% Equity Security Units (“Units”) in a public offering. The Company received approximately $800.2 million in net proceeds from the sale of the Units after deducting underwriting discounts.

     Each Unit has a stated amount of $25 and consists of (a) a purchase contract pursuant to which the holder agreed to purchase, for $25, a variable number of shares of the Company’s Class A Ordinary Shares on May 15, 2007 and (b) a one-fortieth, or 2.5%, ownership interest in a senior note issued by the Company due May 15, 2009 with a principal amount of $1,000. The senior notes are pledged by the holders to secure their obligations under the purchase contract. The number of shares issued under the purchase contract is contingently adjustable based on, among other things, the share price of the Company on the stock purchase date and the dividend rate of the Company. The Company will make quarterly payments at the annual rate of 3.97% and 2.53% under the purchase contracts and senior notes, respectively. The Company may defer the contract payments on the purchase contract, but not the senior notes, until the stock purchase date. In May 2007, the senior notes will be remarketed whereby the interest rate on the senior notes will be reset in order to generate sufficient remarketing proceeds to satisfy the Unit holders’ obligation under the purchase contract. If the senior notes are not successfully remarketed, then the Company will exercise its rights as a secured party and may retain or dispose of the senior notes to satisfy in full the Unit holders’ obligation to purchase its ordinary shares under the purchase contracts.

     In connection with this transaction, $88.6 million, which is the estimated fair value of the purchase contract, was charged to “Additional paid in capital” and a corresponding liability was established. Of the $26.9 million total costs associated with the issuance of the Units, $23.7 million was charged to “Additional paid in capital” with the remainder deferred and amortized over the term of the senior debt. The number of ordinary shares to be issued under each purchase contract depends on, among other things, the average market price of the ordinary shares. The maximum number of ordinary shares to be issued under the purchase contracts is approximately 11 million. The Company accounts for the effect on the number of weighted average ordinary shares, assuming dilution, using the treasury stock method. The purchase contract component of the Units will have no effect on the number of weighted average ordinary shares, assuming dilution, except when the average market price of the Company’s ordinary shares is above the threshold appreciation price of $93.99 per share. Because the average market price of the Company’s ordinary shares during the period the Units were outstanding was below this price, the shares issuable under the purchase contracts were excluded from the computation of net income per ordinary share assuming dilution for the three and nine month periods ended September 30, 2004.

     The Company created and terminated several new bilateral unsecured letter of credit facilities in 2004, which are and were used to provide additional capacity to support the Company’s U.S. non-admitted business. The Company terminated three of these bilateral letter of credit facilities by September 30, 2004, which had amounted to $125.0 million in the aggregate. The newest facility is for $100.0 million of which $60.0 million is available in the form of revolving credit. The facility is currently unutilized.

     The Company replaced its principal $2.5 billion credit and letter of credit facility that expired on June 23, 2004 with a new $1.0 billion facility that expires on June 22, 2005 and a new $2.0 billion facility that expires on June 22, 2007. Both facilities are available to provide revolving credit ($600.0 million in the aggregate) and letters of credit ($3.0 billion in the aggregate) and are syndicated and unsecured. The $1.0 billion facility was unutilized at September 30, 2004, and approximately $1.7 billion of the $2.0 billion facility was utilized to provide letters of credit at September 30, 2004.

     On May 18, 2004, the Company announced that it would make a one-time cash payment to holders of its zero-coupon convertible debentures due May 2021 (“CARZ”) for not exercising their put rights. No bonds were put to the Company and, consequently, the Company paid $15.0 million ($14.84 per bond) to the holders of record on May 26, 2004.

22

XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5.   Notes Payable and Debt and Financing Arrangements (Continued)

     On September 7, 2004, the Company redeemed the entire issue of the Liquid Yield Option^TM Notes due 2021 (“LYONs”) originally issued in September 2001. The bonds were redeemed at their accreted value of approximately $317.0 million, using proceeds from the issuance of the Senior Notes due 2014, as described below.

     On August 23, 2004, the Company issued $300.0 million of 5.25% Senior Notes due September 15, 2014. Net proceeds to the Company, after deducting underwriting discounts and commissions and expenses of the offering, were approximately $296.6 million. These proceeds, together with other available cash, were used to redeem the Company’s LYONs, as described above.

     The Company is in the process of renewing the letter of credit facility that supports its operations at Lloyd’s. The new facility in the amount of £450.0 million is expected to close in mid-November 2004.

6.   Exposures Under Guaranties

     The Company provides and reinsures financial guaranties issued to support public and private borrowing arrangements. Financial guaranties are conditional commitments that guarantee the performance of an obligor to a third party, typically the timely repayment of principal and interest. The Company’s potential liability in the event of non-payment by the issuer of the insured obligation is represented by its proportionate share of the aggregate outstanding principal and interest payable on such insured obligation. In synthetic transactions, the Company guarantees payment obligations of counterparties under credit default swaps. The Company does not record a carrying value for future installment premiums on financial guaranties as they are recognized over the term of the contract.

     The net outstanding exposure as at September 30, 2004 of financial guaranty aggregate insured portfolios was $68.1 billion, which includes credit default swap exposures of $10.9 billion. The net liability for these credit default swaps has a carrying value of $97.2 million.

7.   Derivative Instruments

     The Company is exposed to potential loss from various market risks associated with derivative instruments and manages these market risks based on guidelines established by management. These derivative instruments are carried at fair value with the resulting gains and losses recognized in income in the period in which they occur.

     The following table summarizes the net realized and unrealized gains (losses) on derivative instruments included in net income for the three and nine months ended September 30, 2004 and 2003, respectively:

	(Unaudited)		(Unaudited)
(U.S. dollars in thousands)	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2004	2003	2004	2003
Credit derivatives	$ (1,919)	$ (1,752)	$37,730	$(23,682)
Weather and energy risk management derivatives	(186)	(10,528)	(4,802)	5,105
Investment derivatives	(17,482)	(16,066)	1,222	(7,533)
Net realized and unrealized (losses) gains             on derivatives	$(19,587)	$(28,346)	$34,150	$(26,110)

23

XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

8.   XL Capital Finance (Europe) plc

     XL Capital Finance (Europe) plc (“XLFE”) is a wholly owned finance subsidiary of the Company. In January 2002, XLFE issued $600.0 million par value 6.5% Guaranteed Senior Notes due January 2012. These Notes are fully and unconditionally guaranteed by the Company.

     The Company’s ability to obtain funds from its subsidiaries is subject to certain contractual restrictions, applicable laws and statutory requirements of the various countries in which the Company operates, including Bermuda, the U.S. and the U.K., among others. Required statutory capital and surplus for the principal operating subsidiaries of the Company was $3.0 billion as of December 31, 2003.

9.    Accumulated Other Comprehensive Income

     In August 2004, the Company entered into a treasury rate guarantee agreement in anticipation of the issuance of fixed-rate debt. This transaction, which met the requirements of a cash flow hedge of a forecasted transaction under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, was entered into to mitigate the interest rate risk associated with the subsequent issuance of $300.0 million of 5.25% Senior Notes due September 15, 2014 (see Note 5 above). The loss on the settlement of the treasury rate guarantee transaction on August 18, 2004 of $6.3 million was charged to Accumulated Other Comprehensive Income and is being amortized to interest expense over the 10-year term of the related debt.

10.    Commitments and Contingencies

     In connection with its acquisition of Winterthur International in July 2001, in an all cash transaction, the Company has recorded an unsecured reinsurance recoverable from Winterthur Swiss Insurance Company (the “Seller”) of $1.1 billion at September 30, 2004 based on provisions of the sale and purchase agreement, as amended (“SPA”).

     The SPA provides the Company with post-closing protection with respect to adverse development of loss and unearned premium reserves relating to the acquired Winterthur International operations. This protection is based upon actual net loss experience and development over a three year post-closing seasoning period based on loss development experience, collectible reinsurance, reinsurance recoveries and certain other factors set forth in the SPA. The SPA provides for independent actuarial determination should the Seller and the Company disagree on the final amounts due thereunder. In addition, the Seller provides protection to the Company with respect to reinsurance recoverables aggregating $2.2 billion as of September 30, 2004; certain reinsurers responsible for some portions thereof have raised issues as to whether amounts claimed are due and discussions with respect to resolving such issues are ongoing. The Company may recognize an impairment if the amount determined to be due to the Company is less than the carrying value of the SPA recovery balance deemed due from the Seller or to the extent that any amount proves to be uncollectible from the Seller for any reason.

24

XL CAPITAL LTD
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)

11.   Computation of Earnings Per Ordinary Share and Ordinary Share Equivalent

	(Unaudited)		(Unaudited)
(U.S. dollars in thousands except per share amounts)	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2004	2003	2004	2003
Basic earnings per ordinary share:
Net income	$ 32,552	$109,051	$868,485	$716,728
Less: preference share dividends	(10,081)	(10,080)	(30,241)	(30,241)
Net income available to ordinary shareholders	$ 22,471	$ 98,971	$838,244	$686,487
Weighted average ordinary shares outstanding	138,043	136,826	137,800	136,774
Basic earnings per ordinary share	$ 0.16	$ 0.72	$ 6.08	$ 5.02
Diluted earnings per ordinary share:
Net income	$ 32,552	$109,051	$868,485	$716,728
Less: preference share dividends	(10,081)	(10,080)	(30,241)	(30,241)
Net income available to ordinary shareholders	$ 22,471	$ 98,971	$838,244	$686,487
Weighted average ordinary shares
outstanding — basic	138,043	136,826	137,800	136,744
Average stock options outstanding (1)	889	1,597	711	1,426
Weighted average ordinary shares
outstanding — diluted	138,932	138,423	138,511	138,170
Diluted earnings per ordinary share	$ 0.16	$ 0.71	$ 6.05	$ 4.97
Dividends per ordinary share	$ 0.49	$ 0.48	$ 1.47	$ 1.44

   (1)   Net of shares repurchased under the treasury stock method.

25

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

     The following is a discussion of the Company’s financial condition and liquidity and results of operations. Certain aspects of the Company’s business have loss experience characterized as low frequency and high severity. This may result in volatility in both the Company’s and an individual segment’s results of operations and financial condition.

     This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains
forward-looking statements which involve inherent risks and uncertainties. Statements that are not historical facts, including statements about the Company’s beliefs and expectations, are forward-looking statements. These statements are based upon current plans, estimates and projections. Actual results may differ materially from those projected in such forward-looking statements, and therefore undue reliance should not be placed on them. See “Cautionary Note Regarding Forward-Looking Statements” below for a list of factors that could cause actual results to differ materially from those contained in any forward-looking statement.

     This discussion and analysis should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and the audited Consolidated Financial Statements and notes thereto, presented under Item 7 and Item 8, respectively, of the Company’s Form 10-K for the year ended December 31, 2003.

Executive Overview

     See “Executive Overview” in Item 7 of the Company’s Form 10-K for the year ended December 31, 2003.

Results of Operations

     The following table presents an analysis of the Company’s net income available to ordinary shareholders and other financial measures (described below) for the three months ended September 30, 2004 and 2003:

(U.S. dollars and shares in thousands, except per share amounts)
	(Unaudited)
	Three Months Ended
	September 30,
	2004	2003
Net income available to ordinary shareholders	$22,471	$98,971
Earnings per ordinary share — basic	$ 0.16	$ 0.72
Earnings per ordinary share — diluted	$ 0.16	$ 0.71
Weighted average number of ordinary shares and ordinary share
equivalents — basic	138,043	136,826
Weighted average number of ordinary shares and ordinary share
equivalents — diluted	138,932	138,423

26

     The following table presents an analysis of the Company’s net income available to ordinary shareholders and other financial measures (described below) for the nine months ended September 30, 2004 and 2003.

(U.S. dollars and shares in thousands, except per share amounts)
	(Unaudited)
	Nine Months Ended
	September 30,
	2004	2003
Net income available to ordinary shareholders	$838,244	$686,487
Earnings per ordinary share — basic	$ 6.08	$ 5.02
Earnings per ordinary share — diluted	$ 6.05	$ 4.97
Weighted average number of ordinary shares and ordinary share       equivalents — basic	137,800	136,744
Weighted average number of ordinary shares and ordinary share       equivalents — diluted	138,511	138,170

     The Company’s net income and other financial measures as shown below for the three and nine months ended September 30, 2004 have been affected, among other things, by the following significant items:

1)	Significant hurricane activity in the quarter.
2)	Continued competitive underwriting environment.
3)	Growing asset base and positive performance from investments in affiliates.

27

1.   Significant hurricane activity in the quarter.

     The 2004 Atlantic hurricane season has, through September 30, 2004, resulted in four insured hurricane losses aggregating to the largest seasonal loss in history and had a substantial impact on the results of the Company for the quarter. The following table sets forth the impact of Hurricanes Charley, Frances, Ivan and Jeanne on the Company’s statement of income for the three and nine months ended September 30, 2004 by operating segment. The Company estimates losses incurred of $446.8 million, net of reinsurance recoverable, based on some preliminary reports and estimates of loss and damage. While this is management’s best estimate at this time, it could change as more information becomes available. In estimating the impact of these hurricanes on the Company, premium payments required to reinstate reinsurance policies have been accrued. Premiums from insureds required to reinstate their insurance or reinsurance coverage with the Company have also been accrued in the estimate.

(U.S. dollars in millions, except ratios)
(Unaudited)			Financial Products
	Insurance	Reinsurance	and Services	Total
Operating Data:
Net reinstatement premiums earned:
Charley	$ —	$ 4.0	$ —	$ 4.0
Frances	—	3.0	—	3.0
Ivan	(12.0)	5.9	—	(6.1)
Jeanne	—	—	—	—
Total net reinstatement premiums earned	$(12.0)	$ 12.9	$ —	$ 0.9
Gross losses and loss expenses:
Charley	$ 60.2	$ 80.4	$ —	$140.6
Frances	38.8	52.1	—	90.9
Ivan	142.5	84.4	—	226.9
Jeanne	30.5	67.3	—	97.8
Total gross losses and loss expenses	$272.0	$284.2	—	$556.2
Losses and loss expenses recoverable:
Charley	$13.6	$ 6.9	$ —	$ 20.5
Frances	7.9	2.9	—	10.8
Ivan	55.9	9.4	—	65.3
Jeanne	6.6	6.2	—	12.8
Total losses and losses expense recoveries	$84.0	$ 25.4	$ —	$109.4
Underwriting loss	$200.0	$245.9	$ —	$445.9
Income tax benefit				$ 25.7
Net loss				420.2
Loss ratio impact for the three months ended       September 30, 2004	18.3%	31.6%	—	23.9%
Combined ratio impact for the three months       Ended September 30, 2004	18.6%	31.1%	—	23.9%
Loss ratio impact for the nine months ended       September 30, 2004	6.4%	11.4%	—	8.5%
Combined ratio impact for the nine months       ended September 30, 2004	6.4%	11.2%	—	8.5%

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2.   Continued competitive underwriting environment.

     Property and casualty market conditions overall remain attractive although price competition continued to increase in the third quarter, most notably in regards to property and professional lines. Accordingly, the Company has continued to focus on disciplined risk selection. Based on continued solid demand and the benefits of price increases and improved terms achieved over the last several years’ renewals, the Company believes that overall business in the insurance and reinsurance markets remains adequately priced. Performance by segment is further discussed in the segment analysis below.

3.   Growing asset base and positive performance from investments in affiliates.

     Net investment income increased to $253.1 million in the third quarter of 2004 as compared to $190.8 million in the third quarter of 2003 due primarily to a higher investment base. The investment portfolio has increased due to positive operating cash flows combined with capital raising activities. In addition, net realized gains produced by the Company’s investment portfolio and the equity earnings from affiliates also contributed positively to the quarter. Net realized gains (losses) on investments were $57.0 million for the third quarter compared to ($8.7) million for the third quarter of 2003, and net income of investment, insurance and financial affiliates was $118.6 million for the quarter compared to $38.3 million for the third quarter of 2003. Earnings from affiliates in the same period include $102.1 million of income in connection with the sales of the Company’s interest in Admiral Group Ltd and its investment in Pareto Partners and its affiliated companies. This is further discussed within the investment activities and other revenues and expenses analysis below.

Financial Measures

     The following are some of the financial measures management considers important in evaluating the Company’s operating performance:

(U.S. dollars in thousands, except ratios and per share amounts)
	(Unaudited)
	Three Months Ended
	September 30,
	2004	2003
Underwriting (loss) profit — general operations	$(161,968)	$ 45,164
Combined ratio — general operations	110.6%	98.0%
Investment income — general operations	$ 163,883	$142,166
	(Unaudited)
	Nine Months Ended
	September 30,
	2004	2003
Underwriting profit — general operations	$ 249,268	$401,434
Combined ratio — general operations	96.1%	92.4%
Investment income — general operations	$ 482,392	$436,255
Annualized return on average ordinary shareholders’ equity	16.8%	14.2%
	(Unaudited)
	September 30,	December 31,
	2004	2003
Book value per ordinary share	$ 49.45	$ 46.74

29

Underwriting profit — general operations

     One way the Company evaluates the performance of its property and casualty insurance and reinsurance general operations is the underwriting profit or loss. The Company does not measure performance based on the amount of gross premiums written. Underwriting profit or loss is calculated from premiums earned and fee income, less net losses incurred, foreign exchange gains (losses) and expenses related to the underwriting activities. Underwriting profits in the three and nine months ended September 30, 2004 are primarily reflective of the combined ratio discussed below.

Combined ratio — general operations

     The combined ratio for general operations is used by the Company, and many other property and casualty insurance and reinsurance companies, as another measure of underwriting profitability. The combined ratio is calculated from the net losses incurred and underwriting expenses as a ratio of the net premiums earned for the Company’s general insurance and reinsurance operations. A combined ratio of less than 100% generally indicates an underwriting profit and over 100% reflects an underwriting loss. Increases in the Company’s combined ratio for the three and nine months ended September 30, 2004 compared to the same periods in the previous year were directly a result of a higher loss and loss expense ratio driven primarily by the losses resulting from hurricane activity. The underwriting expense ratio has remained relatively stable. The combined ratio excluding the hurricane losses detailed above was 86.7% and 87.6% for the three and nine months ended September 30, 2004, respectively, representing improvements over the same periods in the prior year.

Net investment income — general operations

     Net investment income from the Company’s general operations is another important measure which affects the Company’s overall profitability. The largest liability of the Company relates to its unpaid loss reserves, and the Company’s investment portfolio provides liquidity for claims settlements of these reserves as they become due. A significant part of the portfolio is in fixed income securities. Net investment income is affected by overall market interest rates and also the size of the portfolio. The average investment portfolio balance during the quarter ended September 30, 2004 has increased as compared to the same period in 2003 due to positive cash flows combined with capital raising activities. Total investments as at September 30, 2004 were $27.9 billion as compared to $21.4 billion as at September 30, 2003.

Book value per ordinary share

     Management also views the Company’s book value per ordinary share as an additional measure of the Company’s performance. Book value per ordinary share is calculated by dividing ordinary shareholders’ equity by the number of outstanding ordinary shares at any period end. Book value per ordinary share is affected primarily by the Company’s net income and also by any changes in the net unrealized gains and losses on its investment portfolio. Book value per ordinary share has increased by $2.71 in the first nine months of 2004. While the Company’s continued growth and profitability has created $868.5 million in net income for the first nine months of the year, the net unrealized gains associated with the Company’s fixed income investment portfolio decreased over the nine months to September 30, 2004 resulting from a rise in interest rates and investment gains being realized in the portfolio. However, for the three months ended September 30, 2004 the change in net unrealized appreciation of investments, net of tax contributed $330.0 million to total book value.

Annualized return on average ordinary shareholders’ equity

     Annualized return on average ordinary shareholder’s equity (“ROE”) is a widely used measure of a company’s profitability. It is calculated by dividing the net income for any period by the average of the opening and closing ordinary shareholders’ equity. The Company establishes target ROE’s for its total operations, segments and lines of business. If the Company’s ROE return targets are not met with respect to any line of business over time, the Company seeks to re-evaluate these lines. In addition, the Company’s compensation of its senior officers is significantly dependant on the achievement of the Company’s performance goals to enhance shareholder value, including ROE. The improvement in this financial measure for the nine months ended September 30, 2004 was due to the key operating factors noted above combined with a 3.2% increase in return related specifically to the net realized gains on investments and derivatives recognized in the period.

30

Other Key Focuses of Management

     See the discussion of the Other Key Focuses of Management in Item 7 of the Company’s Form 10-K for the year ended December 31, 2003. That discussion is updated for the disclosures set forth below.

Assessment of the effectiveness of our internal controls over financial reporting

     Throughout the year and during the quarter, management has continued to focus on completing its assessment of the effectiveness of the Company’s internal controls over financial reporting by the time the Company is required to file its next Annual Report on Form 10-K, as required by Section 404 of the Sarbanes-Oxley Act of 2002. The Company’s independent auditors have also been working to evaluate management’s assessment and to test the design and operating effectiveness of the Company’s internal controls over financial reporting. Given that this is the first year of the new Section 404 requirements, it is difficult at this time for both the Company and its independent auditors to predict how long it will take to complete the assessment of the effectiveness of the Company’s internal controls over financial reporting, including the final evaluation of the significance of any control deficiencies. This, along with the significant remediation effort that remains, results in an increased risk of unexpected delays and obstacles to completing the project in a timely manner. Accordingly, dedicated focus at the senior management and segment and business process levels and tight project management to continually gauge the status of the effort and ensure that it stays on schedule, is critical to success. It is important that management continues diligently to complete this work and provide the results and assessments to the Company’s independent auditors on a timely basis and in accordance with the agreed upon time schedule in order for the Company’s independent auditors to have available the resources necessary to complete their work and issue their reports by the time the Company files its Annual Report on Form 10-K for the year ended December 31, 2004. Management believes that it is on track to accomplish this.

Winterthur International Net Reserve Seasoning

     Management continues to focus on the settlement and collection of certain post-closing balances under the sale and purchase agreement, as amended (“SPA”), related to the 2001 acquisition of the Winterthur International operations from Winterthur Swiss Insurance Company. For further information regarding the settlement and collection under the SPA, see “Financial Condition and Liquidity” discussions below.

Critical Accounting Policies and Estimates

     See the discussion of the Company’s Critical Accounting Policies and Estimates in Item 7 of the Company’s Form 10-K for the year ended December 31, 2003. That discussion is updated for the disclosures set forth below.

     The Company’s net unpaid loss and loss expense general operations and financial operations reserves broken down by operating segment at September 30, 2004 and December 31, 2003 was as follows:

	(Unaudited)
	As of	As of
	September 30,	December 31,
(U.S. dollars in millions)	2004	2003
Insurance	$ 6,782	$ 5,849
Reinsurance	5,293	4,871
Financial products and services	109	62
Net unpaid loss and loss expense reserves	$12,184	$10,782

Reinsurance

     In the Company’s reinsurance general operations, case reserves for reported claims are generally established based on reports received from ceding companies. Additional case reserves may be established by the Company to reflect the estimated ultimate cost of a loss.

     Reinsurance operations by their nature add further complications to the reserving process, particularly for casualty business written, in that there is an inherent lag in the timing and reporting of a loss event from an insured or ced

31

ing company to the reinsurer. This reporting lag creates an even longer period of time between the policy inception and when a claim is finally settled. As a result, more judgment is required to establish reserves for ultimate claims in the Company’s reinsurance operations.

     Casualty reinsurance business involves reserving methods that generally include historical aggregated claim information as reported by ceding companies, combined with the results of claims and underwriting reviews of a sample of the ceding company’s claims and underwriting files. Therefore, the Company does not always receive detailed claim information for this line of business.

Variable Interest Entities and Other Off-Balance Sheet Arrangements

     See the discussion of the Company’s Variable Interest Entities and Other Off-Balance Sheet Arrangements in Item 7 of the Company’s Form 10-K for the year ended December 31, 2003.

Segment Results for the three months ended September 30, 2004 compared to the three months ended September 30, 2003

Insurance

     General insurance business written includes risk management and specialty lines. Risk management products are comprised of global property and casualty insurance programs for large multinational companies, including umbrella liability, integrated risk and primary master property and liability coverages. Specialty lines products include directors’ and officers’ liability insurance, environmental liability insurance, political risk insurance, professional liability, property catastrophe, aviation and satellite insurance, employment practices liability insurance, surety, marine, specie, bloodstock and certain other insurance coverages including program business.

     A large part of the Company’s casualty insurance business written has loss experience that is low frequency and high severity. As a result, large losses, though infrequent, can have a significant impact on the Company’s results of operations, financial condition and liquidity. The Company attempts to mitigate this risk by using strict underwriting guidelines and various reinsurance arrangements.

     The following table summarizes the underwriting results for this segment:

(U.S. dollars in thousands)
	(Unaudited)
	Three Months Ended
	September 30,
	2004	2003	% Change
Gross premiums written	$1,353,755	$1,326,739	2.0%
Net premiums written	897,904	873,547	2.8%
Net premiums earned	1,068,946	995,857	7.3%
Fee income and other	9,269	2,648	NM
Net losses and loss expenses	888,953	611,617	45.3%
Acquisition costs	146,242	154,549	(5.4)%
Operating expenses	146,128	119,184	22.6%
Exchange (gains) losses	(19,444)	(6,477)	NM
Underwriting (loss) profit	$ (83,664)	$119,632	(169.9)%

* NM — Not Meaningful

     Gross premiums written increased by 2.0% in the quarter ended September 30, 2004 compared with the quarter ended September 30, 2003. The increase in gross premiums written was primarily due to increased levels of casualty line multi-year policies issued in the quarter, offset by continued declining rates across most lines, most notably property and professional lines. Softening pricing has led to increasing levels of non-renewal and repositioning of the Company’s exposures. While the general market has become more competitive, the Company continues to see good opportunities. Growth from new business continued to be seen in the professional lines new product offerings, in the areas of small and midsize law firms, as well as architects and engineers, representing $42.0 million in new premiums

32

during the quarter. In addition, new insurance initiatives in the property catastrophe lines contributed $29.0 million in gross written premiums. Net premiums written have increased in line with the increases in gross premiums written.

     Net premiums earned increased by 7.3% in the quarter ended September 30, 2004 compared with the quarter ended September 30, 2003. The increase was due to the earning of increased net premiums written over the last year combined with increased net retentions, particularly in the professional lines of business. Growth in net premiums earned was partially offset by several non-renewed portfolios as the earned premium effect of the non-renewed business lags the written premium impact. The weakening of the U.S. dollar against the U.K. sterling and the Euro as compared to the same period in 2003 accounted for approximately $16.0 million of the increase in net premiums earned for the three months ended September 30, 2004.

     Fee income and other increased in the third quarter of 2004 compared to the same quarter in 2003 primarily due to gains recorded on the sale of property in London combined with increased risk engineering fees.

     Exchange gains in the quarter ended September 30, 2004 were primarily due to the slight strengthening of the Euro and Swiss Franc against the U.S. dollar in those entities with those functional currencies and which are exposed to net U.S. dollar liabilities.

     The following table presents the ratios for this segment:

	(Unaudited)
	Three Months Ended
	September 30,
	2004	2003
Loss and loss expense ratio	83.2%	61.4%
Underwriting expense ratio	27.3%	27.5%
Combined ratio	110.5%	88.9%

     The loss and loss expense ratio includes net losses incurred for both the current year and any adverse or favorable prior year development of loss and loss reserves held at the beginning of the year. The loss ratio for the three months ended September 30, 2004 increased compared with the three months ended September 30, 2003 primarily due to net hurricane losses of $188.0 million incurred in the property and marine lines of business. Hurricanes Charley, Frances, Ivan and Jeanne combined to increase the loss ratio by 18.4%. The current quarter losses also included approximately $89.0 million in net prior period reserve strengthening related to professional lines of business, and liability claims associated with the September 11 event.

     The underwriting expense ratio for the quarter ended September 30, 2004 remained relatively flat compared to the same period in 2003 as the acquisition expense ratio decreased by 1.8 points (13.7% as compared to 15.5%) and the operating expense ratio increase by 1.6 points (13.6% as compared to 12.0%). The reduction in the acquisition expense ratio was due primarily to a change in the mix of business earned during the quarter compared to the same quarter in the prior year. The operating expense ratio increase resulted from a combination of increased corporate allocations, growth of new lines of business and adverse foreign exchange effects.

Reinsurance

Reinsurance — General Operations

     General reinsurance business written includes casualty, property, accident and health and other specialty reinsurance on a global basis. The Company’s property reinsurance business generally has loss experience characterized as low frequency and high severity that can have a negative impact on the Company’s results of operations, financial condition and liquidity. The Company manages its exposures to catastrophic events by limiting the amount of its exposure in each geographic zone worldwide and requiring that its property catastrophe contracts provide for aggregate limits and varying attachment points.

33

     The following table summarizes the underwriting results for the general operations of this segment:

(U.S. dollars in thousands)
	(Unaudited)
	Three Months Ended
	September 30,
	2004	2003	% Change
Gross premiums written	$660,880	$781,872	(15.5)%
Net premiums written	511,383	670,356	(23.7)%
Net premiums earned	798,338	667,856	19.5 %
Fee income and other	(148)	1,865	(107.9)%
Net losses and loss expenses	667,966	558,047	19.7 %
Acquisition costs	170,984	152,978	11.8%
Operating expenses	44,849	33,411	34.2%
Exchange (gains) losses	(7,305)	(247)	NM
Underwriting (loss) profit	$(78,304)	$ (74,468)	(5.2)%

* NM — Not Meaningful

     Gross and net premiums written decreased 15.5% and 23.7%, respectively, in the third quarter of 2004 as compared to the third quarter of 2003. The decrease in gross written premiums was experienced across most lines but most significantly in the Bermuda and U.S. property and casualty businesses and the Latin American property business. The decreases in the U.S. and Bermuda reflect changes in the renewal timing of several large policies. The decrease in the Latin American business is primarily as a result of the non-renewal of several large property programs in Mexico. Favorable foreign exchange movements also contributed approximately $9.2 million to gross written premiums. Net written premiums reflected the above changes in gross premiums written.

     Net premiums earned in the third quarter of 2004 increased 19.5% as compared to the third quarter of 2003 due primarily to growth in the earning of net written premiums over the last year, most notably in casualty and professional lines of business. Net premiums earned for casualty and professional reinsurance lines combined was $362.6 million in the third quarter of 2004 as compared to $260.6 million in the same period in 2003. In addition, $12.9 million of reinstatement premiums were earned in the quarter related to the hurricane losses reported.

     The following table presents the ratios for this segment:

	(Unaudited)
	Three Months Ended
	September 30,
	2004	2003
Loss and loss expense ratio	83.7%	83.6%
Underwriting expense ratio	27.0%	27.9%
Combined ratio	110.7%	111.5%

     The loss and loss expense ratio includes net losses incurred for both the current year and any adverse or favorable prior year development of loss reserves held at the beginning of the year. The increase in the loss and loss expense ratio in the quarter ended September 30, 2004 compared to the same quarter in 2003 primarily resulted from the losses relating to hurricanes Charley, Frances, Ivan and Jeanne, from which the segment incurred a combined $258.8 million of net losses and $284.2 million in gross losses. These hurricane losses contributed 31.6% to the segment loss ratio for the quarter. The quarter ended September 30, 2003 included adverse prior period development primarily related to the Company’s North American casualty business of $184.0 million.

     The decrease in the underwriting expense ratio in the third quarter of 2004 as compared with the third quarter of 2003 was primarily due to a slight decrease in the acquisition expense ratio to 21.4% as compared to 22.9% in the third quarter of 2003. This decrease was mainly due to a combination of minor changes in product mix and reinstatement premiums having no associated acquisition costs.

34

     Exchange gains in the three months ended September 30, 2004 were mainly attributable to an overall weakening in the value of the U.S. dollar against U.K. Sterling and the Euro in those operations with U.S. dollars as their functional currency and net non-U.S. dollar assets.

Reinsurance — Life and Annuity Operations

     Life and annuity business written by the reinsurance operations is primarily European life reinsurance. This includes term assurances, group life, critical illness cover, immediate annuities and disability income business. Due to the nature of these contracts, premium volume may vary significantly from period to period.

     The following summarizes net income from life and annuity operations in the segment:

(U.S. dollars in thousands)
	(Unaudited)
	Three Months Ended
	September 30,
	2004	2003	% Change
Gross premiums written	$73,467	$63,551	15.6%
Net premiums written	72,725	60,485	20.2%
Net premiums earned	72,943	62,600	16.5%
Claims and policy benefits	99,163	81,460	21.7%
Acquisition costs	14,239	6,880	107.0%
Operating expenses	3,662	2,012	82.0%
Exchange gains	(966)	2,648	(136.5)%
Net investment income	57,166	35,446	61.3%
Interest expense	(94)	—	NM
Net income from life and annuity operations	$14,105	$ 5,046	179.5%

* NM — Not Meaningful

     Gross and net premiums written, net premiums earned and claims and policy benefits increased in the third quarter of 2004 as compared to the third quarter of 2003. The increases relate primarily to several premium term assurance treaties entered into in the fourth quarter of 2003, which generated further written premiums in the current quarter. The increase in percentage of net premiums written to gross premiums written was primarily due to the termination of a retrocession agreement with an insurance affiliate in the third quarter of 2003.

     Claims and policy benefits also increased moderately in line with the growth in underlying business. Changes in claims and policy benefits also include the movement in policy benefit reserves related to contracts where investment assets were acquired with the assumption of the policy benefit reserves at the inception of the contract.

     Acquisition costs increased in the third quarter of 2004 as compared to the third quarter of 2003 due to accrual of profit commissions on certain treaties in the U.K., together with an adjustment to deferred acquisition costs in Europe. Operating expenses in the third quarter of 2004 have increased compared to the same period in the prior year primarily due to the costs associated with the start up of US life reinsurance operations.

     Net investment income is included in the calculation of net income from life and annuity operations as it relates to income earned on portfolios of separately identified and managed life investment assets and other allocated assets. Several new large annuity contracts have been written since the third quarter of 2003, which significantly increased the invested assets relating to these operations.

35

Financial Products and Services

Financial Products and Services — Financial Operations

     Financial Products and Services — Financial Operations’ business written includes insurance, reinsurance and derivative solutions for complex financial risks including financial guaranty insurance and reinsurance and weather and energy risk management products. Many of these transactions are unique and tailored to the specific needs of the insured or user.

     Financial guaranty insurance and reinsurance generally guarantees payments of interest and principal on an issuer’s obligations when due. Obligations guaranteed or enhanced by the Company range in duration and premiums are received either on an installment basis or upfront. Guaranties written in derivative form provide coverage for losses upon the occurrence of specified credit events set forth in the swap documentation.

     The Company’s weather and energy risk management products are customized solutions designed to assist corporate customers, primarily energy companies and utilities, to manage their financial exposure to variations in underlying weather conditions and related energy markets. The Company may use the capital markets to hedge portions of these risks written.

     The following table summarizes the contribution for this segment:

(U.S. dollars in thousands)
	(Unaudited)
	Three Months Ended
	September 30,
	2004	2003	% Change
Gross premiums written	$59,605	$91,642	(35.0)%
Net premiums written	52,748	89,585	(41.1)%
Net premiums earned	56,471	35,307	59.9%
Fee income and other	1,373	(655)	NM
Net losses and loss expenses	52,207	3,894	NM
Acquisition costs	3,588	4,969	(27.8)%
Operating expenses	18,707	10,467	78.7%
Exchange (gains) losses	(122)	—	NM
Underwriting (loss) profit	$(16,536)	$ 15,322	NM
Net investment income — financial guarantee	$ 9,773	$ 5,461	79.0%
Net realized and unrealized (losses) gains on weather and
energy derivatives	(186)	(10,528)	(98.2)%
Operating expenses — weather and energy	6,702	4,771	40.5%
Net income from financial affiliates	10,162	12,078	(15.9)%
Minority interest	1,247	2,588	(51.8)%
Net realized and unrealized (losses) gains on
credit default swaps	(1,919)	(1,752)	(9.5)%
Net contribution from financial operations	$ (6,655)	$ 13,222	(150.3)%

* NM — Not Meaningful

     Gross and net premiums written primarily relate to the financial guaranty line of business and reflect premiums received and accrued for in the period and do not include the present value of future cash receipts expected from installment premium policies written in the period. Decreases in gross and net premiums written of 35.0% and 41.1%, respectively, in the third quarter of 2004 as compared to the same period in 2003 were primarily due to the absence, in the current quarter, of several large upfront premium contracts written in the third quarter of 2003, in addition to market conditions which continue to be driven by credit spread compression and increased competition.

36

     Net premiums earned in the third quarter of 2004 have increased compared to the same period in 2003 due to the accelerated earning of unearned premium of $23.3 million on a transaction in which a large loss was recorded in the quarter as discussed below with respect to “Net losses and loss expenses”. Premiums earned do not include premiums on contracts written in derivative form, which are included in “Net realized and unrealized gains (losses) on credit default swaps”.

     As with the Company’s property and casualty insurance and reinsurance operations, net losses and loss expenses include current year net losses incurred and adverse or favorable development of prior year net loss and loss expenses reserves. During the quarter, the Company recorded a provision for losses of approximately $41.7 million, representing the present value of a $50.0 million loss to the subordinate layer of an insured project financing structure. There is currently no payment default with respect to this transaction. Management continues to monitor the exposure and will revise the loss estimates as necessary, as information becomes available. Overall, net losses and loss expenses in the quarter ended September 30, 2004 increased compared to the same period in 2003 primarily as a result of the provision noted above.

     In the three months ended September 30, 2004, amortization of deferred acquisition costs decreased compared with the same period in the prior year as a result of the changing mix of business and resultant slower run-off of in-force business.

     Operating expenses increased in the third quarter of 2004 as compared to the third quarter of 2003 due to costs incurred in connection with the build out of infrastructure supporting the Company’s financial guaranty business over the last year, as well as an increase in the allocation of certain corporate expenses.

     Net investment income related to the financial guaranty business increased in 2004 due to an expanded investment asset basis resulting from premium receipts and a $100.0 million capital infusion to this business in the fourth quarter of 2003.

     The net realized and unrealized positions on weather and energy risk management derivative instruments resulted in a small loss in the quarter ended September 30, 2004 as a result of the relatively cool summer in the U.S. Midwest, compared to much larger losses in the same quarter in 2003 related to large exposures to the natural gas market. In the period since September 30, 2003, the positions and activity in the gas area have been significantly reduced, those in the weather area have been increased slightly, and new contingent risk products were introduced.

     Net income from financial affiliates decreased in the third quarter of 2004, as compared to the third quarter of 2003 due primarily to the Company’s investment in Primus Guaranty, Ltd (“Primus”). Primus specializes in providing credit risk protection through credit derivatives. Primus recorded less income in the quarter as a result of a smaller mark to market gain in the current quarter compared to the prior year. This decrease was partially offset by a gain on the sale of a portion of the Primus investment of $2.8 million.

     The decrease in minority interest expense in the third quarter of 2004, compared to the third quarter of 2003, was due to a decrease in the current quarter profits of XL Financial Assurance Ltd., of which 15% is held by a minority shareholder.

     The Company’s credit derivative transactions relate primarily to financial guaranty coverage that is written in swap form and pertains to tranches of collateralized debt obligations and asset backed securities. The net realized and unrealized losses in the quarter ended September 30, 2004 includes the fair value adjustment for such transactions, as well as the premiums earned from such transactions. These losses were mainly unrealized and related to effects of several large individual credit events offset by the improvement in credit quality of certain credit pools and the general tightening of spreads in the period. Also included in this fair value change is $5.0 million of earnings on premium received in the quarter. The Company continues to monitor its credit exposures and cash flows and adjust the fair value of these derivatives as required.

37

Financial Products and Services — Life and Annuity Operations

     The Company commenced writing life business in this segment in the fourth quarter of 2002. The Company writes municipal reinvestment contracts, funding agreements and institutional life products.

     The Company commenced writing municipal reinvestment contracts in 2002 and funding agreements in 2003 whereby the Company receives deposits at contractual interest rates. The Company has investment risk related to its ability to generate sufficient investment income to enable the total invested assets to cover the payment of the estimated ultimate liability.

     The following summarizes net income (loss) from life and annuity operations in the segment:

(U.S. dollars in thousands)
	(Unaudited)
	Three Months Ended
	September 30,
	2004	2003	% Change
Gross premiums written	$24,417	$25,437	(4.0)%
Net premiums written	24,435	23,811	2.6%
Net premiums earned	24,435	23,828	2.5%
Fee income and other	317	62	NM
Claims and policy benefits	28,784	18,494	55.6%
Acquisition costs	5,957	4,537	31.3%
Operating expenses	2,267	2,083	8.8%
Net investment income	22,254	7,690	189.4%
Interest expense	14,815	3,304	NM
Net income from life and annuity operations	$(4,817)	$ 3,162	NM

* NM — Not Meaningful

     In December 2002, certain blocks of U.S.-based mortality reinsurance business written were novated to the Company from an insurance affiliate. Gross and net premiums earned, claims and policy benefit reserves and acquisition costs are all related to this novated block of business. During the quarter ended September 30, 2003, the Company exercised its right and terminated a retrocession agreement relating to certain of these exposures. These treaties continue to generate premiums consistent with the levels generated in 2003. In the quarter ended September 30, 2004 approximately $10.3 million in additional claims and policy benefit reserves were recorded related to this block of business due to the combination of adverse claim experience in the quarter and a reserve increase that reflected improved in-force policy data.

     Net investment income and interest expense relate to municipal reinvestment contracts and funding agreements transactions. The increase in investment income and the related interest expense were due to the initiation of funding agreements in the second quarter of 2003 combined with increases in the average balances outstanding related to the book of municipal reinvestment contracts. The balances outstanding for funding agreements and municipal reinvestment contracts have increased from $0.6 billion and $1.1 billion, respectively, as at September 30, 2003 to $0.9 billion and $2.2 billion, respectively, as at September 30, 2004.

38

Investment Activities

     The following table illustrates the change in net investment income from general operations, equity in net income of investment affiliates, net realized gains and losses on investments and net realized and unrealized gains and losses on investment derivatives from general operations for the quarters ended September 30, 2004 and 2003:

(U.S. dollars in thousands)
	(Unaudited)
	Three Months Ended
	September 30,
	2004	2003	% Change
Net investment income — general operations	$163,883	$142,166	15.3%
Net income from investment affiliates	47,283	26,240	80.2%
Net realized gains (losses) on investments	57,015	(8,693)	NM
Net realized and unrealized losses on investment       derivative instruments — general operations	(17,482)	(16,066)	8.8%

* NM — Not Meaningful

     Net investment income related to general operations increased in the third quarter of 2004 as compared to the third quarter of 2003 due primarily to a higher investment base. The growth in the investment base reflected the Company’s cash flow from operations and capital raising activities. The market yield to maturity on the total fixed income portfolio was 3.9% at September 30, 2004, and September 30, 2003.

     Net income from investment affiliates increased in the third quarter of 2004 compared to the third quarter of 2003. In the third quarter of 2004, the Company experienced strong performance in the financial results of the investment managers where the Company has a minority stake. This quarter’s earnings benefited from a gain from the sale of the Company’s stake in Pareto Partners and its affiliated companies of $35.4 million. However, the Company’s returns from its fund investment affiliates were marginally positive for the quarter as a result of difficult investment conditions in the majority of capital markets.

     The Company manages portfolios consisting of structured portfolios (i.e., assets supporting deposit liabilities and future policy benefit reserves) and Asset/Liability portfolios, where, due to the unique nature of the underlying liabilities, customized liability-based benchmarks are used to measure performance. The Company also manages Risk Asset portfolios, which constitute approximately 10% of the Company’s invested assets. These are compared to applicable public indices. The following is a summary of the investment performance for the Risk Asset portfolios for the quarters ended September 30, 2004 and September 30, 2003, respectively:

	(Unaudited)
	Three Months Ended
	September 30,
	2004	2003
Risk Asset Portfolios — Fixed Income
U.S. High Yield	2.5%	2.8%
CS First Boston High Yield Index	4.5%	3.0%
Relative Performance	(2.0)%	(0.2)%
Risk Asset Portfolios — Equities
U.S. Large Cap Growth Equity	N/A	4.0%
Russell 1000 Growth Index (Note 1)	N/A	3.9%
Relative Performance	N/A	0.1%
U.S. Large Cap Value Equity	N/A	3.6%
Russell 1000 Value Index (Note 1)	N/A	2.0%
Relative Performance	N/A	1.6%

39

	(Unaudited)
	Three Months Ended
	September 30,
	2004	2003
U.S. Large Cap Equity	(0.7)%	N/A
Russell 1000 Index (Note 1)	(1.9)%	N/A
Relative Performance	1.2%	N/A
U.S. Small Cap Equity	(4.0)%	9.7%
Russell 2000 Index	(2.9)%	9.0%
Relative Performance	(1.1)%	0.7%
Non-U.S. Equity	1.7%	11.2%
MSCI ACWI ex US Index (Note 2)	1.0%	8.1%
Relative Performance	0.7%	3.1%
Risk Asset Portfolios — Alternative Investments
Alternative Investments — (Note 3)	0.2%	0.9%
Standard and Poor’s 500 Index — (Note 3)	(1.0)%	5.1%
Relative Performance	1.2%	(4.2)%

Note 1 —	Equity portfolios previously managed relative to the Russell 1000 Growth Index and the Russell 1000 Value Index are now managed relative to the Russell 1000 Index with effect from July 1, 2004.
Note 2 —	The benchmark for the Non-U.S. Equity portfolios changed from the MSCI EAFE to the MSCI ACWI ex US Index in the second quarter of 2004. Comparative figures reflect the previous index.
Note 3 —	Alternative investments are priced one month in arrears; however, cash flows are reflected in the current reporting period. For comparative purposes the Standard & Poor’s 500 Index returns are lagged one month.

NET REALIZED GAINS AND LOSSES AND OTHER THAN TEMPORARY DECLINES
IN THE VALUE OF INVESTMENTS

     Net realized gains on investments in the third quarter of 2004 included net realized gains of $59.1 million from sales of investments and net realized losses of approximately $2.1 million related to the write-down of certain of the Company’s fixed income and equity investments where the Company determined that there was an other than temporary decline in the value of those investments.

     Net realized losses on investments in the third quarter of 2003 included net realized losses of $3.7 million from sales of investments and net realized losses of approximately $5.0 million related to the write-down of certain of the Company’s fixed income and equity investments where the Company determined that there was an other than temporary decline in the value of those investments.

     The Company’s process for identifying declines in the fair value of investments that are other than temporary involves consideration of several factors. These factors include: (i) the time period during which there has been a significant decline in value; (ii) an analysis of the liquidity, business prospects and overall financial condition of the issuer; (iii) the significance of the decline; (iv) an analysis of the collateral structure and other credit support, as applicable, of the securities in question; and (v) the Company’s intent and ability to hold the investment for a sufficient period of time for the value to recover. Where the Company’s analysis of the above factors results in the Company’s conclusion that declines in fair values are other than temporary, the cost of the security is written down to fair value and the previously unrealized loss is therefore realized.

     Net realized and unrealized losses on investment derivatives for the quarter resulted from the Company’s investment strategy to economically hedge against interest and foreign exchange risk within the investment portfolio.

40

NET UNREALIZED GAINS AND LOSSES ON INVESTMENTS

     At September 30, 2004, the Company had net unrealized gains on fixed income securities of $465.9 million and net unrealized gains on equities of $75.0 million. Of these amounts, gross unrealized losses on fixed income securities and equities were $92.6 million and $15.7 million, respectively. The information presented below for the gross unrealized losses on the Company’s investments at September 30, 2004 shows the potential effect upon the Company’s future earnings and financial position should management later conclude that some of the current declines in the fair value of these investments are other than temporary.

     At September 30, 2004, approximately 4,600 fixed income securities out of a total of approximately 15,900 securities were in an unrealized loss position. The largest unrealized loss in the fixed income portfolio was $5.7 million. The number of fixed income securities in an unrealized loss position decreased from 7,200 individual securities with total unrealized losses of $281.8 million at June 30, 2004. This decrease was a result of a decrease in prevailing market rates during the quarter. Approximately 400 equity securities out of a total of approximately 1,500 securities were in an unrealized loss position at September 30, 2004 with the largest individual loss being $1.8 million.

     The following is an analysis of how long each of those securities with an unrealized loss at September 30, 2004 had been in a continual unrealized loss position:

(U.S. dollars in thousands)
			(Unaudited)
		(Unaudited)	Fair value of securities
	Length of time in a continual	Amount of unrealized	in unrealized loss position
Type of Securities	unrealized loss position	loss at September 30, 2004	at September 30, 2004
Fixed Income and
Short-Term	Less than six months	$11,734	$3,133,338
	At least 6 months but less than 12 months	48,827	3,889,920
	At least 12 months but less than 2 years	30,894	908,374
	2 years and over	1,171	18,495
	Total	$92,626	$7,950,127
Equities	Less than six months	$ 9,227	$209,784
	At least 6 months but less than 12 months	5,071	25,427
	At least 12 months but less than 2 years	1,376	19,436
	2 years and over	33	283
	Total	$15,707	$254,930

     At September 30, 2004, the following was the maturity profile of the fixed income securities that were in a gross unrealized loss position:

(U.S. dollars in thousands)
		(Unaudited)
Maturity profile in years of fixed	(Unaudited)	Fair value of securities
income securities in a gross	Amount of unrealized loss at	in unrealized loss position
unrealized loss position	September 30, 2004	at September 30, 2004
Less than 1 year remaining	$ 1,276	$ 615,359
1 or more years and less than 5 years remaining	14,646	2,347,247
5 or more years and less than 10 years remaining	19,788	1,116,114
10 or more years and less than 20 years remaining	15,763	455,534
20 years or more remaining	13,346	681,704
Mortgage backed securities	27,807	2,734,169
Total	$92,626	$7,950,127

     The Company operates a risk asset portfolio that includes high yield (below investment grade) fixed income securities. These represented approximately 4.5% of the total fixed income portfolio market value at September 30, 2004. The change in fair value of these securities has a higher volatility than investment grade securities. Of the total

41

gross unrealized losses in the Company’s fixed income portfolio at September 30, 2004, $9.9 million related to securities that were below investment grade or not rated. The following is an analysis of how long each of these below investment grade and unrated securities had been in a continual unrealized loss position at the date indicated:

(U.S. dollars in thousands)
		(Unaudited)
	(Unaudited)	Fair value of securities
	Amount of unrealized loss at	in unrealized loss position
Length of time in a continual unrealized loss position	September 30, 2004	at September 30, 2004
Less than six months	$5,596	$888,880
At least 6 months but less than 12 months	3,043	69,732
At least 12 months but less than 2 years	792	13,962
2 years or more	487	4,507
Total	$9,918	$977,081

Other Revenues and Expenses

     The following table sets forth other revenues and expenses for the three months ended September 30, 2004 and 2003:

(U.S. dollars in thousands)
	(Unaudited)
	Three Months Ended
	September 30,
	2004	2003	% Change
Net income (loss) from insurance affiliates	$61,164	$ —	NM
Amortization of intangible assets	3,256	375	NM
Corporate operating expenses	49,537	41,383	19.7%
Interest expense	56,991	46,367	22.9%
Income tax expense	10,342	14,890	30.5%

* NM — Not Meaningful

     The increase in net income from insurance affiliates includes $66.7 million in gain on the sale of the Company’s investment in the Admiral Group Ltd.

     Corporate operating expenses in the third quarter ended September 30, 2004 increased compared to the three months ended September 30, 2003 due to the continued build out of the Company’s global infrastructure in developing its network of shared service organizations to support operations in certain locations, costs related to compliance with the Sarbanes-Oxley Act, and adverse foreign exchange impacts.

     The increase in interest expense primarily reflected the additional interest expense related to the 2.53% Senior Notes portion of the 6.5% Equity Units issued in March 2004 described under “Liquidity and Capital Resources” below, and the 5.25% Senior Notes issued in August of 2004, and partially offset by the redemption of the LYONs. For more information on the Company’s financing structure, see “Financial Condition, Liquidity and Capital Resources” below.

     The decrease in the Company’s income taxes arose principally from decreased profitability of the Company’s U.S. and European operations primarily as a result of hurricane losses in the quarter.

42

Segment Results for the nine months ended September 30, 2004 compared to the nine months ended
September 30, 2003

Insurance

     The following table summarizes the underwriting results for this segment:

(U.S. dollars in thousands)
	(Unaudited)
	Nine Months Ended
	September 30,
	2004	2003	% Change
Gross premiums written	$4,592,691	$4,042,253	13.6%
Net premiums written	3,395,577	2,843,306	19.4%
Net premiums earned	3,066,619	2,747,163	11.6%
Fee income and other	17,165	6,365	169.7%
Net losses and loss expenses	2,143,496	1,684,825	27.2%
Acquisition costs	422,620	422,828	0.0%
Operating expenses	406,549	321,977	26.3%
Exchange (gains) losses	(7,422)	(5,709)	30.0%
Underwriting profit	$ 118,541	$ 329,607	(64.0)%

* NM — Not Meaningful

     Gross and net premiums written increased by 13.6% and 19.4%, respectively, in the nine months ended September 30, 2004 compared with the nine months ended September 30, 2003. These increases are primarily due to new business written across most lines and favorable foreign exchange movements. The most significant growth due to new business was seen in casualty and professional lines of business combined with several new product offerings in the professional liability and property catastrophe lines. The new insurance initiatives added, in total, approximately $225.0 million to gross written premium for the first nine months of the year. The strengthening of the U.K. sterling and the Euro against the U.S. dollar as compared to the first nine months of 2003 accounted for approximately $163.0 million of the increase in gross premiums written in the nine months ended September 30, 2004. Partially offsetting the growth in net and gross premiums written in 2004 were rate reductions in most property lines and growing rate pressures on most casualty lines. Net premiums written have grown by a larger percentage than gross premiums written primarily as a result of ceded reinsurance commutations related to professional lines.

     Net premiums earned increased by 11.6% in the nine months ended September 30, 2004 compared with the nine months ended September 30, 2003. The increase was due to the earning of additional net premiums written in the current and prior year combined with an increase in net retentions as a result of a ceded reinsurance commutation noted above. Growth in net premiums earned was partially offset by several non-renewed portfolios as the earned premium impact of the non-renewed business lags behind the written premium impact.

     The following table presents the ratios for this segment:

	(Unaudited)
	Nine Months Ended
	September 30,
	2004	2003
Loss and loss expense ratio	69.9%	61.3%
Underwriting expense ratio	27.0%	27.1%
Combined ratio	96.9%	88.4%

     The loss and loss expense ratio includes net losses incurred for both the current year and any adverse or favorable prior year development of loss and loss reserves held at the beginning of the year. The loss ratio for the nine months ended September 30, 2004 increased compared with the nine months ended September 30, 2003 primarily due to net hurricane losses of $188.0 million in the property and marine lines. Hurricanes Charley, Frances, Ivan and

43

Jeanne combined to increase the loss ratio for the first nine months of the year by 6.4%. Losses for the first nine months of the year also included approximately $129.0 million in net prior period reserve strengthening related to professional lines of business, and liability claims associated with the September 11 event.

     The underwriting expense ratio in the nine months ended September 30, 2004 compared to the same period in 2003 was flat as an increase in the operating expense ratio of 1.4 points (13.3% as compared to 11.7%) was offset by a reduction in the acquisition expense ratio of 1.7 points (13.7% as compared to 15.4%). The increase in the operating expense ratio was due primarily to the increased costs associated with supporting new business growth in the segment operations globally and in particular the start up operations, an allocation of certain corporate expenses to the segment as well as the impact of foreign exchange movements. The reduction in the acquisition expense ratio was due primarily to a change in the mix of business earned compared to the same period in the prior year.

Reinsurance

Reinsurance — General Operations

     The following table summarizes the underwriting results for the general operations of this segment:

(U.S. dollars in thousands)
	(Unaudited)
	Nine Months Ended
	September 30,
	2004	2003	% Change
Gross premiums written	$2,973,480	$2,912,445	2.1%
Net premiums written	2,537,199	2,452,085	3.5%
Net premiums earned	2,205,815	1,817,957	21.3%
Fee income and other	5,956	19,658	(69.7)%
Net losses and loss expenses	1,467,747	1,285,385	14.2%
Acquisition costs	488,817	399,193	22.5%
Operating expenses	137,672	104,665	31.5%
Exchange gains	(13,192)	(23,455)	(43.8)%
Underwriting profit	$ 130,727	$ 71,827	82.0%

     Gross written premium increased slightly in the first nine months of 2004 as compared to the same period in 2003. Growth in gross premiums written was seen primarily in the U.S. casualty and property lines of business. These increases reflect increases in volume of new and renewal business combined with underlying rate improvements in the U.S. and London casualty portfolio which was partially offset by rate decreases across U.S. property and professional lines. Some international property rates also saw reductions but to a lesser extent. Favorable foreign exchange movements also contributed to the growth in gross written premiums. Net written premiums reflect the above gross changes, together with higher retentions, including approximately $49.0 million of quota share premiums from XL Re Europe (previously Le Mans Re) previously ceded but now retained within the group.

     Net premiums earned in the first nine months of 2004 increased 21.3% as compared to the same period in 2003, due primarily to the earning of net written premium growth in the last year, most notably in casualty and professional lines of business. Net premiums earned for casualty and professional reinsurance lines combined was $968.7 million in the first nine months of 2004 as compared to $715.3 million in the same period in 2003.

44

     The following table presents the ratios for this segment:

	(Unaudited)
	Nine Months Ended
	September 30,
	2004	2003
Loss and expense ratio	66.5%	70.7%
Underwriting expense ratio	28.4%	27.7%
Combined ratio	94.9%	98.4%

     The loss and loss expense ratio includes net losses incurred for both the current year and any adverse or favorable prior year development of loss reserves held at the beginning of the year. The decrease in the loss and loss expense ratio in the nine months ended September 30, 2004 compared to the same period in 2003 is primarily due to the fact that the nine months ended September 30, 2003 included significant adverse prior period development related to the Company’s North American casualty business. The current quarter experienced losses resulting from the hurricanes Charley, Frances, Ivan and Jeanne, from which the segment incurred a combined $258.8 million of net losses. These hurricane losses contributed 11.4% to the segment loss ratio for the nine months ended September 30, 2004. Hurricane losses were partially offset by lower than expected incurred loss development in the first nine months of the year relating to recent underwriting years and price improvements on earned premiums from prior periods.

     The increase in the underwriting expense ratio in the nine months ended September 30, 2004 as compared with the same period in 2003 was primarily due to an increase in the operating expense ratio resulting from additional allocations of corporate expenses as well as the continued build up of the European reinsurance platform.

Reinsurance — Life and Annuity Operations

     The following summarizes net income from life operations:

(U.S. dollars in thousands)
	(Unaudited)
	Nine Months Ended
	September 30,
	2004	2003	% Change
Gross premiums written	$1,135,962	$213,884	NM
Net premiums written	1,135,134	198,215	NM
Net premiums earned	1,137,279	202,442	NM
Fee income and other	93	—	NM
Claims and policy benefits	1,201,407	264,996	NM
Acquisition costs	26,078	20,749	25.7%
Operating expenses	10,342	6,233	65.9%
Exchange gains	(1,912)	(966)	NM
Net investment income	146,716	100,590	45.9%
Interest expense	23	—	NM
Net income from life operations	$ 48,150	$ 12,020	NM

* NM — Not Meaningful

     Gross and net premiums written as well as net premiums earned and claims and policy benefits increased significantly in the first nine months of 2004 as compared to the same period in 2003 primarily as a result of a large immediate annuity portfolio contract bound in the second quarter, representing $898.0 million in net premium earned. In addition, the Company wrote several new regular premium term assurance contracts in the fourth quarter of 2003, which generated further premiums written in the current quarter and will impact subsequent quarters. The increase in percentage of net premiums written to gross premiums written was primarily due to the termination of a retrocession agreement with an insurance affiliate in the third quarter of 2003.

45

     Claims and policy benefits also increased significantly as a result of the annuity payout liabilities accepted under the contract noted above. Changes in claims and policy benefits also included the movement in policy benefit reserves related to other contracts where investment assets were acquired with the assumption of the policy benefit reserves at the inception of the contract.

     Acquisition costs increased in the first nine months of 2004 as compared to the first nine months of 2003 due to accrual of profit commissions on certain treaties in the U.K., together with an adjustment to deferred acquisition costs in Europe. Operating expenses increased in the first nine months of 2004 compared to the first nine months of 2003 reflecting the build out of existing operations and start-up costs of new Life operations in the U.S.

     Net investment income increased in the first nine months of 2004 compared to the first nine months of 2003 reflecting the increase in life business invested assets primarily arising from new large annuity contracts written since September 30, 2003.

Financial Products and Services

Financial Products and Services — Financial Operations

     The following table summarizes the underwriting results for this segment:

(U.S. dollars in thousands)
	(Unaudited)
	Nine Months Ended
	September 30,
	2004	2003	% Change
Gross premiums written	$191,282	$242,674	(21.2)%
Net premiums written	176,932	238,047	(25.7)%
Net premiums earned	123,083	98,087	25.5%
Fee income and other	2,202	(146)	NM
Net losses and loss expenses	61,737	26,177	135.8%
Acquisition costs	12,221	14,008	(12.8)%
Operating expenses	51,909	32,773	58.4%
Foreign exchange (gains) losses	(122)	—	NM
Underwriting profit	$ (460)	$ 24,983	(101.8)%
Net investment income — financial guarantee	$ 26,778	$ 16,134	66.0%
Net realized and unrealized (losses) gains on weather
and energy derivatives	(4,802)	5,105	NM
Operating expenses — weather and energy	20,643	15,581	32.5%
Net income (loss) from financial affiliates	8,959	29,254	(69.4)%
Minority interest	8,334	7,886	5.7%
Net realized and unrealized gains (losses) on credit
default swaps	37,730	(23,682)	NM
Net contribution from financial operations	$ 39,228	$ 28,327	38.5%

* NM — Not Meaningful

     Gross and net premiums written primarily relate to the financial guaranty line of business and reflect premiums received and accrued for in the period and do not include the present value of future cash receipts expected from installment premium policies written in the period. Decreases in gross and net premiums written of 21.2% and 25.7%, respectively, in the first nine months of 2004 as compared to the same period in 2003 were primarily due to the combination of conscious underwriting discipline during generally weaker market conditions and the absence in the period of several large upfront premium contracts written in 2003. Market conditions are being driven by credit spread compression, higher interest rates, increased competition and reduced public financing.

46

     The increase in net premiums earned as compared to the prior year period is primarily due to the accelerated earnings of unearned premium of $23.3 million relating to the large loss with respect to an insured project financing structure discussed below. In addition, financial guaranty premiums earn out over the life of the underlying exposures, which are typically longer than the risk periods related to the Company’s insurance and reinsurance general operations. Premiums earned do not include premiums on contracts written in derivative form, which are included in “Net realized and unrealized gains (losses) on credit default swaps”.

     As with the Company’s property and casualty insurance and reinsurance operations, net losses and loss expenses include current year net losses incurred and adverse or favorable development of prior year net loss and loss expenses reserves. During the third quarter of 2004, the Company recorded a provision for losses of approximately $41.7 million, representing the present value of a $50.0 million loss expected to be incurred in the future with respect to the subordinate layer of an insured project financing structure. No event of default has yet occurred. Management continues to monitor the exposure and will revise its loss estimates as necessary, as information becomes available. Overall net losses and loss expenses in the nine months ended September 30, 2004 increased by $35.6 million compared to the same period in 2003. This increase was primarily a result of the loss noted above offset by the release of prior period reserves related to financial guaranty exposures due to the underlying in force policies approaching maturity, and the absence of several large credit events in the same period in 2003.

     In the nine months ended September 30, 2004 acquisition costs decreased compared with the same period in the prior year as a result of a change in average term over which the acquisition costs are being expensed.

     Operating expenses increased in the first nine months of 2004 as compared to the first nine months of 2003 due to the investment in segment infrastructure over the last year as well as an increase in the allocation of certain corporate expenses.

     Net investment income related to the financial guaranty business increased in 2004 due to the larger investment portfolio created by growth in premium receipts and a $100.0 million capital infusion to this business in the fourth quarter of 2003.

     The net realized and unrealized positions on weather and energy risk management derivative instruments resulted in a loss in the nine months ended September 30, 2004 as compared to a significant gain in the same period in 2003. During the first half of 2004, the winter weather and gas portfolios experienced losses due to higher than expected temperature volatility and costs associated with exiting natural gas positions. In the period since September 30, 2003, the positions and activities in the gas area have been significantly reduced, those in the weather area have been increased slightly, and new contingent risk products were introduced.

     Net income from financial affiliates decreased in the first nine months of 2004 as compared to the first nine months of 2003 due primarily to the Company’s investment in Primus. Primus specializes in providing credit risk protection through credit derivatives. Primus had a mark-to-market adjustment in the period which was less favourable than that recorded in the same period last year. This decrease was partially offset by a gain on the sale of a portion of the Primus investment.

     The increase in minority interest in 2004 compared to 2003 is due to an increase in the profitability of XL Financial Assurance Ltd., of which 15% is held by a minority shareholder.

     The Company’s credit derivative transactions relate primarily to financial guaranty coverage that is written in swap form and pertains to tranches of collateralized debt obligations and asset backed securities. The net realized and unrealized gains in the nine months ended September 30, 2004 related to the fair value adjustment for transactions written in derivative form as well as the premiums earned associated with these transactions. These gains were mainly unrealized and related to the improvement of credit quality for certain credit pools. In the first nine months of 2003 the opposite conditions existed and the fair value change was negative. These positive market movements were partially offset by several individual credit events in the current quarter. The Company continues to monitor its credit exposures and adjust the fair value of these derivatives as required.

47

Financial Products and Services — Life and Annuity Operations

     The following table summarizes net income from life operations:

(U.S. dollars in thousands)
	(Unaudited)
	Nine Months Ended
	September 30,
	2004	2003	% Change
Gross premiums written	$70,842	$62,317	13.7%
Net premiums written	71,079	47,097	50.9%
Net premiums earned	71,079	47,239	50.5%
Fee income and other	454	112	NM
Claims and policy benefits	67,112	37,741	77.8%
Acquisition costs	15,952	5,997	166.0%
Operating expenses	7,819	6,174	26.6%
Net investment income	60,713	20,239	NM
Interest expense	35,489	8,231	NM
Net income from life and annuity operations	$ 5,874	$ 9,447	(37.8)%

* NM — Not Meaningful

     Gross and net premiums written and earned relate to the blocks of U.S.-based mortality reinsurance business.

     In December 2002, certain blocks of U.S.-based mortality reinsurance business written were novated to the Company from an insurance affiliate. Gross and net premiums earned, claims and policy benefit reserves and acquisition costs are all related to this novated block of business. During the quarter ended September 30, 2003, the Company exercised its right and terminated a retrocession agreement of certain of these exposures which led to the significant increase in net premiums written in the first nine months of 2004 compared to the same period in 2003. In the nine months ended September 30, 2004 approximately $11.0 million in additional claims and policy benefit reserves were recorded related to this block of business due to the combination of adverse claim experience and a reserve increase that reflected improved in-force policy data.

     Net investment income and interest expense relate to municipal reinvestment contracts and funding agreements transactions. The increase in investment income and the related interest expense was due to the initiation of the funding agreements in the second quarter of 2003 combined with increases in the average balances outstanding related to the book of municipal reinvestment contracts. The balances outstanding for funding agreements and municipal reinvestment contracts have increased from $0.6 and $1.5 billion, respectively, as at December 31, 2003 to $0.9 million and $2.2 billion, respectively, as at September 30, 2004.

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Investment Activities

     The following table illustrates the change in net investment income from general operations, equity in net income of investment affiliates, net realized gains and losses on investments and net realized and unrealized gains and losses on investment derivatives from general operations for the nine months ended September 30, 2004 and 2003:

(U.S. dollars in thousands)
	(Unaudited)
	Nine Months Ended
	September 30,
	2004	2003	% Change
Net investment income — general operations	$482,392	$436,255	10.6%
Net income from investment affiliates	144,392	87,344	65.3%
Net realized gains on investments	181,115	80,331	125.5%
Net realized and unrealized gains (losses) on
investment derivative instruments — general operations	1,222	(7,533)	NM

* NM — Not Meaningful

     Net investment income related to general operations increased in the first nine months of 2004 as compared to the first nine months of 2003 due primarily to a higher investment base. The growth in the investment base reflects the Company’s cash flow from operations and capital raising activities. The market yield to maturity on the total fixed income portfolio was 3.9% at September 30, 2004 and September 30, 2003.

     Net income from investment affiliates increased significantly in the first nine months of 2004 compared to the first nine months of 2003 mainly due to strong performance in both the alternative portfolio and financial results of the investment managers where the Company has a minority stake, including a gain from the sale of the Company’s stake in Pareto Partners and its affiliated companies of $35.4 million.

     The Company manages portfolios consisting of structured portfolios (i.e., assets supporting deposit liabilities and future policy benefit reserves) and Asset/Liability portfolios where, due to the unique nature of the underlying liabilities, customized liability-based benchmarks are used to measure performance. The Company also manages Risk Asset portfolios, which constitute approximately 10% of the Company’s invested assets. These are compared to applicable public indices. The following is a summary of the investment performance for the Risk Asset portfolios for the nine months ended September 30, 2004 and September 30, 2003, respectively:

	(Unaudited)
	Nine Months Ended
	September 30,
	2004	2003
U.S. High Yield	3.2%	16.9%
CS First Boston High Yield Index	7.1%	20.9%
Relative Performance	(3.9)%	(4.0)%
Risk Asset Portfolios — Equities
U.S. Large Cap Growth Equity	N/A	17.3%
Russell 1000 Growth Index (Note 1)	N/A	17.4%
Relative Performance	N/A	(0.1)%
U.S. Large Cap Value Equity	N/A	16.4%
Russell 1000 Value Index (Note 1)	N/A	13.6%
Relative Performance	N/A	2.8%
U.S. Large Cap Equity	(0.7)%	N/A
Russell 1000 Index (Note 1)	(1.9)%	N/A
Relative Performance	1.2%	N/A

49

	(Unaudited)
	Nine Months Ended
	September 30,
	2004	2003
U.S. Small Cap Equity	2.4%	30.7%
Russell 2000 Index	3.6%	28.4%
Relative Performance	(1.2)%	2.3%
Non-U.S. Equity	6.0%	20.2%
MSCI ACWI ex US Index (Note 2)	4.6%	18.4%
Relative Performance	1.4%	1.8%
Risk Asset Portfolios — Alternative Investments
Alternative Investments (Note 3)	4.6%	5.6%
Standard and Poor’s 500 Index (Note 3)	4.5%	16.0%
Relative Performance	0.1%	(10.4)%

Note 1 —	Equity portfolios previously managed against the Russell 1000 Growth Index and the Russell 1000 Value Index are now managed relative to the Russell 1000 Index with effect from July 1, 2004. The Russell 1000 Index and returns relative to the new index represent three months of results
Note 2 —	The benchmark for the Non-U.S. Equity portfolios changed from the MSCI EAFE to the MSCI ACWI ex US Index in the second quarter of 2004. Comparative figures reflect the previous index.
Note 3 —	Alternative investments are priced one month in arrears; however, cash flows are reflected in the current reporting period. For comparative purposes the Standard & Poor’s 500 Index returns are lagged one month.

NET REALIZED GAINS AND LOSSES AND OTHER THAN TEMPORARY DECLINES IN THE VALUE OF INVESTMENTS

     Net realized gains on investments in the first nine months of 2004 included net realized gains of $187.3 million from sales of investments and net realized losses of approximately $6.2 million related to the write-down of certain of the Company’s fixed income and equity investments where the Company determined that there was an other than temporary decline in the value of those investments.

     Net realized gains on investments in the first nine months of 2003 included net realized gains of $205.2 million from sales of investments and net realized losses of approximately $118.7 million related to the write-down of certain of the Company’s fixed income and equity investments where the Company determined that there was an other than temporary decline in the value of those investments.

     The Company’s process for identifying declines in the fair value of investments that are other than temporary involves consideration of several factors. These factors include: (i) the time period during which there has been a significant decline in value; (ii) an analysis of the liquidity, business prospects and overall financial condition of the issuer; (iii) the significance of the decline; (iv) an analysis of the collateral structure and other credit support, as applicable, of the securities in question; and (v) the Company’s intent and ability to hold the investment for a sufficient period of time for the value to recover. Where the Company’s analysis of the above factors results in the Company’s conclusion that declines in fair values are other than temporary, the cost of the security is written down to fair value and the previously unrealized loss is therefore realized.

     Net realized and unrealized gains on investment derivatives in the first nine months of 2004 resulted from the Company’s investment strategy to economically hedge against interest and foreign exchange risk within the investment portfolio.

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Other Revenues and Expenses

     The following table sets forth other revenues and expenses for the nine months ended September 30, 2004 and 2003:

(U.S. dollars in thousands)
	(Unaudited)
	Nine Months Ended
	September 30,
	2004	2003	% Change
Net income (loss) from insurance affiliates	$ 64,348	$(41,741)	NM
Amortization of intangible assets	9,770	1,125	NM
Corporate operating expenses	129,934	110,335	17.8%
Interest expense	131,218	133,862	(2.0)%
Income tax expense	76,875	45,929	67.4%

* NM — Not Meaningful

     The increase in net income from insurance affiliates includes a gain of $66.7 million on the sale of the Company’s investment in the Admiral Group Ltd.

     Corporate operating expenses in the nine months ended September 30, 2004 increased compared to the nine months ended September 30, 2003 due to the continued build out of the Company’s global infrastructure in developing its network of shared service organizations to support operations in certain locations, costs related to compliance with the Sarbanes-Oxley Act, and adverse foreign exchange impacts.

     The decrease in interest expense primarily reflected reduced deposit liability interest accretion as a result of several commutations in 2004 partially offset by additional interest expense related to the 2.53% Senior Notes issued in March 2004 and the 5.25% Senior Notes issued in August of 2004, which have an interest rate greater that the LYONs which were repaid. For more information on the Company’s financing structure, see “Financial Condition, Liquidity and Capital Resources” below.

     The increase in the Company’s income taxes arose principally from an increase in the profitability of certain of the Company’s U.S. and European operations during the first nine months of 2004.

Financial Condition, Liquidity and Capital Resources

     As a holding company, the Company’s assets consist primarily of its investments in subsidiaries, and the Company’s future cash flows depend on the availability of dividends or other statutorily permissible payments from its subsidiaries. The ability to pay such dividends is limited by the applicable laws and regulations of the various countries in which the Company operates, including, among others, Bermuda, the United States, Ireland, Switzerland, and the United Kingdom, and those of the Society of Lloyd’s and certain contractual provisions. No assurance can be given that the Company or its subsidiaries will be permitted to pay dividends in the future.

     The Company and its subsidiaries provide no guarantees or other commitments (expressed or implied) of financial support to the Company’s subsidiaries or affiliates, except for express written financial support provided by XL Insurance (Bermuda) Ltd in connection with the Company’s financial guaranty subsidiaries and where other express written guaranty or other financial support arrangements are in place.

     The Company’s ability to underwrite business is dependent upon the quality of its claims paying and financial strength ratings as evaluated by independent rating agencies. As a result, in the event that the Company is downgraded, its ability to write business would be adversely affected in financial guaranty and long-tailed insurance and reinsurance lines of business. In the normal course of business, the Company evaluates its capital needs to support the volume of business written in order to maintain its claims paying and financial strength ratings. In January 2004, several of the internationally recognized rating agencies amended their financial strength ratings of the Company’s principal insur-

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ance and reinsurance subsidiaries and pools following the announcement by the Company of an increase in the prior period loss reserves in the fourth quarter of 2003. The Company regularly provides financial information to rating agencies to both maintain and enhance existing ratings.

     The following are the current financial strength and claims paying ratings from internationally recognized rating agencies in relation to the Company’s principal insurance and reinsurance subsidiaries and pools:

Rating agency	Rating
Standard & Poor’s	AA-	(Outlook Stable)
Fitch	AA	(Stable)
A.M. Best	A+	(Outlook Negative)
Moody’s Investor Services	Aa2	(except members of the XL America Pool, XL Re Ltd and XL Life
		Insurance and Annuity Company, which are
		rated Aa3 and the outlook for both ratings is stable)

     The following are the financial strength ratings from internationally recognized rating agencies in relation to the Company’s principal financial guaranty insurance and reinsurance subsidiaries:

Rating agency	Rating
Standard & Poor’s	AAA
Fitch	AAA
Moody’s Investor Services	Aaa

     There can be no assurance that any such ratings will be retained for any period of time or that they will not be qualified, suspended, revised downward or withdrawn entirely by such agencies.

     In addition, XL Capital Ltd currently has the following long term debt ratings: “a-” (Outlook Negative) from A.M. Best, “A” (Negative) from Standard and Poor’s, “A2” (Stable) from Moody’s and “A” (Stable) from Fitch.

Financial Condition

     At September 30, 2004, total investments available for sale and cash, net of unsettled investment trades, were $27.7 billion compared to $23.1 billion at December 31, 2003. This increase in investment assets related primarily to proceeds of notes payable and the issuance of equity units of $1,097.1 million, cash flow generated from operating activities of $3.1 billion, and the receipt of deposit liability assets of $969.6 million. Of the Company’s total investments available for sale, including fixed maturities, short-term investments and equity securities, at September 30, 2004, approximately 99% was managed by several outside investment management firms. Approximately 95.5% of fixed maturity and short-term investments are investment grade, with 68.2% rated “Aa” or “AA” or better by a nationally recognized rating agency. Using the Standard & Poor’s rating scale, the average quality of the fixed income portfolio was “AA”.

     As a significant portion of the Company’s net premium written incepts in the first half of the year, certain assets and liabilities have increased at September 30, 2004 compared to December 31, 2003. This includes deferred acquisition costs, unearned premiums, premiums receivable and prepaid reinsurance premiums. For the nine months ended September 30, 2004, currency translation adjustment losses were $0.5 million. This is shown as part of accumulated other comprehensive income and primarily related to unrealized losses on foreign currency exchange rate movement in those operations where the functional currency is not the U.S. dollar.

     The Company establishes reserves to provide for estimated claims, the general expenses of administering the claims adjustment process and for losses incurred but not reported. These reserves are calculated using actuarial and other reserving techniques to project the estimated ultimate net liability for losses and loss expenses. The Company’s reserving practices, and the establishment of any particular reserve, reflect management’s judgment concerning sound financial practice and do not represent any admission of liability with respect to any claims made against the Company. No assurance can be given that actual claims made and payments related thereto will not be in excess of the amounts reserved.

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     Included in unpaid loss and loss expenses recoverable at September 30, 2004 is an unsecured, net recoverable from Winterthur Swiss Insurance Company (the “Seller”) of $1.1 billion, related to certain contractual arrangements from the Company’s acquisition of Winterthur International in July 2001. This amount is subject to ongoing adjustment as described below, and the Seller is currently rated “A-” by S&P. The sale and purchase agreement, as amended (“SPA”), provides the Company with post-closing protection determined as of June 30, 2004 with respect to, among other things, adverse development of net loss and unearned premium reserves relating to the acquired Winterthur International business. This protection is based upon net loss experience and development over a three-year, post-closing seasoning period based on actual loss development experience, collectible reinsurance and certain other factors set forth in the SPA. The SPA includes a process for determining the adjustment amount due from the Seller. This process contemplates negotiation between the parties and, if no agreement is reached, a binding determination by an independent actuary in London who must select one of the two numbers submitted by the parties based on which of these is closest to the amount determined by the independent actuary. The Company is currently preparing to submit its statement of the amount due from the Seller under the SPA. In addition, the Seller provides protection to the Company with respect to reinsurance recoverables related to the Winterthur International acquisition in the aggregate amount of $2.2 billion as of September 30, 2004; certain reinsurers responsible for some portions thereof have raised issues as to whether amounts claimed are due and the resolution of those discussions is also currently ongoing. The Company expects that the process will likely result in a material increase in the net recoverable from the Seller, the ultimate amount of which presently is not determinable. The Company may recognize a loss in future periods if the amount finally agreed or determined to be due to the Company from the Seller is less than the adverse development of net loss and unearned premium reserves and any unrecovered amounts included within reinsurance recoverables related to the Winterthur International acquisition or to the extent that any amount proves to be uncollectible from the Seller for any reason.

     Inflation can, among other things, potentially result in larger claims. The Company’s underwriting philosophy is to adjust premiums in response to inflation.

Liquidity and Capital Resources

     As at September 30, 2004, the Company had bank, letter of credit and loan facilities available from a variety of sources including commercial banks totaling $7.6 billion, under which $2.7 billion in debt was outstanding. In addition, $2.8 billion of letters of credit were outstanding as of September 30, 2004, 7% of which were collateralized by the Company’s investment portfolio, principally supporting U.S. non-admitted business and the Company’s Lloyd’s capital requirements.

     In May 2004, the Company paid $15.0 million to the holders of record as at close of business on May 26, 2004, of its Zero Coupon Convertible Debentures (“CARZ”) originally issued in May 2001. No bondholders put bonds to the Company and, consequently, all bonds remain outstanding. The Company has had the option to “call” the CARZ since May 23, 2004. This call is exercisable by the Company and would require the payment of approximately $655.0 million for the CARZ to bondholders. This would result in the subsequent retirement of the related debt securities. At present, the Company is evaluating its alternatives with respect to this call.

     In March, 2004 the Company issued 33 million 6.5% Equity Security Units (“Units”) in a public offering. The Company received approximately $800.2 million in proceeds from the sale of the Units after deducting underwriting discounts. The Company used the net proceeds from the sale of the Units for general corporate purposes.

     Each Unit has a stated amount of $25 and consists of (a) a purchase contract pursuant to which the holder agreed to purchase, for $25, a variable number of shares of the Company’s Class A Ordinary Shares (“ordinary shares”) on May 15, 2007 and (b) a one-fortieth, or 2.5%, ownership interest in a senior note issued by the Company due May 15, 2009 with a principal amount of $1,000. The senior notes are pledged by the holders to secure their obligations under the purchase contract. The number of shares issued under the purchase contract is contingently adjustable based on, among other things, the share price of the Company on the stock purchase date and the dividend rate of the Company. The Company will make quarterly payments at the annual rate of 3.97% and 2.53% under the purchase contracts and senior notes, respectively. The Company may defer the contract payments on the purchase contract, but not the senior notes, until the stock purchase date. In May 2007, the senior notes will be remarketed whereby the interest rate on the senior notes will be reset in order to generate sufficient remarketing proceeds to satisfy the Unit holders’ obligation under the purchase contract. If the senior notes are not successfully remarketed, then the Company will exercise its rights as a secured party and may retain or dispose of the senior notes to satisfy in full the holders’ obligation to purchase its ordinary shares under the purchase contracts.

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     The Company created and terminated several new bilateral unsecured letter of credit facilities in 2004 to provide additional capacity to support the Company’s U.S. non-admitted business. The Company terminated three of these bilateral letter of credit facilities by September 30, 2004, which had amounted to $125.0 million in the aggregate. The newest facility is for $100.0 million of which $60.0 million is available in the form of revolving credit. The facility is currently unutilized.

     The Company replaced its principal $2.5 billion credit and letter of credit facility which expired on June 23, 2004, with a new $1.0 billion facility which expires on June 22, 2005, and a new $2.0 billion facility which expires on June 22, 2007. Both facilities are available to provide revolving credit ($600.0 million in the aggregate) and letters of credit ($3.0 billion in the aggregate) and are syndicated and unsecured. The $1.0 billion facility was unutilized at September 30, 2004, and approximately $1.7 billion of the $2.0 billion facility was utilized to provide letters of credit at September 30, 2004.

     On September 7, 2004, the Company redeemed the entire issue of the LYONs originally issued in September 2001. The bonds were redeemed at their accreted value of approximately $317.0 million, using proceeds from the issuance of the 5.25% Senior Notes due 2014, as described below.

     On August 23, 2004, the Company issued $300.0 million of 5.25% Senior Notes due September 15, 2014. Net proceeds to the Company, after deducting underwriting discounts and commissions and expenses of the offering, were approximately $296.6 million. These proceeds, along with other available cash, were used to redeem the Company’s LYONs, as described above.

     The Company is in the process of renewing the letter of credit facility that supports its operations at Lloyd’s. The new facility in the amount of £450.0 million is expected to close in mid-November 2004.

     The following tables present the Company’s indebtedness under outstanding securities and lenders’ commitments as at September 30, 2004:

(U.S. dollars in thousands)
(Unaudited)
			Payments Due By Period
			Year of	Less than	1 to 3	4 to 5	After 5
Notes Payable and Debt	Commitment	In Use	Expiry	1 Year	Years	Years	Years
Revolving credit facilities	$ 660,000	$ nil	2004	$ —	$ —	$ —	$ —
7.15% Senior Notes	100,000	99,992	2005	—	100,000	—	—
6.58% Guaranteed       Senior Notes	255,000	255,000	2011	—	—	—	255,000
6.50% Guaranteed       Senior Notes (1)	600,000	597,679	2012	—	—	—	600,000
Zero Coupon Convertible
Debentures       (“CARZ”) (1)	655,000	654,991	2021	—	—	—	1,011,000
5.25% Senior Notes	300,000	298,328	2014	—	—	—	300,000
2.53% Senior Notes (2)	825,000	825,000	2009	—	—	825,000	—
Total	$3,395,000	$2,730,990		$ —	$100,000	$825,000	$2,166,000

(1)

“Commitment” and “In Use” data represent September 30, 2004 accreted values. “Payments due by period” represent ultimate redemption values. The zero coupon convertible may be “put” or converted by the bondholders at various times prior to the 2021 redemption date. The next “put” date is May 23, 2006, and Company may “call” the bonds from May 2004 onwards.

(2)

The 2.53% Senior Notes are a component of the Equity Security Units issued in March 2004. In addition to the senior notes coupon of 2.53%, contract adjustment payments of 3.97% per annum are being paid on forward purchase contracts for ordinary shares for a total distribution per annum on the Units of 6.50%. The forward purchase contracts mature on May 15, 2007, and the senior notes will mature on May 15, 2009.

     The total pre-tax interest expense on the borrowings described above was $30.9 million and $23.9 million for the three months ended September 30, 2004 and 2003, respectively.

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     The following table presents, as at September 30, 2004, the Company’s letter of credit facilities available and in use and when those facilities are due to expire:

(U.S. dollars in millions)
(Unaudited)
			Payments Due By Period
Other			Year Of	Less than	1 to 3	4 to 5	More than 5
Commercial Commitments	Commitment	In Use	Expiry	1 Year	Years	Years	Years
Letter of Credit Facilities	$4,315	$2,781	2004-7	$2,315	$2,000	$ —	$ —

     The Company has several letter of credit facilities provided on a syndicated and bilateral basis from commercial banks. These facilities are principally utilized to support non-admitted insurance and reinsurance operations in the U.S. and capital requirements at Lloyd’s. In addition to letters of credit, the Company has established insurance trusts in the U.S. that provide cedents with statutory relief under state insurance regulations in the U.S. It is anticipated that the commercial facilities will be renewed on expiry but such renewals are subject to the availability of credit from banks utilized by the Company. In the event that such credit support is insufficient, the Company could be required to provide alternative security to cedents. This could take the form of additional insurance trusts supported by the Company’s investment portfolio or funds withheld using the Company’s cash resources. The value of letters of credit required is driven by, among other things, loss development of existing reserves, the payment pattern of such reserves, the expansion of business written by the Company and the loss experience of such business.

     The Company has had several share repurchase programs in the past as part of its capital management strategy. On January 9, 2000, the Board of Directors authorized a program for the repurchase of shares up to $500.0 million. Under this plan, the Company has purchased 6.6 million shares at an aggregate cost of $364.6 million or an average cost of $55.24 per share. The Company has $135.4 million remaining in its share repurchase authorization. During the nine months ended September 30, 2004, no shares were repurchased in the open market. The Company has repurchased shares from employees and directors in relation to withholding tax on restricted stock during the third quarter of 2004. See “Purchases of Equity Securities by the Issuer and Affiliated Purchases” set forth under Part II, Item 2 below.

     For information regarding cross-default and certain other provisions in the Company’s debt and convertible securities documents, see Item 7 of the Company’s Form 10-K for the year ended December 31, 2003.

     The following table presents the Company’s long term contractual obligations and related payments as at December 31, 2003, due by period. This table excludes further commitments of $154.6 million to the Company’s investment managers, related investment funds, certain limited partnerships, insurance affiliates, collateralized debt/equity investments and letter of credit facilities of $3.5 billion. See Item 8, Note 14 and Note 18 to the Consolidated Financial Statements set forth in the Company’s Form 10-K for the year ended December 31, 2003, for further information.

Contractual Obligations		Less than	1 to	3 to	More than
(U.S. dollars in thousands)	Total	1 year	3 years	5 years	5 years
Long-term debt obligations (1)	$ 2,480,455	$ —	$ 100,000	$ —	$ 2,380,455
Contingent capital facility	116,850	12,300	24,600	24,600	55,350
Capital lease obligations	352,710	10,600	22,010	23,140	296,960
Operating lease obligations	320,408	53,634	70,250	58,013	138,511
Deposit liabilities (2)	7,018,544	492,687	1,199,861	1,102,717	4,233,279
Unpaid losses and loss expenses (3)	16,657,670	4,761,519	6,047,072	2,673,768	3,175,311
Future policy benefit reserves (4)	5,704,674	350,099	428,395	456,183	4,469,997
Total	$32,651,311	$5,680,839	$7,892,188	$4,338,421	$14,749,863

(1) The long term debt obligations include the ultimate redemption values on the CARZ and LYONs up to 2021 and, therefore, the total obligation amount is greater than the current notes payable and debt outstanding at December 31, 2003. See Item 8, Note 14 and Note 18 to the Consolidated Financial Statements set forth in the Company’s Form 10-K for the year ended December 31, 2003 for further information. LYONs were redeemed on September 7, 2004

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(2)	See Note 12 to the Consolidated Financial Statements set forth in the Company’s Form 10-K for the year ended December 31, 2003, for further information.
(3)	The unpaid loss and loss expenses amounted to $16,558,788 on the Company’s Consolidated Balance Sheet at December 31, 2003. The timing and amounts of actual claims payments related to these reserves vary based on many factors including large individual losses, changes in the legal environment, as well as general market conditions. The ultimate amount of the claims payments could differ materially from the Company’s estimated amounts. For information regarding the estimates for unpaid loss and loss expenses as well as factors effecting potential payment patterns of reserves for actual and potential claims related the Company’s different lines of business see “Critical Accounting Policies and Estimates” above. Certain lines of business written by the Company, such as excess casualty, have loss experience characterized as low frequency and high severity. This may result in significant variability in loss payment patterns and, therefore, may impact the related asset/liability investment management process. In order to be in a position, if necessary, to make these payments, the Company’s liquidity requirements are supported by having revolving lines of credit facilities available to the Company and significant reinsurance programs, in addition to the Company’s general high grade fixed income investment portfolio. For information regarding the cash and investments available to pay claims related to these liabilities, see “Financial Condition” above.
(4)	Future policy benefit reserves on life and annuity business amounted to $3,233,845 on the Company’s Consolidated Balance Sheet at December 31, 2003. Amounts included above include an allowance for future premiums in respect of contracts under which premiums are payable throughout the life of the underlying policy. The value of the discount is also included for those lines of business that have reserves where future claim payments and future premium receipts can be estimated using actuarial principles. The timing and amounts of actual claims payments and premium receipts related to these reserves vary based on the underlying experience of the portfolio. Typical elements of the experience include mortality, morbidity and persistency. The ultimate amount of the claims payments and premium receipts could differ materially from our estimated amounts.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     The Private Securities Litigation Reform Act of 1995 (“PSLRA”) provides a “safe harbor” for forward-looking statements. Any prospectus, prospectus supplement, the Company’s Annual Report to ordinary shareholders, any proxy statement, any other Form 10-K, Form 10-Q or Form 8-K of the Company or any other written or oral statements made by or on behalf of the Company may include forward-looking statements that reflect the Company’s current views with respect to future events and financial performance. Such statements include forward-looking statements both with respect to the Company in general, and to the insurance, reinsurance and financial products and services sectors in particular (both as to underwriting and investment matters). Statements that include the words “expect”, “intend”, “plan”, “believe”, “project”, “anticipate”, “will”, “may”, and similar statements of a future or forward-looking nature identify forward-looking statements for purposes of the PSLRA or otherwise.

     All forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such statements. The Company believes that these factors include, but are not limited to, the following: (i) the timely and full recoverability of reinsurance placed by the Company with third parties, or other amounts due to the Company, including, without limitation, amounts due to the Company from the Seller in connection with the Company’s acquisition of the Winterthur International operations; (ii) the projected amount of ceded reinsurance recoverables and the ratings and creditworthiness of reinsurers may change; (iii) the size of the Company's claims relating to the hurricane losses described herein may change due to the preliminary nature of some of the reports and estimates of loss and damage to date; (iv) the timing of claims payments being faster or the receipt of reinsurance recoverables being slower than anticipated by the Company; (v) ineffectiveness or obsolescence of the Company’s business strategy due to changes in current or future market conditions; (vi) increased competition on the basis of pricing, capacity, coverage terms or other factors; (vii) greater frequency or severity of claims and loss activity, including as a result of natural or man-made catastrophic events, than the Company’s underwriting, reserving or investment practices anticipate based on historical experience or industry data; (viii) developments in the world’s financial and capital markets that adversely affect the performance of the Company’s investments and the Company’s access to such markets; (ix) the potential impact on the Company from government-mandated insurance coverage for acts of terrorism; (x) the potential impact of variable interest entities or other off-balance sheet arrangements on the Company; (xi) developments in bankruptcy proceedings or other developments related to bankruptcies of companies insofar as they affect property and casualty insurance and reinsurance coverages or claims that the Company may have as a counterparty; (xii) availability of borrowings and letters of credit under the Company’s credit facilities; (xiii) changes in regulation or tax laws applicable to the Company or its subsidiaries, brokers or customers; (xiv) acceptance of the Company’s products and services, including new products and services; (xv) changes in the availability, cost or quality of reinsurance; (xvi) changes in the distribution or placement of risks due to increased consolidation of insurance and reinsurance brokers; (xvii) loss of key personnel; (xviii) the effects of mergers, acquisitions and divestitures;

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(xix) changes in rating agency policies or practices; (xx) changes in accounting policies or practices or the application thereof; (xxi) legislative or regulatory developments; (xxii) changes in general economic conditions, including inflation, foreign currency exchange rates and other factors; (xxiii) the effects of business disruption or economic contraction due to war, terrorism or other hostilities; and (xxiv) the other factors set forth in the Company’s other documents on file with the SEC. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included herein or elsewhere. The Company undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Except as described below or otherwise in this Form 10-Q, there have been no material changes in the Company’s market risk exposures, or how those exposures are managed, since December 31, 2003. The following discussion should be read in conjunction with “Quantitative and Qualitative Disclosures About Market Risk” presented under Item 7A of the Company’s Form 10-K for the year ended December 31, 2003.

     The Company enters into derivatives and other financial instruments primarily for risk management purposes. The Company’s derivative transactions can expose the Company to credit default swap risk, weather and energy risk, investment market risk, interest rate risk and foreign currency exchange rate risk. The Company attempts to manage these risks based on guidelines established by senior management. Derivative instruments are carried at fair value with resulting changes in fair value recognized in income in the period in which they occur.

     Value-at-risk (“VaR”) is one of the tools used by management to estimate potential losses in fair values using historical rates, market movements and credit spreads to estimate the volatility and correlation of these factors to calculate the potential loss that could occur over a defined period of time given a certain probability.

     This risk management discussion and the estimated amounts generated from the sensitivity and VaR analyses presented in this document are forward-looking statements of market risk assuming certain adverse market conditions occur. Actual results in the future may differ materially from these estimated results due to, among other things, actual developments in the global financial markets. The results of analysis used by the Company to assess and mitigate risk should not be considered projections of future events of losses. See generally “Cautionary Note Regarding Forward-Looking Statements.”

Credit Derivative Risk

     The Company has written certain financial guaranty transactions in derivative or swap form. The Company does not actively trade these transactions and generally issues and holds these contracts to maturity. Changes in fair value can result from changes in market credit spreads, supply and demand for similar type instruments, changes in future loss and/or recovery estimates, interest rates and credit rating upgrades or downgrades. The Company therefore is at risk for changes in fair value due to changes in any of the above factors.

Weather and Energy Market Risk

     The Company offers weather and energy risk management products in insurance or derivative form to end-users, while managing the risks in the over-the-counter and exchange traded derivatives markets in a weather and energy derivatives trading portfolio.

     Fair values for the Company’s natural gas derivative contracts are determined through the use of quoted market prices. As quoted market prices are not widely available in the weather derivative market, management uses available market data and internal pricing models based upon consistent statistical methodologies to estimate fair values. Estimating fair value of instruments which do not have quoted market prices requires management judgment in determining amounts which could reasonably be expected to be received from, or paid to, a third party in settlement of the contracts. The amounts could be materially different from the amounts that might be realized in an actual sale transaction. Fair values are subject to change in the near-term and reflect management’s best estimate based on various factors including, but not limited to, realized and forecasted weather conditions, changes in commodity prices, changes in interest rates and other market factors.

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     The following table summarizes the movement in the fair value of weather and energy contracts outstanding during the nine months ended September 30, 2004:

(U.S. dollars in thousands)
	(Unaudited)
	Nine Months
	Ended
	September 30, 2004
Fair value of contracts outstanding, beginning of the year	$(11,490)
Option premiums received, net of premiums realized (1)	17,737
Reclassification of settled contracts to realized (2)	43,897
Other changes in fair value (3)	(44,793)
Fair value of contracts outstanding, end of period	$ 5,351

(1)	The Company collected $22.6 million of paid premiums and realized $40.3 million of premiums on expired transactions for a net increase in the balance sheet derivative asset of $17.7 million.
(2)	The Company paid $43.9 million to settle derivative positions during the period resulting in a reclassification of this amount from unrealized to realized and an increase in the derivative asset on the balance sheet.
(3)	This represents the effects of changes in commodity prices, the time value of options, and other valuation adjustments of ($44.8) million on the Company’s derivative positions, primarily attributable to hedges of the positions that realized $40.3 million of premiums.

     The change in the fair value of contracts outstanding at September 30, 2004 as compared to the beginning of the year is primarily due to the expiration of natural gas positions, which were not replaced due to management’s decision to reduce the size of its natural gas portfolio.

     The following table summarizes the maturity of contracts outstanding as of September 30, 2004:

(U.S. dollars in thousands)
(Unaudited)
	Less than	1 to	4 to	Greater than	Total
Source of Fair Value	1 year	3 years	5 years	5 years	Fair Value
Prices actively quoted	$ (520)	$ —	$ —	$ —	$ (520)
Prices based on models and other       valuation methods	(3,699)	9,359	211	—	5,871
Total fair value of contracts outstanding	$(4,219)	$9,359	$211	$ —	$5,351

     The Company manages its weather and energy portfolio through the employment of a variety of strategies. These include geographical and directional diversification of risk exposures and direct hedging within the capital and reinsurance markets. Risk management is undertaken on a product portfolio-wide basis, to maintain a portfolio that the Company believes is well diversified and which remains within the aggregate risk tolerance established by the Company’s senior management.

     The Company’s aggregate average, low and high seasonal VaR amounts for its weather risk management portfolio, calculated at a 99% confidence level, during the period ended September 30, 2004 were $177.8 million, $126.5 million and $232.4 million, respectively. The corresponding levels for the weather risk management portfolio during the period ended September 30, 2003 were $126.9 million, $100.1 million and $175.6 million, respectively. The Company calculates its aggregate VaR by summing the VaR amounts for each of its seasonal portfolios. The Company’s aggregation methodology yields a conservative aggregate portfolio VaR, given that current weather events and patterns have an immaterial effect on expectations for future seasons and the Company could therefore greatly reduce or eliminate its VaR on future seasons by selling its positions prior to the beginning of a season. At present, the Company’s VaR calculation does not exceed $60.0 million in any one season.

     For the natural gas portfolio, VaR is calculated using a one-day holding period. Management has established a daily VaR limit for this portfolio of $0.15 million. The Company’s average, low and high daily VaR amounts calculated at a 99% confidence level, during the period ended September 30, 2004 were $0.1 million, nil and $0.2 million,

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respectively. The corresponding amounts during the period ended September 30, 2003 were $2.2 million, $1.7 million and $2.9 million, respectively.

     For electricity generation outage insurance products, VaR is calculated using an annual holding period. Management has established an annual VaR limit of $25.0 million for this book of business. The Company’s average, low and high annual VaR amounts, calculated at a 99% confidence level, during the period ended September 30, 2004 were $4.2 million, $2.6 million, and $7.6 million, respectively. The corresponding amounts during the period ended September 30, 2003 were $2.6 million, $1.2 million, and $5.3 million, respectively.

Investment Market Risk

     The Company’s investment portfolio consists of exposures to fixed income securities, equities, alternative investments, derivatives, business and other investments and cash. These securities and investments are denominated in both U.S. dollar and foreign currencies.

     Through the structure of the Company’s investment portfolio, the Company’s book value is directly affected by changes in the valuations of the securities and investments held in the investment portfolio. These valuation changes reflect changes in fixed income security prices (e.g. slope and curvature of the yield curves, volatility of interest rates, credit spreads and mortgage prepayment speeds), equity prices (e.g. changes in prices and volatilities of individual securities, equity baskets and equity indices) and foreign currency exchange rates (e.g. changes in spot prices, forward prices and volatilities of currency rates). Market risk therefore arises due to the uncertainty surrounding the future valuations of these different assets, the factors that impact their values and the impact that this could have on the Company’s book value.

     The Company generally seeks to manage the risks of the investment portfolio through a combination of asset class, country, industry and security level diversification and investment manager allocations. Further, individual security and issuer exposures are generally controlled and monitored at the investment portfolio level via specific investment constraints outlined in investment guidelines and agreed with the appropriate external investment professionals. Additional constraints may be agreed with the external investment professionals that may address exposures to eligible securities, prohibited investments/transactions, credit quality and general concentration limits.

     The Company’s direct use of investment derivatives includes futures, forwards, swaps and option contracts that derive their value from underlying assets, indices, references rates or a combination of these factors. When investment guidelines allow for the use of derivatives, these can generally only be used for the purposes of managing interest rate risk, foreign exchange risk and credit risk, provided the use of such instruments is incorporated in the overall portfolio duration, spread, convexity and other relevant portfolio metrics. The direct use of derivatives is not permitted to economically leverage the portfolio outside of the stated guidelines. Derivatives may also be used to add value to the investment portfolio where market inefficiencies are perceived to exist, to utilize cash holdings to purchase equity indexed derivatives and to adjust the duration of a portfolio of fixed income securities to match the duration of related deposit liabilities.

Investment Value-At-Risk

     The VaR of the total investment portfolio at September 30, 2004, based on a 95% confidence level with a one month holding period, was approximately $501.4 million as compared to $531.0 million at September 30, 2003. The VaR of all investment related derivatives as at September 30, 2004 was approximately $10.7 million as compared to $9.0 million at September 30, 2003. The Company’s investment portfolio VaR as at September 30, 2004 is not necessarily indicative of future VaR levels.

     To complement the VaR analysis which is based on normal market environments, the Company considers the impact on the investment portfolio in several different historical stress periods to analyze the effect of unusual market conditions. The Company establishes certain historical stress test scenarios which are applied to the actual investment portfolio. As these stress tests and estimated gains and losses are based on historical events, they will not necessarily reflect future stress events or gains and losses from such events. The results of the stress test scenarios are reviewed on a regular basis to ensure they reflect current shareholders equity, market conditions and the Company’s total risk pro-

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file. Given the investment portfolio allocations as at September 30, 2004, the Company would expect to lose approximately 5.6% of the portfolio if the most damaging event stress tested was repeated, all other things held equal, as compared to 6.1% at September 30, 2003. Given the investment portfolio allocations as at September 30, 2004, the Company would expect to gain approximately 17.8% on the portfolio if the most favorable event stress tested was repeated, all other things held equal, as compared to 19.1% as at September 30, 2003. The Company assumes that no action is taken during the stress period to either liquidate or rebalance the portfolio and believes that this fairly reflects the potential decreased liquidity that is often associated with stressed market environments.

Fixed Income Portfolio

     The Company’s fixed income portfolio is exposed to credit and interest rate risk through its portfolio of debt securities. The fixed income portfolio includes fixed maturities, short-term investments, cash and cash equivalents and net payable for investments purchased.

     As at September 30, 2004, the value of the Company’s fixed income portfolio, including cash and cash equivalents and net payable for investments purchased, was approximately $26.9 billion as compared to approximately $20.8 billion at September 30, 2003. As at September 30, 2004, the fixed income portfolio consisted of approximately 89.0% of the total investment portfolio (including cash and cash equivalents, and net payable for investments purchased) as compared to approximately 87.9% as at September 30, 2003.

     The table below shows the Company’s fixed income portfolio by credit rating in percentage terms of the Company’s total fixed income portfolio (including fixed maturities, short-term investments, cash and cash equivalents and net payable for investments purchased) as at September 30, 2004.

	Total
AAA	55.0%
AA	13.2%
A	16.5%
BBB	10.8%
BB & BELOW	4.0%
NR	0.5%
Total	100.0%

     At September 30, 2004 the average credit quality of the Company’s total fixed income portfolio was “AA”.

     As at September 30, 2004, the top 10 corporate holdings represented approximately 9.5% of the total fixed income portfolio and approximately 40.1% of all holdings of corporate fixed income instruments. The top 10 corporate holdings listed below utilizes a conservative approach to aggregation as it includes unsecured as well as securitized, credit enhanced and collateralized securities issued by parent companies and their affiliates.

	Percentage of Total
Top 10 Corporate Holdings (2)	Fixed Income Portfolio (1)
JPMorgan Chase & Co	2.0%
Citigroup Inc.	1.6%
Morgan Stanley	1.0%
Bank of America Corporation	1.0%
Bear, Stearns & Co. Inc	0.7%
Wachovia Corporation	0.7%
General Electric Company	0.7%
HSBC Holdings plc	0.6%
MBNA Corp	0.6%
General Motors Corp	0.6%

(1)	Including fixed maturities, short-term investments, cash and cash equivalents and net payable for investments purchased.
(2)	Corporate holdings include parent and affiliated companies that issue fixed income securities. In some cases a portion of the market value may be invested in bonds that are securitized or have sufficient credit enhancement that provides a long-term credit rating that is higher than the rating of the unsecured debt of the parent company.

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     The Company’s fixed income portfolio is exposed to interest rate risk. Interest rate risk is the price sensitivity of a fixed income security to changes in interest rates. The hypothetical case of an immediate 100 basis point adverse parallel shift in global bond curves as at September 30, 2004 would decrease the fair value of the Company’s fixed income portfolio by approximately 4.4% or $1.2 billion as compared to approximately 4.8% or $0.9 billion as at September 30, 2003. Based on historical observations, it is unlikely that all global yield curves would shift in the same direction, by the same amount and at the same time.

Equity Portfolio

     As at September 30, 2004, the Company’s equity portfolio was $803.2 million as compared to $548.8 million as at September 30, 2003. As at September 30, 2004, the Company’s allocation to equity securities was approximately 2.7% of the total investment portfolio (including cash and cash equivalents, accrued investment income and net payable for investments purchased) as compared to approximately 2.3% as at September 30, 2003.

     As at September 30, 2004, approximately 56.0% of the equity portfolio was invested in U.S. companies as compared to approximately 58.9% as at September 30, 2003. As at September 30, 2004, the top ten equity holdings represented approximately 7.7% of the Company’s total equity portfolio as compared to approximately 4.4% as at September 30, 2003.

     The Company’s equity portfolio is exposed to price risk. Equity price risk is the potential loss arising from decreases in the market value of equities. An immediate hypothetical 10% change in the value of each equity position would decrease the fair value of the portfolio by approximately $80.3 million as at September 30, 2004 as compared to $54.9 million as at September 30, 2003.

Alternative Investment Portfolio

     The Company’s alternative investment portfolio (included in investments in affiliates or other investments) had approximately 50 separate investments in different funds at September 30, 2004 with a total portfolio of $1.6 billion representing approximately 5.4% of the total investment portfolio (including cash and cash equivalents, accrued investment income and net payable for investments purchased) as compared to September 30, 2003 where the Company had approximately 25 separate fund investments with a total exposure of $1.4 billion representing approximately 5.9% of the total investment portfolio.

     As at September 30, 2004, the alternative investment style allocation was 43% in directional/tactical strategies, 24% in arbitrage strategies, 23% in event driven strategies and 10% in multi-strategy strategies.

Private Investment Portfolio

     As at September 30, 2004, the Company’s exposure to private investments was approximately $204.3 million compared to $201.9 million as at September 30, 2003. As at September 30, 2004, the Company’s exposure to private investments consisted of approximately 0.7% of the total investment portfolio (including cash and cash equivalents, accrued investment income and net payable for investments purchased), as compared to 0.9% as at September 30, 2003.

Bond and Stock Index Futures Exposure

     As at September 30, 2004, bond and stock index futures outstanding had a net long position value of $7.5 million. A 10% appreciation or depreciation of these derivative instruments would have resulted in realized gains and realized losses of $80.6 million, respectively. The Company may reduce its exposure to these futures through offsetting transactions, including options and forwards.

Foreign Currency Exchange Risk

     The Company has exposure to foreign currency exchange rate fluctuations through its operations and its investment portfolio. The Company’s net foreign currency denominated payable on foreign exchange contracts as at September 30, 2004 was $74.8 million and the net foreign currency denominated receivable at September 30, 2003 was $23.9 million, with a net unrealized loss of $8.6 million as at September 30, 2004 and $0.8 million at September 30, 2003.

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     Foreign exchange contracts within the investment portfolio are utilized to manage individual portfolio foreign exchange exposures, subject to investment manager guidelines established by management. These contracts are not designated as specific hedges for financial reporting purposes and, therefore, realized and unrealized gains and losses on these contracts are recorded in income in the period in which they occur. These contracts generally have maturities of three months or less.

     The Company also attempts to manage the foreign exchange volatility arising on certain transactions denominated in foreign currencies. These include, but are not limited to, premiums receivable, reinsurance contracts, claims payable and investment in subsidiaries.

ITEM 4. CONTROLS AND PROCEDURES

     The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 promulgated under the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective to provide reasonable assurance that all material information relating to the Company required to be filed in this report has been made known to them in a timely fashion. There have been no changes in internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

     The Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s disclosure controls or its internal controls will prevent all errors and all fraud. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. As a result of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. As a result of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Accordingly, the Company’s disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the disclosure controls and procedures are met.

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XL CAPITAL LTD

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     On March 17, 2004, certain current and former directors and officers of the Company were named as defendants in a putative “shareholder derivative complaint” (Marilyn Clark, Derivatively on Behalf of XL Capital Ltd v. Brian O’Hara et al.) filed in Connecticut Superior Court by a California shareholder (the “Action”). The Company was named as a nominal defendant. The complaint alleged several causes of action including breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment during the time period “from November 2001 to the present” (the “Relevant Period”). The Action alleged that the Company maintained inadequate loss reserves for its NAC Re subsidiary (now known as XL Reinsurance America, Inc.) during the Relevant Period and that, as a consequence, the Company’s earnings and assets were materially overstated. On June 10, 2004, the Company filed a motion to dismiss the plaintiff’s claim. Thereafter, the plaintiff moved to withdraw the complaint in this action and, on September 29, 2004, the court approved the plaintiff’s motion.

     On June 21, 2004, a consolidated and amended class action complaint (the “Amended Complaint”) was served on the Company and certain of its present and former directors and officers as defendants in a putative class action (Malin et al. v. XL Capital Ltd et al.) filed in United States District Court, District of Connecticut (the “Malin Action”). The Malin Action purports to be on behalf of purchasers of the Company’s common stock between November 1, 2001 and October 16, 2003, and alleges claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder (“Securities Laws”). The Amended Complaint alleges that the defendants violated the Securities Laws by, among other things, failing to disclose in various public and shareholder and investor reports and other communications the alleged inadequacy of the Company’s loss reserves for its NAC Re subsidiary (now known as XL Reinsurance America, Inc.) and that, as a consequence, the Company’s earnings and assets were materially overstated. On November 1, 2004, all defendants filed a motion to dismiss the Amended Complaint with prejudice. There has been no discovery in the Malin Action. The Company and the defendant present and former officers and directors intend to vigorously defend the claims asserted against them.

     On June 17, 2004, William Kronenberg, III, Frank A. Piliero and David M. Rosenberg (together, the “Claimants”) commenced an arbitration against the Company before the American Arbitration Association (“AAA”) in New York, New York. The Claimants and the Company were parties to a stock purchase agreement dated June 1, 1999, pursuant to which the Company acquired the outstanding capital stock of ECS, Inc (the “Stock Purchase Agreement”). In their AAA arbitration demand, the Claimants assert claims of fraud and deceitful conduct, negligent misrepresentation, and breach of contract and a covenant of good faith and fair dealing, all relating to the allegation that the Company failed to make certain contingent payments allegedly due to Claimants under the Stock Purchase Agreement. Claimants seek $85 million (the maximum amount payable under the contingent payment provision at issue), plus punitive damages, interest, costs and attorneys’ fees. On July 30, 2004, the Company filed an Answering Statement and Motion to Stay or Dismiss the AAA arbitration. On April 13, 2004, the Company commenced a separate arbitration procedure, as provided in the Stock Purchase Agreement, but the Claimants have refused to participate in such procedure. On July 15, 2004, the Company filed a petition in the United States District Court for the Southern District of New York, seeking an order of the Court compelling the Claimants to arbitrate the dispute pursuant to those procedures and staying or dismissing the AAA arbitration. On September 19, 2004, the District Court denied our petition. On October 22, 2004, we filed an appeal of the District Court’s decision with the United States Court of Appeals for the Second Circuit. The AAA arbitration is proceeding. The Company intends to vigorously defend against the Claimants’ claims.

     On July 15, 2003, the Company and Messrs. Esposito and O’Hara were named in a Consolidated Amended Class Action Complaint (the “Amended Complaint”) filed by certain shareholders of Annuity and Life Re (Holdings), Ltd. (“ANR”) against ANR and certain present and former officers and directors of ANR in the United States District Court for the District of Connecticut seeking unspecified money damages on behalf of purchasers of ANR stock. Schnall v. Annuity and Life Re (Holdings), Ltd., Civil Action No. 02-CV-2133 (GLG) (the “Schnall Action”). The plaintiffs claim that the defendants violated certain provisions of the United States securities laws by making (or being responsible as alleged controlling persons for) various alleged material misstatements and omissions in public filings and press releases of ANR. On July 19, 2004, an agreement in principle was reached with plaintiffs to settle the

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Schnall Action. The settlement is without any admission of liability or wrongdoing and would include a nominal cash payment by the Company. The settlement is subject to certain approvals, full documentation, notice to the class, court approval and certain other steps required to consummate a class action settlement.

     The Company is also subject to litigation and arbitration in the normal course of its business. These lawsuits and arbitrations principally involve claims on policies of insurance and contracts of reinsurance and are typical for the Company and for the property and casualty insurance and reinsurance industry in general. Such legal proceedings are considered in connection with the Company’s loss and loss expense reserves. Reserves in varying amounts may or may not be established in respect of particular claims proceedings based on many factors, including the legal merits thereof and other factors. In addition to claims litigation, the Company and its subsidiaries are subject to lawsuits in the normal course of business that do not arise from or directly relate to claims on policies of insurance or contracts of reinsurance.

     The Company believes that the ultimate outcomes of all outstanding litigation and arbitration will not have a material adverse effect on its consolidated financial condition, future operating results and/or liquidity, although an adverse resolution of a number of these items could have a material adverse effect on the Company’s results of operations in a particular fiscal quarter or year.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(c) Purchases of Equity Securities by the Issuer and Affiliate Purchases

     The following table provides information about purchases by the Company during the quarter ended September 30, 2004 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act:

			Total Number	Approximate Dollar
			of Shares	Value of Shares
			Purchased as	that May Yet Be
			Part of	Purchased Under
	Total Number	Average Price	Publicly	the Plans
	of Shares	Paid	Announced Plans	or Programs
Period	Purchased (1)	per Share (2)	or Programs	(3)
July 1–31, 2004	3,013	84.11	—	$135.4 million
August 1–31, 2004	78	71.42	—	$135.4 million
September 1–30, 2004	90	73.16	—	$135.4 million
Total	3,181	$83.49	—	$135.4 million

(1)	All of the shares included in each period were purchased in connection with the vesting of restricted shares granted under the Company’s restricted stock plan. All of these purchases were made in connection with satisfying tax withholding obligations of those employees. These shares were not purchased as part of the Company’s publicly announced share repurchase program.
(2)	The price paid per share is the closing price of the shares on the vesting date.
(3)	On January 9, 2000, the Board of Directors previously authorized a $500.0 million share repurchase program. The Company did not repurchase any equity securities under the program during the three or nine months ended September 30, 2004. As of September 30, 2004, the Company could repurchase up to approximately $135.4 million of our equity securities under the Company’s share repurchase program.

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ITEM 6. EXHIBITS

4.1	First Supplemental Indenture, dated August 23, 2004, to the Indenture, dated June 2, 2004, between the Company and The Bank of New York, as Trustee, incorporated by reference to the Company’s current report on Form 8-K filed on August 23, 2004.
4.2	Form of Senior Note (included in Exhibit 4.1 hereto), incorporated by reference to the Company’s current report on Form 8-K filed on August 23, 2004.
4.3	First Supplemental Indenture, dated September 22, 2004, to the Indenture, dated May 23, 2001, between the Company and U.S. Bank National Association, as Trustee, incorporated by reference to the Company’s current report on Form 8-K filed on September 22, 2004.
10.1	364-Day Credit Agreement, dated as of September 30, 2004, between the Company, X.L. America, Inc., XL Insurance (Bermuda) Ltd, and XL Re Ltd, as the Account Parties and Guarantors, and Deutsche Bank AG, New York Branch, as the Lender.
31	Rule 13a-14(a)/15d-14(a) Certifications.
32	Section 1350 Certifications.
99.1	XL Capital Assurance Inc. condensed consolidated financial statements (unaudited) for the three and nine month periods ended September 30, 2004 and 2003.
99.2	XL Financial Assurance Ltd. condensed financial statements (unaudited) for the three and nine month periods ended September 30, 2004 and 2003.

65

SIGNATURES

     Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	XL CAPITAL LTD
	(Registrant)
Dated: November 5, 2004	/s/ BRIAN M. O’HARA
	Brian M. O’Hara
	President and Chief Executive Officer
Dated: November 5, 2004	/s/ JERRY DE ST. PAER
	Jerry de St. Paer
	Executive Vice President and
	Chief Financial Officer

66

EX-10.1

================================================================================



                            364-DAY CREDIT AGREEMENT

                                   dated as of

                               September 30, 2004

                                     between

                                 XL CAPITAL LTD,
          X.L. AMERICA, INC., XL INSURANCE (BERMUDA) LTD and XL RE LTD,
                       as Account Parties and Guarantors,

                       DEUTSCHE BANK AG, NEW YORK BRANCH,
                                    as Lender

                                  -------------
                                  $100,000,000
                                  -------------




================================================================================




                                            TABLE OF CONTENTS


                                                                                                    PAGE

                                                ARTICLE I

                                               DEFINITIONS
                                                                                                
 SECTION 1.01.        Defined Terms....................................................................1
 SECTION 1.02.        Terms Generally.................................................................12
 SECTION 1.03.        Accountings Terms; GAAP and SAP.................................................12

                                                ARTICLE II

                                               THE CREDITS

 SECTION 2.01.        Dollar Letters of Credit........................................................13
 SECTION 2.02.        Alternative Currency Letters of Credit..........................................14
 SECTION 2.03.        Reimbursement of LC Disbursements, Etc..........................................14
 SECTION 2.04.        Loans and Borrowings............................................................16
 SECTION 2.05.        Requests for Borrowings.........................................................17
 SECTION 2.06.        Funding of Borrowings...........................................................17
 SECTION 2.07.        Interest Elections..............................................................17
 SECTION 2.08.        Termination and Reduction of the Commitment.....................................18
 SECTION 2.09.        Repayment of Loans; Term-Out Option; Evidence of Debt...........................19
 SECTION 2.10.        Prepayment of Loans.............................................................20
 SECTION 2.11.        Fees ...........................................................................20
 SECTION 2.12.        Interest........................................................................21
 SECTION 2.13.        Alternate Rate of Interest......................................................22
 SECTION 2.14.        Increased Costs.................................................................22
 SECTION 2.15.        Break Funding Payments..........................................................23
 SECTION 2.16.        Taxes...........................................................................24
 SECTION 2.17.        Payments Generally; Pro Rata Treatment; Sharing of Set-offs.....................25
 SECTION 2.18.        Designation of a Different Lending Office.......................................26

                                               ARTICLE III

                                                GUARANTEE

 SECTION 3.01.        The Guarantee...................................................................26
 SECTION 3.02.        Obligations Unconditional.......................................................26
 SECTION 3.03.        Reinstatement...................................................................27
 SECTION 3.04.        Subrogation.....................................................................27
 SECTION 3.05.        Remedies........................................................................27
 SECTION 3.06.        Continuing Guarantee............................................................28
 SECTION 3.07.        Rights of Contribution..........................................................28
 SECTION 3.08.        General Limitation on Guarantee Obligations.....................................28





                                                   -i-



                                                                                                    PAGE

                                                ARTICLE IV

                                      REPRESENTATIONS AND WARRANTIES

                                                                                               
 SECTION 4.01.        Organization; Powers............................................................29
 SECTION 4.02.        Authorization; Enforceability...................................................29
 SECTION 4.03.        Governmental Approvals; No Conflicts............................................29
 SECTION 4.04.        Financial Condition; No Material Adverse Change.................................29
 SECTION 4.05.        Properties......................................................................30
 SECTION 4.06.        Litigation and Environmental Matters............................................30
 SECTION 4.07.        Compliance with Laws and Agreements.............................................30
 SECTION 4.08.        Investment and Holding Company Status...........................................30
 SECTION 4.09.        Taxes...........................................................................31
 SECTION 4.10.        ERISA...........................................................................31
 SECTION 4.11.        Disclosure......................................................................31
 SECTION 4.12.        Use of Credit...................................................................31
 SECTION 4.13.        Subsidiaries....................................................................31
 SECTION 4.14.        Withholding Taxes...............................................................32
 SECTION 4.15.        Stamp Taxes.....................................................................32
 SECTION 4.16.        Legal Form......................................................................32

                                                ARTICLE V

                                                CONDITIONS

 SECTION 5.01.        Effective Date..................................................................32
 SECTION 5.02.        Each Credit Event...............................................................33

                                                ARTICLE VI

                                          AFFIRMATIVE COVENANTS

 SECTION 6.01.        Financial Statements and Other Information......................................34
 SECTION 6.02.        Notices of Material Events......................................................36
 SECTION 6.03.        Preservation of Existence and Franchises........................................36
 SECTION 6.04.        Insurance.......................................................................36
 SECTION 6.05.        Maintenance of Properties.......................................................36
 SECTION 6.06.        Payment of Taxes and Other Potential Charges and Priority Claims; Payment
                          of Other Current Liabilities................................................36
 SECTION 6.07.        Financial Accounting Practices..................................................37
 SECTION 6.08.        Compliance with Applicable Laws.................................................37
 SECTION 6.09.        Use of Letters of Credit and Proceeds...........................................37
 SECTION 6.10.        Continuation of and Change in Businesses........................................38
 SECTION 6.11.        Visitation......................................................................38

                                               ARTICLE VII

                                            NEGATIVE COVENANTS

 SECTION 7.01.        Mergers.........................................................................38
 SECTION 7.02.        Dispositions....................................................................38





                                                   -ii-




                                                                                                    PAGE
                                                                                               
 SECTION 7.03.        Liens...........................................................................39
 SECTION 7.04.        Transactions with Affiliates....................................................40
 SECTION 7.05.        Ratio of Total Funded Debt to Total Capitalization..............................41
 SECTION 7.06.        Consolidated Net Worth..........................................................41
 SECTION 7.07.        Indebtedness....................................................................41
 SECTION 7.08.        Financial Strength Ratings......................................................41
 SECTION 7.09.        Private Act.....................................................................41

                                               ARTICLE VIII

                                            EVENTS OF DEFAULT


                                                ARTICLE IX

                                              MISCELLANEOUS

 SECTION 9.01.        Notices.........................................................................44
 SECTION 9.02.        Waivers; Amendments.............................................................45
 SECTION 9.03.        Expenses; Indemnity; Damage Waiver..............................................45
 SECTION 9.04.        Successors and Assigns..........................................................46
 SECTION 9.05.        Survival........................................................................46
 SECTION 9.06.        Counterparts; Integration; Effectiveness........................................47
 SECTION 9.07.        Severability....................................................................47
 SECTION 9.08.        Right of Setoff.................................................................47
 SECTION 9.09.        Governing Law; Jurisdiction; Etc................................................47
 SECTION 9.10.        WAIVER OF JURY TRIAL............................................................48
 SECTION 9.11.        Headings........................................................................48
 SECTION 9.12.        Treatment of Certain Information; Confidentiality...............................48
 SECTION 9.13.        Judgment Currency...............................................................49
 SECTION 9.14.        USA PATRIOT Act.................................................................50



                                                  -iii-


                  364-DAY CREDIT AGREEMENT dated as of September 30, 2004,
between XL CAPITAL LTD, a company incorporated under the laws of the Cayman
Islands ("XL CAPITAL"), X.L. AMERICA, INC., a Delaware corporation ("XL
AMERICA"), XL INSURANCE (BERMUDA) LTD, a Bermuda limited liability company ("XL
INSURANCE") and XL RE LTD, a Bermuda limited liability company ("XL RE" and,
together with XL Capital, XL America and XL Insurance, each an "ACCOUNT PARTY"
and each a "GUARANTOR" and collectively, the "ACCOUNT PARTIES" and the
"GUARANTORS"; the Account Parties and the Guarantors being collectively referred
to as the "OBLIGORS"), and DEUTSCHE BANK AG, NEW YORK BRANCH, as the Lender.

                  The Account Parties have requested that the Lender issue
letters of credit for their account and make loans to them in an aggregate face
or principal amount not exceeding $100,000,000 at any one time outstanding, and
the Lender is prepared to issue such letters of credit and make such loans upon
the terms and conditions hereof. Accordingly, the parties hereto agree as
follows:

ARTICLE I

                                   DEFINITIONS
                                   -----------

                  SECTION 1.01. DEFINED TERMS. As used in this Agreement, the
following terms have the meanings specified below:

                  "ABR", when used in reference to any Loan or Borrowing, refers
         to whether such Loan, or the Loans constituting such Borrowing, are
         bearing interest at a rate determined by reference to the Alternate
         Base Rate.

                  "ACCOUNT PARTIES" means each of XL Capital, XL America, XL
         Insurance and XL Re.

                  "ACCOUNT PARTY JURISDICTION" means (a) Bermuda, (b) the Cayman
         Islands and (c) any other country (i) where any Account Party is
         licensed or qualified to do business or (ii) from or through which
         payments hereunder are made by any Account Party.

                  "ADJUSTED LIBO RATE" means, for the Interest Period for any
         Eurodollar Borrowing, an interest rate per annum (rounded upwards, if
         necessary, to the next 1/16 of 1%) equal to (a) the LIBO Rate for such
         Interest Period MULTIPLIED BY (b) the Statutory Reserve Rate for such
         Interest Period.

                  "AFFILIATE" means, with respect to a specified Person, another
         Person that directly, or indirectly, Controls or is Controlled by or is
         under common Control with the Person specified.

                  "ALTERNATE BASE RATE" means, for any day, a rate per annum
         equal to the greater of (a) the Prime Rate in effect on such day, and
         (b) the Federal Funds Effective Rate for such day PLUS 1/2 of 1%. Any
         change in the Alternate Base Rate due to a change in the Prime Rate or
         the Federal Funds Effective Rate shall be effective from and including
         the effective date of such change in the Prime Rate or the Federal
         Funds Effective Rate, as the case may be.

                  "ALTERNATIVE CURRENCY" means any currency other than Dollars
         (a) that is freely transferable and convertible into Dollars in the
         London foreign exchange market and (b) for which no central bank or
         other governmental authorization in the country of issue of such
         currency is required to permit use of such currency by the Lender for
         issuing, renewing, extending or





                                      -2-

         amending letter of credits or funding or making drawings thereunder
         and/or to permit any Account Party to pay the reimbursement obligations
         and interest thereon, each as contemplated hereunder, unless such
         authorization has been obtained and is in full force and effect.

                  "ALTERNATIVE CURRENCY LC EXPOSURE" means, at any time, the sum
         of (a) the Dollar Equivalent of the aggregate undrawn amount of all
         outstanding Alternative Currency Letters of Credit at such time PLUS
         (b) the Dollar Equivalent of the aggregate amount of all LC
         Disbursements under Alternative Currency Letters of Credit that have
         not been reimbursed by or on behalf of the Account Parties at such
         time.

                  "ALTERNATIVE CURRENCY LETTER OF CREDIT" means a letter of
         credit issued by the Lender in an Alternative Currency pursuant to
         Section 2.02.

                  "APPLICABLE FACILITY FEE RATE" means 0.06%.

                  "APPLICABLE LETTER OF CREDIT FEE RATE" means 0.34%.

                  "APPLICABLE MARGIN" means a rate per annum equal to, (a) for
         the period from and including the date hereof to but not including the
         Commitment Termination Date, 0.34% and (b) in the event that the
         Term-Out Option has been exercised and is in effect, for the period
         from and including the Commitment Termination Date to but not including
         the date of payment in full of the Loans, 0.59%.

                  "APPLICABLE ADDITIONAL MARGIN" means a rate per annum equal to
         0.10% (a) for any period during which the aggregate outstanding
         principal amount of the Loans shall be greater than 50% of the RC
         Sublimit then in effect and (b) from and after the Term-Out Option has
         been exercised and is in effect.

                  "AVAILABILITY PERIOD" means the period from and including the
         Effective Date to and including the Commitment Termination Date.

                  "BOARD" means the Board of Governors of the Federal Reserve
         System of the United States of America.

                  "BORROWING" means, with respect to any Account Party, (a) all
         ABR Loans of such Account Party made, converted or continued on the
         same date or (b) all Eurodollar Loans of such Account Party that have
         the same Interest Period.

                  "BORROWING REQUEST" means a request by an Account Party for a
         Borrowing in accordance with Section 2.05.

                  "BUSINESS DAY" means any day (a) that is not a Saturday,
         Sunday or other day on which commercial banks in New York City, London,
         the Cayman Islands or Bermuda are authorized or required by law to
         remain closed and (b) if such day relates to a borrowing of, a payment
         or prepayment of principal of or interest on, a continuation or
         conversion of or into, or the Interest Period for, a Eurodollar Loan,
         or to a notice by an Account Party with respect to any such borrowing,
         payment, prepayment, continuation, conversion, or Interest Period, that
         is also a day on which dealings in Dollar deposits are carried out in
         the London interbank market.




                                      -3-

                  "CAPITAL LEASE OBLIGATIONS" of any Person means the
         obligations of such Person to pay rent or other amounts under any lease
         of (or other arrangement conveying the right to use) real or personal
         property, or a combination thereof, which obligations are required to
         be classified and accounted for as capital leases on a balance sheet of
         such Person under GAAP, and the amount of such obligations shall be the
         capitalized amount thereof determined in accordance with GAAP.

                  "CHANGE IN CONTROL" means the occurrence of any of the
         following events or conditions: (a) any Person, including any syndicate
         or group deemed to be a Person under Section 13(d)(3) of the Securities
         Exchange Act of 1934, as amended, acquires beneficial ownership,
         directly or indirectly, through a purchase, merger or other acquisition
         transaction or series of transactions, of shares of capital stock of XL
         Capital entitling such Person to exercise 40% or more of the total
         voting power of all shares of capital stock of XL Capital that is
         entitled to vote generally in elections of directors, other than an
         acquisition by XL Capital, any of its Subsidiaries or any employee
         benefit plans of XL Capital; or (b) XL Capital merges or consolidates
         with or into any other Person (other than a Subsidiary), another Person
         (other than a Subsidiary) merges into XL Capital or XL Capital conveys,
         sells, transfers or leases all or substantially all of its assets to
         another Person (other than a Subsidiary), other than any transaction:
         (i) that does not result in a reclassification, conversion, exchange or
         cancellation of the outstanding shares of capital stock of XL Capital
         (other than the cancellation of any outstanding shares of capital stock
         of XL Capital held by the Person with whom it merges or consolidates)
         or (ii) which is effected solely to change the jurisdiction of
         incorporation of XL Capital and results in a reclassification,
         conversion or exchange of outstanding shares of capital stock of XL
         Capital solely into shares of capital stock of the surviving entity; or
         (c) a majority of the members of XL Capital's board of directors are
         persons who are then serving on the board of directors without having
         been elected by the board of directors or having been nominated for
         election by its shareholders.

                  "CHANGE IN LAW" means (a) the adoption of any law, rule or
         regulation after the date of this Agreement, (b) any change in any law,
         rule or regulation or in the interpretation or application thereof by
         any Governmental Authority after the date of this Agreement or (c)
         compliance by the Lender (or, for purposes of Section 2.14(b), by any
         lending office of the Lender or by the Lender's holding company, if
         any) with any request, guideline or directive (whether or not having
         the force of law) of any Governmental Authority made or issued after
         the date of this Agreement.

                  "CODE" means the Internal Revenue Code of 1986, as amended
         from time to time.

                  "COMMITMENT" means, the Lender's commitment (a) to issue
         Letters of Credit and (b) to make Loans, in each case expressed as an
         amount representing the maximum aggregate amount of the Lender's Credit
         Exposure hereunder, as such commitment may be reduced from time to time
         pursuant to Section 2.08. The initial aggregate amount of the Lender's
         Commitment is $100,000,000.

                  "COMMITMENT TERMINATION DATE" means September 29, 2005.

                  "CONSOLIDATED NET WORTH" means, at any time, the consolidated
         stockholders' equity of XL Capital and its Subsidiaries.




                                      -4-

                  "CONTROL" means the possession, directly or indirectly, of the
         power to direct or cause the direction of the management or policies of
         a Person, whether through the ability to exercise voting power, by
         contract or otherwise. "CONTROLLING" and "CONTROLLED" have meanings
         correlative thereto.

                  "CREDIT DOCUMENTS" means, collectively, this Agreement and the
         Letter of Credit Documents.

                  "CREDIT EXPOSURE" means the sum of the outstanding principal
         amount of the Lender's Loans and its LC Exposure at any time.

                  "DEFAULT" means any event or condition which constitutes an
         Event of Default or which upon notice, lapse of time or both would,
         unless cured or waived, become an Event of Default.

                  "DOLLAR EQUIVALENT" means, in respect of any Alternative
         Currency Letter of Credit, the amount of Dollars obtained by converting
         the Alternative Currency LC Exposure with respect to such Alternative
         Currency Letter of Credit, into Dollars at the spot rate for the
         purchase of Dollars with such currency as quoted by the Lender at
         approximately 11:00 a.m. (London time) on the second Business Day
         before the date such Dollar Equivalent shall be calculated (unless
         another rate or time is agreed to by XL Capital and the Lender).

                  "DOLLAR LETTER OF CREDIT" means a letter of credit issued by
         the Lender in Dollars pursuant to Section 2.01.

                  "DOLLARS" or "$" refers to lawful money of the United States
         of America.

                  "EFFECTIVE DATE" means the date on which the conditions
         specified in Section 5.01 are satisfied (or waived in accordance with
         Section 9.02).

                  "ENVIRONMENTAL LAWS" means any Law, whether now existing or
         subsequently enacted or amended, relating to (a) pollution or
         protection of the environment, including natural resources, (b)
         exposure of Persons, including but not limited to employees, to
         Hazardous Materials, (c) protection of the public health or welfare
         from the effects of products, by-products, wastes, emissions,
         discharges or releases of Hazardous Materials or (d) regulation of the
         manufacture, use or introduction into commerce of Hazardous Materials,
         including their manufacture, formulation, packaging, labeling,
         distribution, transportation, handling, storage or disposal.

                  "ENVIRONMENTAL LIABILITY" means any liability, contingent or
         otherwise (including any liability for damages, costs of environmental
         remediation, fines, penalties or indemnities), of an Account Party or
         any Subsidiary resulting from or based upon (a) violation of any
         Environmental Law, (b) the generation, use, handling, transportation,
         storage, treatment or disposal of any Hazardous Materials, (c) exposure
         to any Hazardous Materials, (d) the release or threatened release of
         any Hazardous Materials into the environment or (e) any contract or
         agreement pursuant to which liability is assumed or imposed with
         respect to any of the foregoing.




                                      -5-

                  "EQUITY RIGHTS" means, with respect to any Person, any
         subscriptions, options, warrants, commitments, preemptive rights or
         agreements of any kind (including any shareholders' or voting trust
         agreements) for the issuance, sale, registration or voting of, or
         securities convertible into, any additional shares of capital stock of
         any class, or partnership or other ownership interests of any type in,
         such Person.

                  "ERISA" means the Employee Retirement Income Security Act of
         1974, as amended from time to time.

                  "ERISA AFFILIATE" means any trade or business (whether or not
         incorporated) that, together with any Account Party, is treated as a
         single employer under Section 414(b) or (c) of the Code, or, solely for
         purposes of Section 302 of ERISA and Section 412 of the Code, is
         treated as a single employer under Section 414 of the Code.

                  "ERISA EVENT" means (a) any "reportable event", as defined in
         Section 4043 of ERISA or the regulations issued thereunder with respect
         to a Plan (other than an event for which the 30-day notice period is
         waived); (b) the existence with respect to any Plan of an "accumulated
         funding deficiency" (as defined in Section 412 of the Code or Section
         302 of ERISA), whether or not waived; (c) the filing pursuant to
         Section 412(d) of the Code or Section 303(d) of ERISA of an application
         for a waiver of the minimum funding standard with respect to any Plan;
         (d) the incurrence by any Account Party or any of such Account Party's
         ERISA Affiliates of any liability under Title IV of ERISA with respect
         to the termination of any Plan; (e) the receipt by any Account Party or
         any ERISA Affiliate from the PBGC or a plan administrator of any notice
         relating to an intention to terminate any Plan or Plans or to appoint a
         trustee to administer any Plan; (f) the incurrence by any Account Party
         or any of its ERISA Affiliates of any liability with respect to the
         withdrawal or partial withdrawal from any Plan or Multiemployer Plan;
         or (g) the receipt by any Account Party or any ERISA Affiliate of any
         notice, or the receipt by any Multiemployer Plan from any Account Party
         or any ERISA Affiliate of any notice, concerning the imposition of
         Withdrawal Liability or a determination that a Multiemployer Plan is,
         or is expected to be, insolvent or in reorganization, within the
         meaning of Title IV of ERISA.

                  "EURODOLLAR", when used in reference to any Loan or Borrowing,
         refers to whether such Loan, or the Loans constituting such Borrowing,
         are bearing interest at a rate determined by reference to the Adjusted
         LIBO Rate.

                  "EVENT OF DEFAULT" has the meaning assigned to such term in
         Article VIII.

                  "EXCESS FUNDING GUARANTOR" has the meaning assigned to such
         term in Section 3.07.

                  "EXCESS PAYMENT" has the meaning assigned to such term in
         Section 3.07.

                  "EXCLUDED TAXES" means, with respect to the Lender or any
         other recipient of any payment to be made by or on account of any
         obligation of any Account Party hereunder, (a) Taxes imposed on (or
         measured by) its net income, net profits or overall gross receipts
         (including, without limitation, branch profits or similar taxes) by the
         United States of America, or by any jurisdiction under the laws of
         which such recipient is organized or resident, in which such recipient
         has an office or with which such recipient has any other connection
         (other than a connection that is deemed to arise solely by reason of
         both (I) the transactions contemplated by




                                      -6-

         this Agreement and (II) an Account Party being organized in,
         maintaining an office in, conducting business in, or having a
         connection with, such jurisdiction), (b) any Taxes not described in
         clause (a) above (other than Other Taxes) that are imposed as a result
         of a connection the Lender has with the relevant jurisdiction (other
         than a connection that is deemed to arise solely by reason of both (I)
         the transactions contemplated by this Agreement and (II) an Account
         Party being organized or resident in, maintaining an office in,
         conducting business in, or having a connection with, such
         jurisdiction), (c) any U.S. federal withholding tax that is imposed on
         amounts payable to a Lender under a law that was in effect at the time
         such Lender becomes a party to this Agreement (or designates a new
         lending office), except to the extent that such Lender (or its
         assignor, if any) was entitled, immediately prior to the designation of
         a new lending office (or assignment), to receive additional amounts
         from Borrower with respect to such withholding tax pursuant to Section
         2.16(a) and (d) any Tax that is not imposed solely as a result of a
         Change in Law formally announced after the date hereof.

                  "FEDERAL FUNDS EFFECTIVE RATE" means, for any day, the
         weighted average (rounded upwards, if necessary, to the next 1/100 of
         1%) of the rates on overnight Federal funds transactions with members
         of the Federal Reserve System arranged by Federal funds brokers, as
         published on the next succeeding Business Day by the Federal Reserve
         Bank of New York, or, if such rate is not so published for any day that
         is a Business Day, the average (rounded upwards, if necessary, to the
         next 1/100 of 1%) of the quotations for such day for such transactions
         received by the Lender from three Federal funds brokers of recognized
         standing selected by it.

                  "FINANCIAL OFFICER" means, with respect to any Obligor, a
         principal financial officer of such Obligor.

                  "GAAP" means generally accepted accounting principles in the
         United States of America.

                  "GIC" means a guaranteed investment contract or funding
         agreement or other similar agreement issued by an Account Party or any
         of its Subsidiaries that guarantees to a counterparty a rate of return
         on the invested capital over the life of such contract or agreement.

                  "GOVERNMENTAL AUTHORITY" means the government of the United
         States of America, or of any other nation (including the European
         Union), or any political subdivision thereof, whether state or local,
         and any agency, authority, instrumentality, regulatory body, court,
         central bank or other entity exercising executive, legislative,
         judicial, taxing, regulatory or administrative powers or functions of
         or pertaining to government.

                  "GUARANTEE" means, with respect to any Person, without
         duplication, any obligations of such Person (other than endorsements in
         the ordinary course of business of negotiable instruments for deposit
         or collection) guaranteeing or intended to guarantee any Indebtedness
         of any other Person in any manner, whether direct or indirect, and
         including any obligation, whether or not contingent, (i) to purchase
         any such Indebtedness or any property constituting security therefor
         for the purpose of assuring the holder of such Indebtedness, (ii) to
         advance or provide funds or other support for the payment or purchase
         of any such Indebtedness or to maintain working capital, solvency or
         other balance sheet condition of such other Person (including keepwell
         agreements, maintenance agreements, comfort letters or similar
         agreements




                                      -7-

         or arrangements) for the benefit of any holder of Indebtedness of such
         other Person, (iii) to lease or purchase property, securities or
         services primarily for the purpose of assuring the holder of such
         Indebtedness or (iv) to otherwise assure or hold harmless the holder of
         such Indebtedness against loss in respect thereof. The amount of any
         Guarantee hereunder shall (subject to any limitations set forth
         therein) be deemed to be an amount equal to the outstanding principal
         amount of the Indebtedness in respect of which such Guarantee is made.
         The terms "GUARANTEE" and "GUARANTEED" used as a verb shall have a
         correlative meaning.

                  "GUARANTEED OBLIGATIONS" has the meaning assigned to such term
         in Section 3.01.

                  "GUARANTORS" means each of XL Capital, XL America, XL
         Insurance and XL Re.

                  "HAZARDOUS MATERIALS" means all explosive or radioactive
         substances or wastes and all hazardous or toxic substances, wastes or
         other pollutants, including petroleum or petroleum distillates,
         asbestos or asbestos containing materials, polychlorinated biphenyls,
         radon gas, infectious or medical wastes and all other substances or
         wastes of any nature regulated pursuant to any Environmental Law.

                  "HEDGING AGREEMENT" means any interest rate protection
         agreement, foreign currency exchange agreement, commodity price
         protection agreement or other interest or currency exchange rate or
         commodity price hedging arrangement.

                  "INDEBTEDNESS" means, for any Person, without duplication (it
         being understood, for the avoidance of doubt, that insurance payment
         liabilities, as such, and liabilities arising in the ordinary course of
         such Person's business as an insurance or reinsurance company
         (including GICs and Stable Value Instruments and any Specified
         Transaction Agreement relating thereto) or corporate member of The
         Council of Lloyd's or as a provider of financial or investment services
         or contracts (including GICs and Stable Value Instruments and any
         Specified Transaction Agreement relating thereto) (in each case other
         than in connection with the provision of financing to such Person or
         any of such Person's Affiliates) shall not be deemed to constitute
         Indebtedness): (i) all indebtedness or liability for or on account of
         money borrowed by, or for or on account of deposits with or advances to
         (but not including accrued pension costs, deferred income taxes or
         accounts payable of) such Person; (ii) all obligations (including
         contingent liabilities) of such Person evidenced by bonds, debentures,
         notes, banker's acceptances or similar instruments; (iii) all
         indebtedness or liability for or on account of property or services
         purchased or acquired by such Person; (iv) any amount secured by a Lien
         on property owned by such Person (whether or not assumed) and Capital
         Lease Obligations of such Person (without regard to any limitation of
         the rights and remedies of the holder of such Lien or the lessor under
         such capital lease to repossession or sale of such property); (v) the
         maximum available amount of all standby letters of credit issued for
         the account of such Person and, without duplication, all drafts drawn
         thereunder (to the extent unreimbursed); and (vi) all Guarantees of
         such Person.

                  "INDEMNIFIED TAXES" means Taxes imposed on the Lender on or
         with respect to any payment hereunder, other than Excluded Taxes and
         Other Taxes.

                  "INSURANCE SUBSIDIARY" means any Subsidiary which is subject
         to the regulation of, and is required to file statutory financial
         statements with, any governmental body, agency or




                                      -8-

         official in any State or territory of the United States or the District
         of Columbia which regulates insurance companies or the doing of an
         insurance business therein.

                  "INTEREST ELECTION REQUEST" means a request by an Account
         Party to convert or continue a Borrowing in accordance with Section
         2.07.

                  "INTEREST PAYMENT DATE" means (a) with respect to any ABR
         Loan, each Quarterly Date and (b) with respect to any Eurodollar Loan,
         the last day of each Interest Period therefor and, in the case of any
         Interest Period of more than three months' duration, each day prior to
         the last day of such Interest Period that occurs at three-month
         intervals after the first day of such Interest Period.

                  "INTEREST PERIOD" means, for any Eurodollar Loan or Borrowing,
         the period commencing on the date of such Loan or Borrowing and ending
         on the numerically corresponding day in the calendar month that is one,
         two, three or six months thereafter, as specified in the applicable
         Borrowing Request or Interest Election Request; PROVIDED that (i) if
         any Interest Period would end on a day other than a Business Day, such
         Interest Period shall be extended to the next succeeding Business Day
         unless such next succeeding Business Day would fall in the next
         calendar month, in which case such Interest Period shall end on the
         next preceding Business Day, and (ii) any Interest Period that
         commences on the last Business Day of a calendar month (or on a day for
         which there is no numerically corresponding day in the last calendar
         month of such Interest Period) shall end on the last Business Day of
         the last calendar month of such Interest Period. For purposes hereof,
         the date of a Loan initially shall be the date on which such Loan is
         made and thereafter shall be the effective date of the most recent
         conversion or continuation of such Loan, and the date of a Borrowing
         comprising Loans that have been converted or continued shall be the
         effective date of the most recent conversion or continuation of such
         Loans.

                  "ISDA" has the meaning assigned to such term in Section
         7.03(f).

                  "LAW" means any law (including common law), constitution,
         statute, treaty, regulation, rule, ordinance, order, injunction, writ,
         decree or award of any Governmental Authority.

                  "LC DISBURSEMENT" means with respect to any Letter of Credit a
         payment made by the Lender pursuant thereto.

                  "LC EXPOSURE" means, at any time, the sum of (a) the aggregate
         undrawn amount of all outstanding Letters of Credit at such time PLUS
         (b) the aggregate amount of all LC Disbursements under Letters of
         Credit that have not yet been reimbursed by or on behalf of the Account
         Parties at such time. The LC Exposure of the Lender at the time shall
         be the sum of (i) LC Exposure (excluding any Alternative Currency LC
         Exposure) PLUS (ii) the Alternative Currency LC Exposure (if any) at
         such time.

                  "LENDER" means Deutsche Bank AG, New York Branch, or its
         successors or assigns.

                  "LETTER OF CREDIT DOCUMENTS" means, with respect to any Letter
         of Credit, collectively, any application therefor and any other
         agreements, instruments, guarantees or other documents (whether general
         in application or applicable only to such Letter of Credit) governing
         or pro-




                                      -9-

         viding for the rights and obligations of the parties concerned or at
         risk with respect to such Letter of Credit.

                  "LETTERS OF CREDIT" means each of the Dollar Letters of Credit
         and the Alternative Currency Letters of Credit.

                  "LIBO RATE" means, for the Interest Period for any Eurodollar
         Borrowing, the rate appearing on Page 3750 of the Telerate Service (or
         on any successor or substitute page of such Service, or any successor
         to or substitute for such Service, providing rate quotations comparable
         to those currently provided on such page of such Service, as determined
         by the Lender from time to time for purposes of providing quotations of
         interest rates applicable to Dollar deposits in the London interbank
         market) at approximately 11:00 a.m., London time, two Business Days
         prior to the commencement of such Interest Period, as the rate for the
         offering of Dollar deposits with a maturity comparable to such Interest
         Period. In the event that such rate is not available at such time for
         any reason, then the LIBO Rate for such Interest Period shall be the
         rate at which Dollar deposits of $5,000,000 and for a maturity
         comparable to such Interest Period are offered by the principal London
         office of the Lender in immediately available funds in the London
         interbank market at approximately 11:00 a.m., London time, two Business
         Days prior to the commencement of such Interest Period.

                  "LIEN" means, with respect to any asset, any mortgage, deed of
         trust, pledge, lien, security interest, charge or other encumbrance or
         security arrangement of any nature whatsoever, including but not
         limited to any conditional sale or title retention arrangement, and any
         assignment, deposit arrangement or lease intended as, or having the
         effect of, security.

                  "LOANS" means the loans made by the Lender to the Account
         Parties pursuant to Section 2.04.

                  "MARGIN STOCK" means "margin stock" within the meaning of
         Regulations T, U and X of the Board.

                  "MATERIAL ADVERSE EFFECT" means a material adverse effect on:
         (a) the assets, business, financial condition or operations of an
         Account Party and its Subsidiaries taken as a whole; or (b) the ability
         of an Account Party to perform any of its payment or other material
         obligations under this Agreement.

                  "MATURITY DATE" means the Commitment Termination Date, as such
         date may be extended pursuant to the Term-Out Option.

                  "MULTIEMPLOYER PLAN" means a multiemployer plan as defined in
         Section 4001(a)(3) of ERISA.

                  "NON-U.S. BENEFIT PLAN" means any plan, fund (including any
         superannuation fund) or other similar program established or maintained
         outside the United States by any Account Party or any of their
         Subsidiaries, with respect to which such Account Party or such
         Subsidiary has an obligation to contribute, for the benefit of
         employees of such Account Party or such Subsidiary, which plan, fund or
         other similar program provides, or results in, the type of benefits
         described in Section 3(1) or 3(2) of ERISA, and which plan is not
         subject to ERISA or the Code.



                                      -10-

                  "OBLIGORS" means each of the Account Parties and each of the
         Guarantors.

                  "OTHER TAXES" means any and all present or future stamp or
         documentary taxes or any other similar excise or property Taxes,
         arising from any payment made hereunder or from the execution, delivery
         or enforcement of this Agreement, but excluding property or similar
         Taxes other than any such Taxes imposed in such circumstances solely as
         a result of the Account Party being organized or resident in,
         maintaining an office in, conducting business in or maintaining
         property located in the taxing jurisdiction in question.

                  "PBGC" means the Pension Benefit Guaranty Corporation referred
         to and defined in ERISA and any successor entity performing similar
         functions.

                  "PERSON" means any natural person, corporation, limited
         liability company, trust, joint venture, association, company,
         partnership, Governmental Authority or other entity.

                  "PLAN" means any employee pension benefit plan (other than a
         Multiemployer Plan) subject to the provisions of Title IV of ERISA or
         Section 412 of the Code or Section 302 of ERISA, and in respect of
         which any Account Party or any ERISA Affiliate is (or, if such plan
         were terminated, would under Section 4069 of ERISA be deemed to be) an
         "employer" as defined in Section 3(5) of ERISA.

                  "PRIME RATE" means the rate of interest per annum publicly
         announced from time to time by the Lender as its prime rate in effect
         at its principal office in New York City; each change in the Prime Rate
         shall be effective from and including the date such change is publicly
         announced as being effective.

                  "PRIVATE ACT" means separate legislation enacted in Bermuda
         with the intention that such legislation apply specifically to an
         Account Party, in whole or in part.

                  "PRO RATA SHARE" has the meaning assigned to such term in
         Section 3.07.

                  "QUARTERLY DATE" means the last Business Day of March, June,
         September and December in each year, the first of which shall be the
         first such day after the date hereof.

                  "RC SUBLIMIT" means $60,000,000, as such amount may be reduced
         from time to time pursuant to Section 2.08.

                  "RELATED PARTIES" means, with respect to any specified Person,
         such Person's Affiliates and the respective directors, officers,
         employees, agents and advisors of such Person and such Person's
         Affiliates.

                  "SAP" means, as to each Account Party and each Subsidiary that
         offers insurance products, the statutory accounting practices
         prescribed or permitted by the relevant Governmental Authority for such
         Account Party's or such Subsidiary's domicile for the preparation of
         its financial statements and other reports by insurance corporations of
         the same type as such Account Party or such Subsidiary in effect on the
         date such statements or reports are to be prepared, except if otherwise
         notified by XL Capital as provided in Section 1.03.

                  "SEC" means the Securities and Exchange Commission or any
         successor entity.





                                      -11-

                  "SIGNIFICANT SUBSIDIARY" means, at any time, each Subsidiary
         of XL Capital that, as of such time, meets the definition of a
         "significant subsidiary" under Regulation S-X of the SEC.

                  "SPECIFIED ACCOUNT PARTY" has the meaning assigned to such
         term in Section 2.03(e).

                  "SPECIFIED TRANSACTION AGREEMENT" means any agreement,
         contract or documentation with respect to the following types of
         transactions: rate swap transaction, swap option, basis swap, asset
         swap, forward rate transaction, commodity swap, commodity option,
         equity or equity index swap, equity or equity index option, bond
         option, interest rate option, foreign exchange transaction, cap
         transaction, floor transaction, collar transaction, current swap
         transaction, cross-currency rate swap transaction, currency option,
         credit protection transaction, credit swap, credit default swap, credit
         default option, total return swap, credit spread transaction,
         repurchase transaction, reverse repurchase transaction, buy/sell-back
         transaction, securities lending or borrowing transaction, weather index
         transaction or forward purchase or sale of a security, commodity or
         other financial instrument or interest, and transactions on any
         commodity futures or other exchanges, markets and their associated
         clearing houses (including any option with respect to any of these
         transactions).

                  "STABLE VALUE INSTRUMENT" means any insurance, derivative or
         similar financial contract or instrument designed to mitigate the
         volatility of returns during a given period on a specified portfolio of
         securities held by one party (the "CUSTOMER") through the commitment of
         the other party (the "SVI PROVIDER") to provide the customer with a
         credited rate of return on the portfolio, typically determined through
         an interest-crediting mechanism (and in exchange for which the SVI
         provider typically receives a fee).

                  "STATUTORY RESERVE RATE" means, for any day (or for the
         Interest Period for any Eurodollar Borrowing), a fraction (expressed as
         a decimal), the numerator of which is the number one and the
         denominator of which is the number one MINUS the aggregate of the
         maximum reserve percentages (including any marginal, special, emergency
         or supplemental reserves) expressed as a decimal established by the
         Board to which the Lender is subject on such day (or, with respect to
         an Interest Period, the denominator of which is the number one MINUS
         the arithmetic mean of such aggregates for the days in such Interest
         Period) with respect to the Adjusted LIBO Rate, for eurocurrency
         funding (currently referred to as "Eurocurrency liabilities" in
         Regulation D of the Board). Such reserve percentages shall include
         those imposed pursuant to such Regulation D. Eurodollar Loans shall be
         deemed to constitute eurocurrency funding and to be subject to such
         reserve requirements without benefit of or credit for proration,
         exemptions or offsets that may be available from time to time to the
         Lender under such Regulation D or any comparable regulation. The
         Statutory Reserve Rate shall be adjusted automatically on and as of the
         effective date of any change in any reserve percentage.

                  "SUBSIDIARY" means, with respect to any Person (the "PARENT"),
         at any date, any corporation (or similar entity) of which a majority of
         the shares of outstanding capital stock normally entitled to vote for
         the election of directors (regardless of any contingency which does or
         may suspend or dilute the voting rights of such capital stock) is at
         such time owned directly or indirectly by the parent or one or more
         subsidiaries of the parent. Unless otherwise specified, "Subsidiary"
         means a Subsidiary of an Account Party.





                                      -12-

                  "TAXES" means any and all present or future taxes, levies,
         imposts, duties, deductions, charges or withholdings imposed by any
         Governmental Authority.

                  "TERM-OUT OPTION" has the meaning assigned to such term in
         Section 2.09(b).

                  "TOTAL FUNDED DEBT" means, at any time, all Indebtedness of XL
         Capital and its Subsidiaries which would at such time be classified in
         whole or in part as a liability on the consolidated balance sheet of XL
         Capital in accordance with GAAP.

                  "TRANSACTIONS" means the execution, delivery and performance
         by the Obligors of this Agreement and the other Credit Documents to
         which any Account Party is intended to be a party, the issuance of
         Letters of Credit, the borrowing of Loans and the use of the proceeds
         thereof.

                  "TYPE", when used in reference to any Loan or Borrowing,
         refers to whether the rate of interest on such Loan, or on the Loans
         constituting such Borrowing, is determined by reference to the Adjusted
         LIBO Rate or the Alternate Base Rate.

                  "WITHDRAWAL LIABILITY" means liability to a Multiemployer Plan
         as a result of a complete or partial withdrawal from such Multiemployer
         Plan, as such terms are defined in Part I of Subtitle E of Title IV of
         ERISA.

                  SECTION 1.02. TERMS GENERALLY. The definitions of terms herein
shall apply equally to the singular and plural forms of the terms defined.
Whenever the context may require, any pronoun shall include the corresponding
masculine, feminine and neuter forms. The words "include", "includes" and
"including" shall be deemed to be followed by the phrase "without limitation".
The word "will" shall be construed to have the same meaning and effect as the
word "shall". Unless the context requires otherwise (a) any definition of or
reference to any agreement, instrument or other document herein shall be
construed as referring to such agreement, instrument or other document as from
time to time amended, supplemented or otherwise modified (subject to any
restrictions on such amendments, supplements or modifications set forth herein),
(b) any reference herein to any Person shall be construed to include such
Person's successors and assigns, (c) the words "herein", "hereof" and
"hereunder", and words of similar import, shall be construed to refer to this
Agreement in its entirety and not to any particular provision hereof, (d) all
references herein to Articles, Sections, Exhibits and Schedules shall be
construed to refer to Articles and Sections of, and Exhibits and Schedules to,
this Agreement and (e) the words "asset" and "property" shall be construed to
have the same meaning and effect and to refer to any and all tangible and
intangible assets and properties, including cash, securities, accounts and
contract rights.

                  SECTION 1.03. ACCOUNTINGS TERMS; GAAP AND SAP. Except as
otherwise expressly PROVIDED herein, all terms of an accounting or financial
nature shall be construed in accordance with GAAP or SAP, as the context
requires, each as in effect from time to time; PROVIDED that, if XL Capital
notifies the Lender that the Account Parties request an amendment to any
provision hereof to eliminate the effect of any change occurring after the date
hereof in GAAP or SAP, as the case may be, or in the application thereof on the
operation of such provision, regardless of whether any such notice is given
before or after such change in GAAP or SAP, as the case may be, or in the
application thereof, then such provision shall be interpreted on the basis of
GAAP or SAP, as the case may be, as






                                      -13-

in effect and applied immediately before such change shall have become effective
until such notice shall have been withdrawn or such provision amended in
accordance herewith.

                                   ARTICLE II

                                   THE CREDITS
                                   -----------

                  SECTION 2.01. DOLLAR LETTERS OF CREDIT.

                  (a) GENERAL. Subject to the terms and conditions set forth
herein, at the request of any Account Party the Lender agrees at any time and
from time to time during the Availability Period to issue Dollar Letters of
Credit for the account of such Account Party in an aggregate amount that will
not result in the Credit Exposure exceeding the Commitment (it being understood
that Dollar Letters of Credit may be issued, or be outstanding, for the account
of more than one of the Account Parties at any time). Each Dollar Letter of
Credit shall be in such form as is consistent with the requirements of the
applicable regulatory authorities in Illinois, California, Wisconsin or New
York, as reasonably determined by the Lender or as otherwise agreed to by the
Lender and XL Capital.

                  (b) NOTICE OF ISSUANCE, AMENDMENT, RENEWAL OR EXTENSION. To
request the issuance of Dollar Letters of Credit (or the amendment, renewal or
extension of outstanding Dollar Letters of Credit), an Account Party shall hand
deliver or telecopy (or transmit by electronic communication, if arrangements
for doing so have been approved by the Lender) to the Lender (reasonably in
advance of the requested date of issuance, amendment, renewal or extension) a
notice requesting the issuance of Letters of Credit, or identifying the Dollar
Letters of Credit to be amended, renewed or extended, and specifying the date of
issuance, amendment, renewal or extension, as the case may be (which shall be a
Business Day), the date on which such Dollar Letters of Credit are to expire
(which shall comply with paragraph (d) of this Section), the aggregate amount of
all Dollar Letters of Credit to be issued in connection with such request, the
name and address of the beneficiary thereof and the terms and conditions of (and
such other information as shall be necessary to prepare, amend, renew or extend,
as the case may be) such Dollar Letters of Credit. If requested by the Lender,
such Account Party also shall submit a letter of credit application on Lender's
standard form in connection with any request for a Letter of Credit. In the
event of any inconsistency between the terms and conditions of this Agreement
and the terms and conditions of any form of letter of credit application or
other agreement submitted by any Account Party to, or entered into by any
Account Party with, the Lender relating to any Dollar Letter of Credit, the
terms and conditions of this Agreement shall control.

                  (c) LIMITATIONS ON AMOUNTS. A Dollar Letter of Credit shall be
issued, amended, renewed or extended only if (and upon such issuance, amendment,
renewal or extension of each Dollar Letter of Credit the Account Parties shall
be deemed to represent and warrant that), after giving effect to such issuance,
amendment, renewal or extension, the Credit Exposure shall not exceed the
aggregate amount of the Commitment.

                  (d) EXPIRY DATE. Each Dollar Letter of Credit shall expire at
or prior to the close of business on the date one year after the date of the
issuance of such Dollar Letter of Credit (or, in the case of any renewal or
extension thereof, one year after such renewal or extension).





                                      -14-


                  SECTION 2.02. ALTERNATIVE CURRENCY LETTERS OF CREDIT. From
time to time during the Availability Period, an Account Party may request the
Lender to make offers to issue an Alternative Currency Letter of Credit for the
account of such Account Party. The Lender may, but shall have no obligation to,
make such offers on terms and conditions that are satisfactory to the Lender,
and such Account Party may, but shall have no obligation to, accept any such
offers. An Alternative Currency Letter of Credit shall be issued, amended,
renewed or extended only if (and upon such issuance, amendment, renewal or
extension of each Alternative Currency Letter of Credit the Account Parties
shall be deemed to represent and warrant that), after giving effect to such
issuance, amendment, renewal or extension, the Credit Exposure shall not exceed
the amount of the Commitment. Each such Alternative Currency Letter of Credit
shall be issued, and subsequently, renewed, extended, amended and confirmed, on
such terms as XL Capital, the applicable Account Party and the Lender shall
agree, including expiry, drawing conditions, reimbursement, interest, fees and
provision of cover; PROVIDED that the expiry of any Alternative Currency Letter
of Credit shall not be later than the one-year anniversary from the date of
issuance thereof (or, in the case of any renewal or extension thereof, one-year
after such renewal or extension).

                  SECTION 2.03. REIMBURSEMENT OF LC DISBURSEMENTS, ETC.

                  (a) REIMBURSEMENT. If the Lender shall make any LC
Disbursement, regardless of the identity of the Account Party of such Letter of
Credit, the Account Parties jointly and severally agree that they shall
reimburse the Lender in respect of such LC Disbursement under (x) a Dollar
Letter of Credit, by paying to the Lender an amount equal to such LC
Disbursement not later than noon, New York City time, on (i) the Business Day
that the Account Parties receive notice of such LC Disbursement, if such notice
is received prior to 10:00 a.m., New York City time, or (ii) the Business Day
immediately following the day that the Account Parties receive such notice, if
such notice is not received prior to such time and (y) an Alternative Currency
Letter of Credit, by paying the Lender on the date, in the currency and amount
thereof, together with interest thereon (if any), and in the manner (including
the place of payment) as the Lender and such Account Party shall have separately
agreed pursuant to Section 2.02.

                  (b) REIMBURSEMENT OBLIGATIONS ABSOLUTE. The Account Parties'
joint and several obligations to reimburse LC Disbursements as PROVIDED in
paragraph (a) of this Section shall be absolute, unconditional and irrevocable,
and shall be performed strictly in accordance with the terms of this Agreement
under any and all circumstances whatsoever and irrespective of (i) any lack of
validity or enforceability of any Letter of Credit or any term or provision
therein, (ii) any draft or other document presented under a Letter of Credit
proving to be forged, fraudulent or invalid in any respect or any statement
therein being untrue or inaccurate in any respect, (iii) payment under a Letter
of Credit against presentation of a draft or other document that does not comply
strictly with the terms of such Letter of Credit (PROVIDED that the Account
Parties shall not be obligated to reimburse such LC Disbursements unless payment
is made against presentation of a draft or other document that at least
substantially complies with the terms of such Letter of Credit), (iv) at any
time or from time to time, without notice to any Account Party, the time for any
performance of or compliance with any of such reimbursement obligations of any
other Account Party shall be waived, extended or renewed, (v) any of such
reimbursement obligations of any other Account Party being amended or otherwise
modified in any respect, or any guarantee of any of such reimburse-





                                      -15-

ment obligations being released, substituted or exchanged in whole or in part or
otherwise dealt with, (vi) the occurrence of any Default, (vii) the existence of
any proceedings of the type described in clause (g) or (h) of Article VIII with
respect to any other Account Party or any guarantor of any of such reimbursement
obligations, (viii) any lack of validity or enforceability of any of such
reimbursement obligations against any other Account Party or any guarantor of
any of such reimbursement obligations, or (ix) any other event or circumstance
whatsoever, whether or not similar to any of the foregoing, that might, but for
the provisions of this Section, constitute a legal or equitable discharge of the
obligations of any Account Party hereunder.

                  Neither the Lender nor any of its Related Parties shall have
any liability or responsibility by reason of or in connection with the issuance
or transfer of any Letter of Credit or any payment or failure to make any
payment thereunder (irrespective of any of the circumstances referred to in the
preceding sentence), or any error, omission, interruption, loss or delay in
transmission or delivery of any draft, notice or other communication under or
relating to any Letter of Credit (including any document required to make a
drawing thereunder), any error in interpretation of technical terms or any
consequence arising from causes beyond their control; PROVIDED that the
foregoing shall not be construed to excuse the Lender from liability to any
Account Party to the extent of any direct damages (as opposed to consequential
damages, claims in respect of which are hereby waived by the Account Parties to
the extent permitted by applicable law) suffered by any Account Party that are
caused by the gross negligence or willful misconduct of the Lender determined in
a final, non-appealable judgment by a court of competent jurisdiction. The
parties hereto expressly agree that:

                  (i) the Lender may accept documents that appear on their face
to be in substantial compliance with the terms of a Letter of Credit without
responsibility for further investigation, regardless of any notice or
information to the contrary, and may make payment upon presentation of documents
that appear on their face to be in substantial compliance with the terms of such
Letter of Credit;

                  (ii) the Lender shall have the right, in its sole discretion,
to decline to accept such documents and to make such payment if such documents
are not in strict compliance with the terms of such Letter of Credit; and

                  (iii) this sentence shall establish the standard of care to be
exercised by the Lender when determining whether drafts and other documents
presented under a Letter of Credit comply with the terms thereof (and the
parties hereto hereby waive, to the extent permitted by applicable law, any
standard of care inconsistent with the foregoing).

                  (c) DISBURSEMENT PROCEDURES. The Lender shall, within a
reasonable time following its receipt thereof, examine all documents purporting
to represent a demand for payment under any Letter of Credit. The Lender shall
promptly after such examination notify each of the Account Parties by telephone
(confirmed by telecopy) of such demand for payment. The Lender will make any
such LC Disbursement available to the beneficiary of such Letter of Credit by
promptly crediting the amounts so received, in like funds, to the account
identified by such beneficiary in connection with such demand for payment.
Promptly following any LC Disbursement by the Lender in respect of any Letter of
Credit, the Lender will notify the Account Parties of such LC Disbursement;
PROVIDED that any failure to give or delay in giving such notice shall not
relieve the Account Parties of their obligation to reimburse the Lender with
respect to any such LC Disbursement,

                  (d) INTERIM INTEREST. If any LC Disbursement with respect to a
Letter of Credit is made, then, unless the Account Parties shall reimburse such
LC Disbursement in full on the date






                                      -16-

such LC Disbursement is made, the unpaid amount thereof shall bear interest, for
each day from and including the date such LC Disbursement is made to but
excluding the date that the Account Parties reimburse such LC Disbursement, at
the rate per annum equal to (i) 1% PLUS the Alternate Base Rate to but excluding
the date three Business Days after such LC Disbursement is made and (ii) from
and including the date three Business Days after such LC Disbursement is made,
3% PLUS the Alternate Base Rate.

                  (e) RIGHT OF CONTRIBUTION. The Account Parties hereby agree,
as between themselves, that if any Account Party shall pay any reimbursement
obligation in respect of any LC Disbursement with respect to a Letter of Credit
issued to support the obligations of another Account Party (the "SPECIFIED
ACCOUNT PARTY"), the Specified Account Party shall, on demand (but subject to
the next sentence), pay to such first Account Party an amount equal to the
amount of such reimbursement. The payment obligation of a Specified Account
Party to another Account Party under this paragraph (e) shall be subordinate and
subject in right of payment to the prior payment in full of the obligations of
the Specified Account Party under this Agreement and each other Credit Document,
and such other Account Party shall not exercise any right or remedy with respect
to such reimbursement until payment and satisfaction in full of all of such
obligations of the Specified Account Party.

                  SECTION 2.04. LOANS AND BORROWINGS.

                  (a) GENERAL. Subject to the terms and conditions set forth
herein, the Lender agrees to make Loans to an Account Party from time to time
during the Availability Period in an aggregate principal amount that will not
result in (i) the Lender's outstanding Loans exceeding the RC Sublimit and (ii)
the Credit Exposure exceeding the aggregate amount of the Commitment. Loans may
be made, or be outstanding, to more than one of the Account Parties at any time.
Within the foregoing limits and subject to the terms and conditions set forth
herein, the Account Parties may borrow, prepay and reborrow Loans.

                  (b) TYPE OF LOANS. Subject to Section 2.12, each Borrowing
shall be constituted entirely of ABR Loans or of Eurodollar Loans as any Account
Party may request in accordance herewith. The Lender at its option may make any
Eurodollar Loan by causing any domestic or foreign branch or Affiliate of the
Lender to make such Loan; PROVIDED that any exercise of such option shall not
affect the obligation of the Account Parties to repay such Loan in accordance
with the terms of this Agreement.

                  (c) MINIMUM AMOUNTS; LIMITATION ON NUMBER OF BORROWINGS. Each
Eurodollar Borrowing shall be in an aggregate amount of $10,000,000 or a larger
multiple of $1,000,000. Each ABR Borrowing shall be in an aggregate amount equal
to $10,000,000 or a larger multiple of $1,000,000; PROVIDED that an ABR
Borrowing may be in an aggregate amount that is equal to the entire unused
balance of the Commitment or that is requested to finance the reimbursement of
an LC Disbursement as contemplated by Section 2.03(a). Borrowings of more than
one Type may be outstanding at the same time; PROVIDED that there shall not at
any time be more than a total of ten Eurodollar Borrowings outstanding.

                  (d) LIMITATIONS ON INTEREST PERIODS. Notwithstanding any other
provision of this Agreement, no Account Party shall be entitled to request (or
to elect to convert to or continue as






                                      -17-

a Eurodollar Borrowing) any Borrowing if the Interest Period requested therefor
would end after the Maturity Date.

                  SECTION 2.05. REQUESTS FOR BORROWINGS.

                  (a) NOTICE BY THE ACCOUNT PARTIES. To request a Borrowing, XL
Capital shall notify the Lender of such request by telephone (i) in the case of
a Eurodollar Borrowing, not later than 11:00 a.m., New York City time, three
Business Days before the date of the proposed Borrowing or (ii) in the case of
an ABR Borrowing, not later than 11:00 a.m., New York City time, on the date of
the proposed Borrowing; PROVIDED that any such notice of an ABR Borrowing to
finance the reimbursement of an LC Disbursement as contemplated by Section
2.03(a) may be given not later than 11:00 a.m., New York City time, on the date
of the proposed Borrowing. Each such telephonic Borrowing Request shall be
irrevocable and shall be confirmed promptly by hand delivery or telecopy to the
Lender of a written Borrowing Request in a form approved by the Lender and
signed by XL Capital.

                  (b) CONTENT OF BORROWING REQUESTS. Each telephonic and written
Borrowing Request shall specify the following information in compliance with
Section 2.04:

                  (i) the relevant Account Party;

                  (ii) the aggregate amount of the requested Borrowing;

                  (iii) the date of such Borrowing, which shall be a Business
         Day;

                  (iv) whether such Borrowing is to be an ABR Borrowing or a
         Eurodollar Borrowing;

                  (v) in the case of a Eurodollar Borrowing, the Interest Period
         therefor, which shall be a period contemplated by the definition of the
         term "Interest Period" and permitted under Section 2.04(d); and

                  (vi) the location and number of such Account Party's account
         to which funds are to be disbursed, which shall comply with the
         requirements of Section 2.06.

                  (c) FAILURE TO ELECT. If no election as to the Type of a
Borrowing is specified, then the requested Borrowing shall be an ABR Borrowing.
If no Interest Period is specified with respect to any requested Eurodollar
Borrowing, then the requested Borrowing shall be made instead as an ABR
Borrowing.

                  SECTION 2.06. FUNDING OF BORROWINGS. The Lender shall make
each Loan to be made by it hereunder on the proposed date thereof by wire
transfer of immediately available funds by 12:00 noon, New York City time (or
1:00 p.m., New York City time with respect to ABR Loans requested by XL Capital
no later than 11:00 a.m. on the same day), available to the relevant Account
Party by promptly crediting the amounts so received, in like funds, to an
account of such Account Party maintained with the Lender in New York City and
designated by such Account Party in the applicable Borrowing Request.

                  SECTION 2.07. INTEREST ELECTIONS.






                                      -18-


                  (a) ELECTIONS BY THE ACCOUNT PARTIES. The Loans constituting
each Borrowing initially shall be of the Type specified in the applicable
Borrowing Request and, in the case of a Eurodollar Borrowing, shall have the
Interest Period specified in such Borrowing Request. Thereafter, the relevant
Account Party may elect to convert such Borrowing to a Borrowing of a different
Type or to continue such Borrowing as a Borrowing of the same Type and, in the
case of a Eurodollar Borrowing, may elect the Interest Period therefor, all as
provided in this Section. The relevant Account Party may elect different options
with respect to different portions of the affected Borrowing, and the Loans
constituting each such portion shall be considered a separate Borrowing.

                  (b) NOTICE OF ELECTIONS. To make an election pursuant to this
Section, XL Capital shall notify the Lender of such election by telephone by the
time that a Borrowing Request would be required under Section 2.05 if XL Capital
were requesting a Borrowing of the Type resulting from such election to be made
on the effective date of such election. Each such telephonic Interest Election
Request shall be irrevocable and shall be confirmed promptly by hand delivery or
telecopy to the Lender of a written Interest Election Request in a form approved
by the Lender and signed by XL Capital.

                  (c) CONTENT OF INTEREST ELECTION REQUESTS. Each telephonic and
written Interest Election Request shall specify the following information in
compliance with Section 2.04:

                  (i) the Borrowing to which such Interest Election Request
         applies and, if different options are being elected with respect to
         different portions thereof, the portions thereof to be allocated to
         each resulting Borrowing (in which case the information to be specified
         pursuant to clauses (iii) and (iv) of this paragraph shall be specified
         for each resulting Borrowing);

                  (ii) the effective date of the election made pursuant to such
         Interest Election Request, which shall be a Business Day;

                  (iii) whether the resulting Borrowing is to be an ABR
         Borrowing or a Eurodollar Borrowing; and

                  (iv) if the resulting Borrowing is a Eurodollar Borrowing, the
         Interest Period therefor after giving effect to such election, which
         shall be a period contemplated by the definition of the term "Interest
         Period" and permitted under Section 2.04(d).

                  (d) FAILURE TO ELECT; EVENTS OF DEFAULT. If XL Capital fails
to deliver a timely and complete Interest Election Request with respect to a
Eurodollar Borrowing prior to the end of the Interest Period therefor, then,
unless such Borrowing is repaid as provided herein, at the end of such Interest
Period such Borrowing shall be converted to an ABR Borrowing. Notwithstanding
any contrary provision hereof, if an Event of Default has occurred and is
continuing and the Lender so notifies XL Capital, then, so long as an Event of
Default is continuing (i) no outstanding Borrowing may be converted to or
continued as a Eurodollar Borrowing and (ii) unless repaid, each Eurodollar
Borrowing shall be converted to an ABR Borrowing at the end of the Interest
Period therefor.

                  SECTION 2.08. TERMINATION AND REDUCTION OF THE COMMITMENT.

                  (a) SCHEDULED TERMINATION. Unless previously terminated, the
Commitment shall terminate at the close of business on the Commitment
Termination Date.





                                      -19-


                  (b) VOLUNTARY TERMINATION OR REDUCTION. The Account Parties
may at any time terminate, or from time to time reduce, the Commitment and/or RC
Sublimit; PROVIDED that (i) each reduction of the Commitment or RC Sublimit
shall be in an amount that is $25,000,000 or a larger multiple of $5,000,000 and
(ii) the Account Parties shall not terminate or reduce the Commitment or RC
Sublimit if the Credit Exposure would exceed the Commitment or the outstanding
Loans would exceed the RC Sublimit, as the case may be. XL Capital shall notify
the Lender of any election to terminate or reduce the Commitment or RC Sublimit
under this paragraph (b) at least three Business Days prior to the effective
date of such termination or reduction, specifying such election and the
effective date thereof, PROVIDED that no reduction of the RC Sublimit shall
occur in connection with a reduction of the Commitment unless specified in such
notice, except that upon the earlier of (x) the termination of the Commitment
and (y) the Commitment Termination Date, the RC Sublimit shall be reduced to
zero. Each notice delivered by XL Capital pursuant to this paragraph (b) shall
be irrevocable; PROVIDED that a notice of termination of the Commitment
delivered by XL Capital may state that such notice is conditioned upon the
effectiveness of other credit facilities, in which case such notice may be
revoked by XL Capital (by notice to the Lender on or prior to the specified
effective date) if such condition is not satisfied. Subject to the proviso in
the immediately preceding sentence, any termination or reduction of the
Commitment or the RC Sublimit shall be permanent.

                  SECTION 2.09. REPAYMENT OF LOANS; TERM-OUT OPTION; EVIDENCE OF
DEBT.

                  (a) REPAYMENT. Each Account Party hereby unconditionally
promises to pay to the Lender, (i) in the event that the Term-Out Option has not
been exercised, the outstanding principal amount of the Loans made to such
Account Party on the Commitment Termination Date and (ii) in the event that the
Term-Out Option has been exercised and is in effect, the outstanding principal
amount of the Loans made to such Account Party on the Maturity Date.

                  (b) TERM-OUT OPTION. The Account Parties may, by notice given
by XL Capital to the Lender not less than 15 days prior to the Commitment
Termination Date, extend the Maturity Date for all Loans outstanding at the
close of business New York City time on the Commitment Termination Date to the
first anniversary of the Commitment Termination Date (the "TERM-OUT OPTION");
PROVIDED that such extension shall not be effective with respect to the Lender
unless:

                  (i) no Default shall have occurred and be continuing on each
         of the date of the notice requesting such extension and on the
         Commitment Termination Date; and

                  (ii) the representations and warranties of the Obligors set
         forth in this Agreement (other than in Section 4.04(b)) shall be true
         and correct on and as of each of the date of the notice requesting such
         extension and the Commitment Termination Date (or, if any such
         representation or warranty is expressly stated to have been made as of
         a specific date, as of such specific date).

Such notice shall be deemed to constitute a representation and warranty by XL
Capital as to the matters specified in clauses (i) and (ii) of the immediately
preceding sentence as of each such date.

                  Notwithstanding the foregoing, the Commitment of the Lender to
make Loans shall terminate on the Commitment Termination Date.

                  (c) MANNER OF PAYMENT. Prior to any repayment or prepayment of
any Borrowings hereunder, XL Capital shall select the Borrowing or Borrowings to
be paid and shall notify the






                                      -20-

Lender by telephone (confirmed by telecopy) of such selection not later than
11:00 a.m., New York City time, three Business Days before the scheduled date of
such repayment; PROVIDED that each repayment of Borrowings shall be applied to
repay any outstanding ABR Borrowings before any other Borrowings. If XL Capital
fails to make a timely selection of the Borrowing or Borrowings to be repaid or
prepaid, such payment shall be applied, first, to pay any outstanding ABR
Borrowings and, second, to other Borrowings in the order of the remaining
duration of their respective Interest Periods (the Borrowing with the shortest
remaining Interest Period to be repaid first). Each payment of a Borrowing shall
be applied ratably to the Loans included in such Borrowing.

                  (d) MAINTENANCE OF RECORDS BY LENDER. The Lender shall
maintain in accordance with its usual practice records evidencing the
indebtedness of each Account Party to the Lender resulting from each Loan made
by the Lender to such Account Party, including the amounts of principal and
interest payable and paid to the Lender from time to time hereunder. The entries
made in the records maintained pursuant to paragraph (d) or (e) of this Section
shall be PRIMA FACIE evidence of the existence and amounts of the obligations
recorded therein; PROVIDED that the failure of the Lender to maintain such
records or any error therein shall not in any manner affect the obligation of
the Account Parties to repay the Loans in accordance with the terms of this
Agreement.

                  (e) PROMISSORY NOTES. The Lender may request that Loans made
by it to any Account Party be evidenced by a promissory note of such Account
Party. In such event, each Account Party shall prepare, execute and deliver to
the Lender a promissory note payable to the Lender (or, if requested by the
Lender, to the Lender and its registered assigns) and in a form approved by the
Lender. Thereafter, the Loans evidenced by such promissory note and interest
thereon shall at all times be represented by one or more promissory notes in
such form payable to the payee named therein (or, if such promissory note is a
registered note, to such payee and its registered assigns).

                  SECTION 2.10. PREPAYMENT OF LOANS.

                  (a) RIGHT TO PREPAY BORROWINGS. The Account Parties shall have
the right at any time and from time to time to prepay any Borrowing in whole or
in part, subject to the requirements of this Section.

                  (b) NOTICES, ETC. XL Capital shall notify the Lender by
telephone (confirmed by telecopy) of any prepayment hereunder (i) in the case of
prepayment of a Eurodollar Borrowing, not later than 11:00 a.m., New York City
time, three Business Days before the date of prepayment or (ii) in the case of
prepayment of an ABR Borrowing, not later than 11:00 a.m., New York City time,
one Business Day before the date of prepayment. Each such notice shall be
irrevocable and shall specify the prepayment date and the principal amount of
each Borrowing or portion thereof to be prepaid; PROVIDED that, if a notice of
prepayment is given in connection with a conditional notice of termination of
the Commitment as contemplated by Section 2.08, then such notice of prepayment
may be revoked if such notice of termination is revoked in accordance with
Section 2.08. Each partial prepayment of any Borrowing shall be in an amount
that would be permitted in the case of a Borrowing of the same Type as provided
in Section 2.04. Each prepayment of a Borrowing shall be applied ratably to the
Loans included in the prepaid Borrowing. Prepayments shall be accompanied by
accrued interest to the extent required by Section 2.12 and shall be made in the
manner specified in Section 2.09(c).

                  SECTION 2.11. FEES.





                                      -21-

                  (a) FACILITY FEE. XL Capital agrees to pay to the Lender a
facility fee which shall accrue at a rate per annum equal to the Applicable
Facility Fee Rate, (i) prior to the termination of the Lender's Commitment, on
the daily amount of such Commitment (whether used or unused) during the period
from and including the Effective Date to but excluding the earlier of the date
on which such Commitment terminates and the Commitment Termination Date and (ii)
if the Lender continues to have any Credit Exposure after its Commitment
terminates, on the daily amount of the Lender's Credit Exposure from and
including the date on which the Lender's Commitment terminates to but excluding
the date on which the Lender ceases to have any Credit Exposure. Accrued
facility fees shall be payable on each Quarterly Date and on (i) in the event
the Term-Out Option has not been exercised, the earlier of the date the
Commitment terminates and the Commitment Termination Date or (ii) in the event
the Term-Out Option has been exercised and is in effect, on the Maturity Date;
PROVIDED that any facility fees accruing after such earlier date or the Maturity
Date, as the case may be, shall be payable on demand.

                  (b) LETTER OF CREDIT FEES. XL Capital agrees to pay to the
Lender a letter of credit fee which shall accrue at a rate per annum equal to
the Applicable Letter of Credit Fee Rate on the average daily aggregate undrawn
amount of all outstanding Letters of Credit during the period from and including
the Effective Date to but excluding the later of the date on which the Lender's
Commitment terminates and the date on which the Lender ceases to have any LC
Exposure. Letter of Credit fees accrued through and including each Quarterly
Date shall be payable on the third Business Day following such Quarterly Date,
commencing on the first such date to occur after the Effective Date; PROVIDED
that all such fees shall be payable on the date on which the Commitment
terminates and any such fees accruing after the date on which the Commitment
terminates shall be payable on demand.

                  (c) PAYMENT AND COMPUTATION OF FEES. All fees payable
hereunder shall be paid on the dates due, in immediately available funds, to the
Lender entitled thereto. Fees paid shall not be refundable under any
circumstances. All fees payable under paragraphs (a) and (b) of this Section
shall be computed on the basis of a year of 360 days and shall be payable for
the actual number of days elapsed (including the first day but excluding the
last day).

                  SECTION 2.12. INTEREST.

                  (a) ABR LOANS. The Loans constituting each ABR Borrowing shall
bear interest at a rate per annum equal to the Alternate Base Rate PLUS the
Applicable Additional Margin, if any.

                  (b) EURODOLLAR LOANS. The Loans constituting each Eurodollar
Borrowing shall bear interest at a rate per annum equal to the Adjusted LIBO
Rate for the Interest Period for such Borrowing plus the Applicable Margin PLUS
the Applicable Additional Margin, if any.

                  (c) DEFAULT INTEREST. Notwithstanding the foregoing, if any
principal of or interest on any Loan or any fee or other amount payable (other
that in respect of any LC Disbursement under Section 2.03(d)) by the Account
Parties hereunder is not paid when due, whether at stated maturity, upon
acceleration or otherwise, such overdue amount shall bear interest, after as
well as before judgment, at a rate per annum equal to (i) in the case of overdue
principal of any Loan, 2% PLUS the rate otherwise applicable to such Loan as
PROVIDED above or (ii) in the case of any other amount, 2% PLUS the rate
applicable to ABR Loans as PROVIDED in paragraph (a) of this Section.





                                      -22-

                  (d) PAYMENT OF INTEREST. Accrued interest on each Loan shall
be payable by the applicable Account Party in arrears on each Interest Payment
Date for such Loan and upon (i) in the event the Term-Out Option has not been
exercised, the date the Commitment terminates or (ii) in the event the Term-Out
Option has been exercised and is in effect, the Maturity Date; PROVIDED that (x)
interest accrued pursuant to paragraph (c) of this Section shall be payable on
demand, (y) in the event of any repayment or prepayment of any Loan (other than
a prepayment of an ABR Loan prior to the later of the Commitment Termination
Date and the Maturity Date), accrued interest on the principal amount repaid or
prepaid shall be payable on the date of such repayment or prepayment and (z) in
the event of any conversion of any Eurodollar Borrowing prior to the end of the
Interest Period therefor, accrued interest on such Borrowing shall be payable on
the effective date of such conversion.

                  (e) COMPUTATION. All interest hereunder shall be computed on
the basis of a year of 360 days, except that interest computed by reference to
the Alternate Base Rate at times when the Alternate Base Rate is based on the
Prime Rate shall be computed on the basis of a year of 365 days (or 366 days in
a leap year), and in each case shall be payable for the actual number of days
elapsed (including the first day but excluding the last day). The applicable
Alternate Base Rate or Adjusted LIBO Rate shall be determined by the Lender, and
such determination shall be conclusive absent manifest error.

                  SECTION 2.13. ALTERNATE RATE OF INTEREST. If prior to the
commencement of the Interest Period for any Eurodollar Borrowing, the Lender
determines in good faith that the Adjusted LIBO Rate for such Interest Period
will not adequately and fairly reflect the cost to the Lender of making or
maintaining its respective Loans included in such Borrowing for such Interest
Period, then the Lender shall give notice thereof to XL Capital by telephone or
telecopy as promptly as practicable thereafter and, until the Lender notifies XL
Capital that the circumstances giving rise to such notice no longer exist, (i)
any Interest Election Request that requests the conversion of any Borrowing to,
or the continuation of any Borrowing as, a Eurodollar Borrowing shall be
ineffective and such Borrowing (unless prepaid) shall be continued as, or
converted to, an ABR Borrowing and (ii) if any Borrowing Request requests a
Eurodollar Borrowing, such Borrowing shall be made as an ABR Borrowing.

                  SECTION 2.14. INCREASED COSTS.

                  (a) INCREASED COSTS GENERALLY. If any Change in Law shall:

                  (i) impose, modify or deem applicable any reserve, special
         deposit or similar requirement against assets of, deposits with or for
         account of, or credit extended by, the Lender (except any such reserve
         requirement reflected in the Adjusted LIBO Rate); or

                  (ii) impose on the Lender or the London interbank market any
         other condition affecting this Agreement, any Letter of Credit (or any
         participation therein) or any Eurodollar Loan made by the Lender;

and the result of any of the foregoing shall be to increase the cost to the
Lender of making or maintaining, or participating in, any Letter of Credit (or
of maintaining any participation therein) or Eurodollar Loan (or of maintaining
its obligation to make any such Loan) or to reduce the amount of any sum
received or receivable by the Lender hereunder (whether of principal, interest
or otherwise), then the





                                      -23-

Account Parties jointly and severally agree that they will pay to the Lender
such additional amount or amounts as will compensate the Lender for such
additional costs incurred or reduction suffered.

                  (b) CAPITAL REQUIREMENTS. If the Lender determines that any
Change in Law regarding capital requirements has or would have the effect of
reducing the rate of return on the Lender's capital or on the capital of the
Lender's holding company, if any, as a consequence of this Agreement or the
Letters of Credit issued or participated in, or the Loans made, by the Lender to
a level below that which the Lender or the Lender's holding company could have
achieved but for such Change in Law (taking into consideration the Lender's
policies and the policies of the Lender's holding company with respect to
capital adequacy), then from time to time the Account Parties will pay to the
Lender such additional amount or amounts as will compensate the Lender or the
Lender's holding company for any such reduction suffered.

                  (c) CERTIFICATES FROM LENDER. A certificate of the Lender
setting forth the Lender's good faith determination of the amount or amounts
necessary to compensate the Lender or its holding company, as the case may be,
as specified in paragraph (a) or (b) of this Section shall be delivered to XL
Capital and shall be conclusive absent manifest error. The Account Parties shall
pay the Lender the amount shown as due on any such certificate within 10 days
after receipt thereof by XL Capital.

                  (d) DELAY IN REQUESTS. Failure or delay on the part of the
Lender to demand compensation pursuant to this Section shall not constitute a
waiver of the Lender's right to demand such compensation; PROVIDED that the
Account Parties shall not be required to compensate the Lender pursuant to this
Section for any increased costs or reductions incurred more than 90 days prior
to the date that the Lender notifies XL Capital of the Change in Law giving rise
to such increased costs or reductions and of the Lender's intention to claim
compensation therefor; PROVIDED, FURTHER, that, if the Change in Law giving rise
to such increased costs or reductions is retroactive, then the 90 day period
referred to above shall be extended to include the period of retroactive effect
thereof.

                  (e) APPLICATION TO TAXES. Notwithstanding anything in this
Section to the contrary, this Section shall not apply to Taxes, which shall be
governed solely by Section 2.16.

                  SECTION 2.15. BREAK FUNDING PAYMENTS. In the event of (a) the
payment of any principal of any Eurodollar Loan other than on the last day of an
Interest Period therefor (including as a result of an Event of Default), (b) the
conversion of any Eurodollar Loan other than on the last day of an Interest
Period therefor or (c) the failure to borrow, convert, continue or prepay any
Loan on the date specified in any notice delivered pursuant hereto (regardless
of whether such notice is permitted to be revocable under Section 2.10(b) and is
revoked in accordance herewith), then, in any such event, the Account Parties
shall compensate the Lender for the loss attributable to such event. The loss to
the Lender attributable to any such event shall be deemed to be an amount
determined by the Lender to be equal to the excess, if any, of (i) the amount of
interest that the Lender would pay for a deposit equal to the principal amount
of such Loan for the period from the date of such payment, conversion, failure
or assignment to the last day of the then current Interest Period for such Loan
(or, in the case of a failure to borrow, convert or continue, the duration of
the Interest Period that would have resulted from such borrowing, conversion or
continuation) if the interest rate payable on such deposit were equal to the
Adjusted LIBO Rate for such Interest Period, OVER (ii) the amount of interest
that the Lender would earn on such principal amount for such period if the
Lender were to invest such principal amount for





                                      -24-

such period at the interest rate that would be bid by the Lender (or an
affiliate of the Lender) for Dollar deposits from other banks in the eurodollar
market at the commencement of such period. A certificate of the Lender setting
forth the Lender's good faith determination of any amount or amounts that the
Lender is entitled to receive pursuant to this Section shall be delivered to XL
Capital and shall be conclusive absent manifest error. The Account Parties shall
pay the Lender the amount shown as due on any such certificate within 10 days
after receipt thereof by XL Capital.

                  SECTION 2.16. TAXES.

                  (a) PAYMENTS FREE OF TAXES. Any and all payments by or on
account of any obligation of the Account Parties hereunder shall be made free
and clear of and without deduction for any Indemnified Taxes; PROVIDED that if
any Account Party shall be required to deduct any Indemnified Taxes from such
payments, then (i) the sum payable shall be increased as necessary so that after
making all required deductions (including deductions applicable to additional
sums payable under this Section) the Lender (as the case may be) receives an
amount equal to the sum it would have received had no such deductions been made,
(ii) such Account Party shall make such deductions and (iii) such Account Party
shall pay the full amount deducted to the relevant Governmental Authority in
accordance with applicable law.

                  (b) PAYMENT OF OTHER TAXES BY THE ACCOUNT PARTIES. In
addition, each Account Party shall pay any Other Taxes to the relevant
Governmental Authority in accordance with applicable law.

                  (c) INDEMNIFICATION BY THE ACCOUNT PARTIES. The Account
Parties shall indemnify the Lender, within 10 days after written demand to XL
Capital therefor, for the full amount of any Indemnified Taxes and Other Taxes
(including Indemnified Taxes imposed or asserted on or attributable to amounts
payable under this Section) paid by the Lender and any penalties, interest and
reasonable expenses arising therefrom or with respect thereto, whether or not
such Indemnified Taxes or Other Taxes, as the case may be, were correctly or
legally imposed or asserted by the relevant Governmental Authority. A
certificate setting forth the Lender's good faith determination of the amount of
such payment or liability delivered to XL Capital by the Lender, shall be
conclusive as between the Lender and the Account Parties absent manifest error.

                  (d) EVIDENCE OF PAYMENTS. As soon as practicable after any
payment of Indemnified Taxes or Other Taxes by any Account Party to a
Governmental Authority, XL Capital on behalf of such Account Party shall deliver
to the Lender the original or a certified copy of a receipt issued by such
Governmental Authority evidencing such payment, a copy of the return reporting
such payment or other evidence of such payment reasonably satisfactory to the
Lender.

                  (e) EXEMPTIONS. The Lender shall, at the written request of XL
Capital, provide to any Account Party such form, certification or similar
documentation, if any (each duly completed, accurate and signed) as is currently
required by any Account Party Jurisdiction or any other jurisdiction, or comply
with such other requirements, if any, as is currently applicable in such Account
Party Jurisdiction or any other jurisdiction, in order to obtain an exemption
from, or reduced rate of, deduction, payment or withholding of Indemnified Taxes
or Other Taxes to which the Lender is entitled pursuant to an applicable tax
treaty or the law of such Account Party Jurisdiction or any other jurisdiction;
PROVIDED that XL Capital shall have furnished to the Lender in a reasonably
timely manner copies of such documentation and notice of such requirements
together with ap-




                                      -25-

plicable instructions. Upon the reasonable request of XL Capital in writing, the
Lender will provide to XL Capital such form, certification or similar
documentation (each duly completed, accurate and signed) as may in the future be
required by any Account Party Jurisdiction or any other jurisdiction, or comply
with such other requirements, if any, as may be applicable in such Account Party
Jurisdiction or any other jurisdiction in order to obtain an exemption from, or
reduced rate of, deduction, payment or withholding of Indemnified Taxes or Other
Taxes to which the Lender is entitled pursuant to an applicable tax treaty or
the law of the relevant jurisdiction. The Account Parties shall not be required
to pay additional amount to, or to indemnify, the Lender under paragraph (a) or
(c) of this Section for any Indemnified Taxes or Other Taxes to the extent such
Indemnified Taxes or Other Taxes would not have been imposed but for the failure
by the Lender to comply with the foregoing provisions of this paragraph (e).

                  (f) If the Lender determines, in its reasonable discretion,
that it has received a refund of any Taxes or Other Taxes as to which it has
been indemnified by an Account Party or with respect to which an Account Party
has paid additional amounts pursuant to this Section, it shall pay over such
refund to such Account Party (but only to the extent of indemnity payments made,
or additional amounts paid, by such Account Party under this Section with
respect to the Taxes or Other Taxes giving rise to such refund), net of all
out-of-pocket expenses of the Lender and without interest (other than any
interest paid by the relevant Governmental Authority with respect to such
refund); PROVIDED that such Account Party, upon the request of the Lender,
agrees to repay the amount paid over to such Account Party (plus any penalties,
interest or other charges imposed by the relevant Governmental Authority) to the
Lender in the event the Lender is required to repay such refund to such
Governmental Authority. This Section shall not be construed to require the
Lender to make available its tax returns (or any other information relating to
its taxes which it deems confidential) to any Account Party or any other Person.

                  SECTION 2.17. PAYMENTS GENERALLY; PRO RATA TREATMENT; SHARING
OF SET-OFFS.

                  (a) PAYMENTS BY THE ACCOUNT PARTIES. The Account Parties shall
make each payment required to be made by them hereunder (whether of principal,
interest, fees or reimbursement of LC Disbursements, interest or fees, or under
Section 2.14, 2.15 or 2.16, or otherwise) or under any other Credit Document
(except to the extent otherwise provided therein) prior to 12:00 noon, New York
City time, on the date when due, in immediately available funds, without set-off
or counterclaim; PROVIDED that any payments in respect of Alternative Currency
Letters of Credit shall be made in the manner (including the time and place of
payment) as shall have been separately agreed between the relevant Account Party
and Lender pursuant to Section 2.02. Any amounts received after such time on any
date may, in the discretion of the Lender, be deemed to have been received on
the next succeeding Business Day for purposes of calculating interest thereon.
All such payments shall be made to the Lender at its offices at 60 Wall Street,
New York, New York 10005, except payments pursuant to Sections 2.14, 2.15, 2.16
and 9.03, which shall be made directly to the Persons entitled thereto. If any
payment hereunder shall be due on a day that is not a Business Day, the date for
payment shall be extended to the next succeeding Business Day and, in the case
of any payment accruing interest, interest thereon shall be payable for the
period of such extension. All payments hereunder shall be made in Dollars.

                  (b) APPLICATION OF INSUFFICIENT PAYMENTS. If at any time
insufficient funds are received by and available to the Lender to pay fully all
amounts of principal, unreimbursed LC Disbursements, interest and fees then due
hereunder, such funds shall be applied (i) first, to pay interest





                                      -26-

and fees then due hereunder, and (ii) second, to pay principal and unreimbursed
LC Disbursements then due hereunder.

                  SECTION 2.18. DESIGNATION OF A DIFFERENT LENDING OFFICE. If
the Lender requests compensation under Section 2.14, or if any Account Party is
required to pay any additional amount or indemnification payment to the Lender
or any Governmental Authority for account of the Lender pursuant to Section
2.16, then the Lender shall use reasonable efforts to designate a different
lending office for funding or booking its Loans and/or Letters of Credit
hereunder or to assign its rights and obligations hereunder to another of its
offices, branches or Affiliates, if, in the reasonable judgment of the Lender,
such designation or assignment (i) would eliminate or reduce amounts payable
pursuant to Section 2.14 or 2.16, as the case may be, in the future and (ii)
would not subject the Lender to any unreimbursed cost or expense and would not
otherwise be disadvantageous to the Lender. Each Account Party hereby agrees to
pay all reasonable costs and expenses incurred by the Lender in connection with
any such designation or assignment.

                                  ARTICLE III

                                    GUARANTEE
                                    ---------

                  SECTION 3.01. THE GUARANTEE. Each Guarantor hereby jointly and
severally guarantees to the Lender and its respective successors and assigns the
prompt payment in full when due (whether at stated maturity, by acceleration or
otherwise) of the principal of and interest on the Loans and LC Disbursements
(and interest thereon) made by the Lender to each of the Account Parties (other
than such Guarantor in its capacity as an Account Party hereunder) and all other
amounts from time to time owing to the Lender by such Account Parties under this
Agreement, in each case strictly in accordance with the terms thereof (such
obligations being herein collectively called the "GUARANTEED OBLIGATIONS"). Each
Guarantor hereby further jointly and severally agrees that if any Account Party
(other than such Guarantor in its capacity as an Account Party hereunder) shall
fail to pay in full when due (whether at stated maturity, by acceleration or
otherwise) any of the Guaranteed Obligations, such Guarantor will promptly pay
the same, without any demand or notice whatsoever, and that in the case of any
extension of time of payment or renewal of any of the Guaranteed Obligations,
the same will be promptly paid in full when due (whether at extended maturity,
by acceleration or otherwise) in accordance with the terms of such extension or
renewal.

                  SECTION 3.02. OBLIGATIONS UNCONDITIONAL. The obligations of
the Guarantors under Section 3.01 are absolute and unconditional, joint and
several, irrespective of the value, genuineness, validity, regularity or
enforceability of the obligations of the Account Parties under this Agreement or
any other agreement or instrument referred to herein or therein, or any
substitution, release or exchange of any other guarantee of or security for any
of the Guaranteed Obligations, and, to the fullest extent permitted by
applicable law, irrespective of any other circumstance whatsoever that might
otherwise constitute a legal or equitable discharge or defense of a surety or
guarantor, it being the intent of this Article that the obligations of the
Guarantors hereunder shall be absolute and unconditional, joint and several,
under any and all circumstances. Without limiting the generality of the
foregoing, it is agreed that the occurrence of any one or more of the following
shall not alter or impair the liability of the Guarantors hereunder, which shall
remain absolute and unconditional as described above:




                                      -27-

                  (i) at any time or from time to time, without notice to the
         Guarantors, the time for any performance of or compliance with any of
         the Guaranteed Obligations shall be extended, or such performance or
         compliance shall be waived;

                  (ii) any of the acts mentioned in any of the provisions of
         this Agreement or any other agreement or instrument referred to herein
         shall be done or omitted; or

                  (iii) the maturity of any of the Guaranteed Obligations shall
         be accelerated, or any of the Guaranteed Obligations shall be modified,
         supplemented or amended in any respect, or any right under this
         Agreement or any other agreement or instrument referred to herein shall
         be waived or any other guarantee of any of the Guaranteed Obligations
         or any security therefor shall be released or exchanged in whole or in
         part or otherwise dealt with.

The Guarantors hereby expressly waive diligence, presentment, demand of payment,
protest and all notices whatsoever, and any requirement that the Lender exhaust
any right, power or remedy or proceed against any Account Party under this
Agreement or any other agreement or instrument referred to herein, or against
any other Person under any other guarantee of, or security for, any of the
Guaranteed Obligations.

                  SECTION 3.03. REINSTATEMENT. The obligations of the Guarantors
under this Article shall be automatically reinstated if and to the extent that
for any reason any payment by or on behalf of any Account Party in respect of
the Guaranteed Obligations is rescinded or must be otherwise restored by any
holder of any of the Guaranteed Obligations, whether as a result of any
proceedings in bankruptcy or reorganization or otherwise, and the Guarantors
jointly and severally agree that they will indemnify the Lender on demand for
all reasonable costs and expenses (including reasonable fees of counsel)
incurred by the Lender in connection with such rescission or restoration,
including any such costs and expenses incurred in defending against any claim
alleging that such payment constituted a preference, fraudulent transfer or
similar payment under any bankruptcy, insolvency or similar law.

                  SECTION 3.04. SUBROGATION. The Guarantors hereby jointly and
severally agree that until the payment and satisfaction in full of all
Guaranteed Obligations and the expiration and termination of the Commitment they
shall not exercise any right or remedy arising by reason of any performance by
them of their guarantee in Section 3.01, whether by subrogation or otherwise,
against any Account Party or any other guarantor of any of the Guaranteed
Obligations or any security for any of the Guaranteed Obligations.

                  SECTION 3.05. REMEDIES. The Guarantors jointly and severally
agree that, as between the Guarantors and the Lender, the obligations of the
Account Parties under this Agreement may be declared to be forthwith due and
payable as provided in Article VIII (and shall be deemed to have become
automatically due and payable in the circumstances provided in Article VIII) for
purposes of Section 3.01 notwithstanding any stay, injunction or other
prohibition preventing such declaration (or such obligations from becoming
automatically due and payable) as against any Account Party and that, in the
event of such declaration (or such obligations being deemed to have become
automatically due and payable), such obligations (whether or not due and payable
by any Account Party) shall forthwith become due and payable by the Guarantors
for purposes of Section 3.01.




                                      -28-

                  SECTION 3.06. CONTINUING GUARANTEE. The guarantee in this
Article is a continuing guarantee, and shall apply to all Guaranteed Obligations
whenever arising.

                  SECTION 3.07. RIGHTS OF CONTRIBUTION. The Guarantors (other
than XL Capital) hereby agree, as between themselves, that if any such Guarantor
shall become an Excess Funding Guarantor (as defined below) by reason of the
payment by such Guarantor of any Guaranteed Obligations, each other Guarantor
(other than XL Capital) shall, on demand of such Excess Funding Guarantor (but
subject to the next sentence), pay to such Excess Funding Guarantor an amount
equal to such Guarantor's Pro Rata Share (as defined below and determined, for
this purpose, without reference to the properties, debts and liabilities of such
Excess Funding Guarantor) of the Excess Payment (as defined below) in respect of
such Guaranteed Obligations. The payment obligation of a Guarantor to any Excess
Funding Guarantor under this Section shall be subordinate and subject in right
of payment to the prior payment in full of the obligations of such Guarantor
under the other provisions of this Article III and such Excess Funding Guarantor
shall not exercise any right or remedy with respect to such excess until payment
and satisfaction in full of all of such obligations.

                  For purposes of this Section, (i) "EXCESS FUNDING GUARANTOR"
means, in respect of any Guaranteed Obligations, a Guarantor that has paid an
amount in excess of its Pro Rata Share of such Guaranteed Obligations, (ii)
"EXCESS PAYMENT" means, in respect of any Guaranteed Obligations, the amount
paid by an Excess Funding Guarantor in excess of its Pro Rata Share of such
Guaranteed Obligations and (iii) "PRO RATA SHARE" means, for any Guarantor, the
ratio (expressed as a percentage) of (x) the amount by which the aggregate
present fair saleable value of all properties of such Guarantor (excluding any
shares of stock of any other Guarantor) exceeds the amount of all the debts and
liabilities of such Guarantor (including contingent, subordinated, unmatured and
unliquidated liabilities, but excluding the obligations of such Guarantor
hereunder and any obligations of any other Guarantor that have been Guaranteed
by such Guarantor) to (y) the amount by which the aggregate fair saleable value
of all properties of all of the Guarantors (other than XL Capital) exceeds the
amount of all the debts and liabilities (including contingent, subordinated,
unmatured and unliquidated liabilities, but excluding the obligations of the
Guarantors under this Article III) of all of the Guarantors (other than XL
Capital), determined (A) with respect to any Guarantor that is a party hereto on
the date hereof, as of the date hereof, and (B) with respect to any other
Guarantor, as of the date such Guarantor becomes a Guarantor hereunder.

                  SECTION 3.08. GENERAL LIMITATION ON GUARANTEE OBLIGATIONS. In
any action or proceeding involving any corporate law, or any bankruptcy,
insolvency, reorganization or other law affecting the rights of creditors
generally, if the obligations of any Guarantor under Section 3.01 would
otherwise, taking into account the provisions of Section 3.07, be held or
determined to be void, invalid or unenforceable, or subordinated to the claims
of any other creditors, on account of the amount of its liability under Section
3.01, then, notwithstanding any other provision hereof to the contrary, the
amount of such liability shall, without any further action by such Guarantor,
the Lender or any other Person, be automatically limited and reduced to the
highest amount that is valid and enforceable and not subordinated to the claims
of other creditors as determined in such action or proceeding.





                                      -29-

                                   ARTICLE IV

                         REPRESENTATIONS AND WARRANTIES
                         ------------------------------

                  Each Account Party represents and warrants to the Lender that:

                  SECTION 4.01. ORGANIZATION; POWERS. Such Account Party and
each of its Significant Subsidiaries is duly organized, validly existing and in
good standing under the laws of the jurisdiction of its organization, has all
requisite power and authority to carry on its business as now conducted and,
except where the failure to do so, individually or in the aggregate, could not
reasonably be expected to result in a Material Adverse Effect, is qualified to
do business in, and is in good standing in, every jurisdiction where such
qualification is required.

                  SECTION 4.02. AUTHORIZATION; ENFORCEABILITY. The Transactions
are within such Account Parties' corporate powers and have been duly authorized
by all necessary corporate and, if required, by all necessary shareholder
action. This Agreement has been duly executed and delivered by such Account
Party and constitutes a legal, valid and binding obligation of such Account
Party, enforceable against such Account Party in accordance with its terms,
except as such enforceability may be limited by (a) bankruptcy, insolvency,
reorganization, moratorium, examination or similar laws of general applicability
affecting the enforcement of creditors' rights and (b) the application of
general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).

                  SECTION 4.03. GOVERNMENTAL APPROVALS; NO CONFLICTS. The
Transactions (a) do not require any consent or approval of (including any
exchange control approval), registration or filing with, or any other action by,
any Governmental Authority, except such as have been obtained or made and are in
full force and effect, (b) will not violate any applicable law or regulation or
the charter, by-laws or other organizational documents of such Account Party or
any of its Significant Subsidiaries or any order of any Governmental Authority,
(c) will not violate or result in a default under any material indenture,
agreement or other instrument binding upon such Account Party or any of its
Significant Subsidiaries or assets, or give rise to a right thereunder to
require any payment to be made by any such Person, and (d) will not result in
the creation or imposition of any Lien on any asset of such Account Party or any
of its Significant Subsidiaries.

                  SECTION 4.04. FINANCIAL CONDITION; NO MATERIAL ADVERSE CHANGE.

                  (a) FINANCIAL CONDITION. Such Account Party has heretofore
furnished to the Lender the consolidated balance sheet and statements of income,
stockholders' equity and cash flows of such Account Party and its consolidated
Subsidiaries (A) as of and for the fiscal year ended December 31, 2003, reported
on by PricewaterhouseCoopers LLP, independent public accountants (as provided in
XL Capital's Report on Form 10-K filed with the SEC for the fiscal year ended
December 31, 2003), and (B) as of and for the fiscal quarter ended June 30,
2004, as provided in XL Capital's Report on Form 10-Q filed with the SEC for the
fiscal quarter ended June 30, 2004. Such financial statements present fairly, in
all material respects, the financial position and results of operations and cash
flows of such Account Party and its respective consolidated Subsidiaries as of
such dates and for such periods in accordance with GAAP or (in the case of XL
Insurance or XL Re) SAP, subject to year-end audit adjustments and the absence
of footnotes in the case of the statements referred to in clause (B) of the
first sentence of this paragraph.





                                      -30-

                  (b) NO MATERIAL ADVERSE CHANGE. Since December 31, 2003, there
has been no material adverse change in the assets, business, financial condition
or operations of such Account Party and its Subsidiaries, taken as a whole.

                  SECTION 4.05. PROPERTIES.

                  (a) PROPERTY GENERALLY. Such Account Party and each of its
Significant Subsidiaries has good title to, or valid leasehold interests in, all
its real and personal property material to its business, subject only to Liens
permitted by Section 7.03 and except for minor defects in title that do not
interfere with its ability to conduct its business as currently conducted or to
utilize such properties for their intended purposes.

                  (b) INTELLECTUAL PROPERTY. Such Account Party and each of its
Significant Subsidiaries owns, or is licensed to use, all trademarks,
tradenames, copyrights, patents and other intellectual property material to its
business, and the use thereof by such Account Party and its Subsidiaries does
not infringe upon the rights of any other Person, except for any such
infringements that, individually or in the aggregate, could not reasonably be
expected to result in a Material Adverse Effect.

                  SECTION 4.06. LITIGATION AND ENVIRONMENTAL MATTERS.

                  (a) ACTIONS, SUITS AND PROCEEDINGS. Except as disclosed in
Schedule II or contemplated by our SEC reports, or as routinely encountered in
claims activity, there are no actions, suits or proceedings by or before any
arbitrator or Governmental Authority now pending against or, to the knowledge of
such Account Party, threatened against or affecting such Account Party or any of
its Subsidiaries (i) as to which there is a reasonable possibility of an adverse
determination and that could reasonably be expected, individually or in the
aggregate, to result in a Material Adverse Effect or (ii) that involve this
Agreement or the Transactions.

                  (b) ENVIRONMENTAL MATTERS. Except as disclosed in Schedule III
and except with respect to any other matters that, individually or in the
aggregate, could not reasonably be expected to result in a Material Adverse
Effect, neither such Account Party nor any of its Subsidiaries (i) has failed to
comply with any Environmental Law or to obtain, maintain or comply with any
permit, license or other approval required for its business under any
Environmental Law, (ii) has incurred any Environmental Liability, (iii) has
received notice of any claim with respect to any Environmental Liability or (iv)
knows of any basis for any Environmental Liability.

                  SECTION 4.07. COMPLIANCE WITH LAWS AND AGREEMENTS. Such
Account Party and each of its Subsidiaries is in compliance with all laws,
regulations and orders of any Governmental Authority applicable to it or its
property and all indentures, agreements and other instruments binding upon it or
its property, except where the failure to do so, individually or in the
aggregate, could not reasonably be expected to result in a Material Adverse
Effect. No Default has occurred and is continuing.

                  SECTION 4.08. INVESTMENT AND HOLDING COMPANY STATUS. Such
Account Party is not (a) an "investment company" as defined in, or subject to
regulation under, the Investment Company Act of 1940 or (b) a "holding company"
as defined in, or subject to regulation under, the Public Utility Holding
Company Act of 1935.





                                      -31-

                  SECTION 4.09. TAXES. Such Account Party and each of its
Subsidiaries has timely filed or caused to be filed all Tax returns and reports
required to have been filed and has paid or caused to be paid all Taxes required
to have been paid by it, except (a) Taxes that are being contested in good faith
by appropriate proceedings and for which such Person has set aside on its books
adequate reserves or (b) to the extent that the failure to file any such Tax
return or pay any such Taxes could not reasonably be expected to result in a
Material Adverse Effect.

                  SECTION 4.10. ERISA. No ERISA Event has occurred or is
reasonably expected to occur that, when taken together with all other such ERISA
Events for which liability is reasonably expected to occur, could reasonably be
expected to result in a Material Adverse Effect. The present value of all
accumulated benefit obligations under each Plan (based on the assumptions used
for purposes of Statement of Financial Accounting Standards No. 87) did not, as
of the date of the most recent financial statements reflecting such amounts,
exceed the fair market value of the assets of such Plan by an amount that could
reasonably be expected to result in a Material Adverse Effect.

                  Except as could not reasonably be expected to result in a
Material Adverse Effect, (i) all contributions required to be made by any
Account Party or any of their Subsidiaries with respect to a Non-U.S. Benefit
Plan have been timely made, (ii) each Non-U.S. Benefit Plan has been maintained
in compliance with its terms and with the requirements of any and all applicable
laws and has been maintained, where required, in good standing with the
applicable Governmental Authority and (iii) neither any Account Party nor any of
their Subsidiaries has incurred any obligation in connection with the
termination or withdrawal from any Non-U.S. Benefit Plan.

                  SECTION 4.11. DISCLOSURE. The reports, financial statements,
certificates or other information furnished by such Account Party to the Lender
in connection with the negotiation of this Agreement or delivered hereunder
(taken as a whole) do not contain any material misstatement of fact or omit to
state any material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading; PROVIDED that,
with respect to projected financial information, such Account Party represents
only that such information was prepared in good faith based upon assumptions
believed to be reasonable at the time.

                  SECTION 4.12. USE OF CREDIT. Neither such Account Party nor
any of its Subsidiaries is engaged principally, or as one of its important
activities, in the business of extending credit for the purpose, whether
immediate, incidental or ultimate, of buying or carrying Margin Stock, and no
Letter of Credit will be used in connection with buying or carrying any Margin
Stock. No part of the proceeds of any Loan hereunder will be used to buy or
carry any Margin Stock (except for repurchases of the capital stock of XL
Capital and purchases of Margin Stock in accordance with XL Capital's Statement
of Investment Policy Objectives and Guidelines as in effect on the date hereof
or as it may be changed from time to time by a resolution duly adopted by the
board of directors of XL Capital (or any committee thereof)). The purchase of
any Margin Stock with the proceeds of any Loan will not be in violation of
Regulation U or X of the Board and, after applying the proceeds of such Loan,
not more than 25% of the value of the assets of XL Capital and its Subsidiaries
taken as a whole consists or will consist of Margin Stock.

                  SECTION 4.13. SUBSIDIARIES. Set forth in Schedule IV is a
complete and correct list of all of the Subsidiaries of XL Capital as of June
30, 2004, together with, for each such Subsidiary, (i) the jurisdiction of
organization of such Subsidiary, (ii) each Person holding ownership interests in
such Subsidiary and (iii) the percentage of ownership of such Subsidiary
represented by such own-




                                      -32-

ership interests. Except as disclosed in Schedule IV, (x) each of XL Capital and
its Subsidiaries owns, free and clear of Liens, and has the unencumbered right
to vote, all outstanding ownership interests in each Person shown to be held by
it in Schedule IV, (y) all of the issued and outstanding capital stock of each
such Person organized as a corporation is validly issued, fully paid and
nonassessable and (z) except as disclosed in filings of XL Capital with the SEC
prior to the date hereof, there are no outstanding Equity Rights with respect to
any Account Party.

                  SECTION 4.14. WITHHOLDING TAXES. Based upon information with
respect to the Lender provided as of the date hereof, the payment of the LC
Disbursements and interest thereon, principal of and interest on the Loans, the
fees under Section 2.11 and all other amounts payable hereunder will not be
subject, by withholding or deduction, to any Indemnified Taxes imposed by
Bermuda or the Cayman Islands.

                  SECTION 4.15. STAMP TAXES. To ensure the legality, validity,
enforceability or admissibility in evidence of this Agreement or any promissory
notes evidencing Loans made (or to be made), it is not necessary, as of the date
hereof, that this Agreement or such promissory notes or any other document be
filed or recorded with any Governmental Authority in Bermuda or the Cayman
Islands, or that any stamp or similar tax be paid on or in respect of this
Agreement in any such jurisdiction, or such promissory notes or any other
document other than such filings and recordations that have already been made
and such stamp or similar taxes that have been paid.

                  SECTION 4.16. LEGAL FORM. Each of this Agreement and any
promissory notes evidencing Loans made (or to be made) is in proper legal form
under the laws of any Account Party Jurisdiction for the admissibility thereof
in the courts of such Account Party Jurisdiction.

                                   ARTICLE V

                                   CONDITIONS
                                   ----------

                  SECTION 5.01. EFFECTIVE DATE. The obligations of the Lender to
issue or continue Letters of Credit and to make Loans hereunder are subject to
the receipt by the Lender of each of the following documents, each of which
shall be satisfactory to the Lender in form and substance (or such condition
shall have been waived in accordance with Section 9.02):

                  (a) EXECUTED COUNTERPARTS. From each party hereto either (i) a
counterpart of this Agreement signed on behalf of such party or (ii) written
evidence satisfactory to the Lender (which may include telecopy transmission of
a signed signature page to this Agreement) that such party has signed a
counterpart of this Agreement.

                  (b) OPINIONS OF COUNSEL TO THE OBLIGORS. Opinions, each dated
the Effective Date, of (i) Paul S. Giordano, Esq., counsel to XL Capital,
substantially in the form of Exhibit A-1, (ii) Charles R. Barr, Esq., counsel to
XL America, substantially in the form of Exhibit A-2, (iii) Cahill Gordon &
Reindel LLP, special U.S. counsel for the Obligors, substantially in the form of
Exhibit A-3, (iv) Conyers, Dill & Pearman, special Bermuda counsel to XL
Insurance and XL Re, substantially in the form of Exhibit A-4, and (v) Appleby
Spurling Hunter, special Cayman Islands counsel to XL Capital, substantially in
the form of Exhibit A-5.

                  (c) CORPORATE DOCUMENTS. Such documents and certificates as
the Lender or its counsel may reasonably request relating to the organization,
existence and good standing, if appli-




                                      -33-

cable, of the Obligors, the authorization of the Transactions and any other
legal matters relating to the Obligors, this Agreement or the Transactions, all
in form and substance reasonably satisfactory to the Lender and its counsel.

                  (d) OFFICER'S CERTIFICATE. A certificate, dated the Effective
Date and signed by the President, a Vice President or a Financial Officer of XL
Capital, confirming compliance with the conditions set forth in the lettered
clauses of the first sentence of Section 5.02.

                  (e) OTHER DOCUMENTS. Such other documents as the Lender may
reasonably request.

                  The obligation of the Lender to make its initial extension of
credit hereunder is also subject to the payment by XL Capital of such fees as XL
Capital shall have agreed to pay to the Lender in connection herewith, (to the
extent that reasonably detailed statements for such fees and expenses have been
delivered to XL Capital).

                  The Lender shall notify the Account Parties of the Effective
Date, and such notice shall be conclusive and binding. Notwithstanding the
foregoing, the obligations of the Lender to issue or continue Letters of Credit
or to make Loans hereunder shall not become effective unless each of the
foregoing conditions is satisfied (or waived pursuant to Section 9.02) at or
prior to 5:00 p.m., New York City time, on September 30, 2004 (and, in the event
such conditions are not so satisfied or waived, the Commitment shall terminate
at such time).

                  SECTION 5.02. EACH CREDIT EVENT. The obligation of the Lender
to issue, continue, amend, renew or extend any Letter of Credit or to make any
Loan is additionally subject to the satisfaction of the following conditions:

                  (a) the representations and warranties of the Obligors set
forth in this Agreement (other than, at any time after the Effective Date, in
Section 4.04(b)) shall be true and correct on and as of the date of issuance,
continuation, amendment, renewal or extension of such Letter of Credit or the
date of such Loan, as applicable (or, if any such representation or warranty is
expressly stated to have been made as of a specific date, as of such specific
date);

                  (b) at the time of and immediately after giving effect to the
issuance, amendment, renewal or extension of such Letter of Credit or such Loan,
as applicable, no Default shall have occurred and be continuing; and

                  (c) in the case of any Alternative Currency Letter of Credit,
receipt by the Lender of a request for offers as required by Section 2.02.

Each issuance, continuation, amendment, renewal or extension of a Letter of
Credit and each Borrowing shall be deemed to constitute a representation and
warranty by the Obligors on the date thereof as to the matters specified in
clauses (a) and (b) of the immediately preceding sentence.




                                      -34-

                                   ARTICLE VI

                              AFFIRMATIVE COVENANTS
                              ---------------------

                  Until the Commitment has expired or been terminated, the
principal of and interest on each Loan and all fees payable hereunder shall have
been paid in full, all Letters of Credit shall have expired or terminated and
all LC Disbursements shall have been reimbursed, the Account Parties covenant
and agree with the Lender that:

                  SECTION 6.01. FINANCIAL STATEMENTS AND OTHER INFORMATION. Each
Account Party will furnish to the Lender:

                  (a) within 135 days after the end of each fiscal year of each
Account Party except for XL America (but in the case of XL Capital, within 100
days after the end of each fiscal year of XL Capital), the audited consolidated
balance sheet and related statements of operations, stockholders' equity and
cash flows of such Account Party and its consolidated Subsidiaries as of the end
of and for such year, setting forth in each case in comparative form the figures
for the previous fiscal year (if such figures were already produced for such
corresponding period or periods) (it being understood that delivery to the
Lender of XL Capital's Report on Form 10-K filed with the SEC shall satisfy the
financial statement delivery requirements of this paragraph (a) to deliver the
annual financial statements of XL Capital so long as the financial information
required to be contained in such Report is substantially the same as the
financial information required under this paragraph (a)), all reported on by
independent public accountants of recognized national standing (without a "going
concern" or like qualification or exception and without any qualification or
exception as to the scope of such audit) to the effect that such consolidated
financial statements present fairly in all material respects the financial
condition and results of operations of such Account Party and its consolidated
Subsidiaries on a consolidated basis in accordance with GAAP or (in the case of
XL Insurance and XL Re) SAP, as the case may be, consistently applied;

                  (b) by June 15 of each year, (i) an unaudited consolidated
balance sheet and related statements of operations, stockholders' equity and
cash flows of XL America and its consolidated Subsidiaries as of the end of and
for the immediately preceding fiscal year, setting forth in each case in
comparative form the figures for the previous fiscal year (if such figures were
already produced for such corresponding period or periods), all certified by a
Financial Officer of XL America as presenting fairly in all material respects
the financial condition and results of operations of XL America and its
consolidated Subsidiaries on a consolidated basis in accordance with GAAP
consistently applied, subject to normal year-end audit adjustments and the
absence of footnotes, and (ii) audited statutory financial statements for each
Insurance Subsidiary of XL America reported on by independent public accountants
of recognized national standing (without a "going concern" or like qualification
or exception and without any qualification or exception as to the scope of such
audit) to the effect that such audited consolidated financial statements present
fairly in all material respects the financial condition and results of
operations of such Insurance Subsidiaries in accordance with SAP, consistently
applied;

                  (c) within 60 days after the end of each of the first three
fiscal quarters of each fiscal year of such Account Party, the consolidated
balance sheet and related statements of operations, stockholders' equity and
cash flows of such Account Party and its consolidated Subsidiaries as of the end
of and for such fiscal quarter and the then elapsed portion of the fiscal year,
setting





                                      -35-

forth in each case in comparative form the figures for (or, in the case of the
balance sheet, as of the end of) the corresponding period or periods of the
previous fiscal year (if such figures were already produced for such
corresponding period or periods), all certified by a Financial Officer of such
Account Party as presenting fairly in all material respects the financial
condition and results of operations of such Account Party and its consolidated
Subsidiaries on a consolidated basis in accordance with GAAP or (in the case of
XL Insurance and XL Re) SAP, as the case may be, consistently applied, subject
to normal year-end audit adjustments and the absence of footnotes (it being
understood that delivery to the Lender of XL Capital's Report on Form 10-Q filed
with the SEC shall satisfy the financial statement delivery requirements of this
paragraph to deliver the quarterly financial statements of XL Capital so long as
the financial information required to be contained in such Report is
substantially the same as the financial information required under this
paragraph (c));

                  (d) concurrently with any delivery of financial statements
under clause (a), (b) or (c) of this Section, a certificate signed on behalf of
each Account Party by a Financial Officer (i) certifying as to whether a Default
has occurred and, if a Default has occurred, specifying the details thereof and
any action taken or proposed to be taken with respect thereto, (ii) setting
forth reasonably detailed calculations demonstrating compliance with Sections
7.03, 7.05, 7.06 and 7.07 and (iii) stating whether any change in GAAP or (in
the case of XL Insurance, XL Re and any Insurance Subsidiary of XL America) SAP
or in the application thereof has occurred since the date of the audited
financial statements referred to in Section 4.04 and, if any such change has
occurred, specifying any material effect of such change on the financial
statements accompanying such certificate;

                  (e) concurrently with any delivery of financial statements
under clauses (a) and (b)(ii) of this Section, a certificate of the accounting
firm that reported on such financial statements stating whether they obtained
knowledge during the course of their examination of such financial statements of
any Default (which certificate may be limited to the extent required by
accounting rules or guidelines);

                  (f) promptly after the same become publicly available, copies
of all periodic and other reports, proxy statements and other materials filed by
such Account Party or any of its respective Subsidiaries with the SEC, or any
Governmental Authority succeeding to any or all of the functions of said
Commission, or with any U.S. or other securities exchange, or distributed by
such Account Party to its shareholders generally, as the case may be;

                  (g) concurrently with any delivery of financial statements
under clause (a), (b) or (c) of this Section, a certificate of a Financial
Officer of XL Capital, setting forth on a consolidated basis for XL Capital and
its consolidated Subsidiaries as of the end of the fiscal year or quarter to
which such certificate relates (i) the aggregate book value of assets which are
subject to Liens permitted under Section 7.03(h) and the aggregate book value of
liabilities which are subject to Liens permitted under Section 7.03(h) (it being
understood that the reports required by paragraphs (a), (b) and (c) of this
Section shall satisfy the requirement of this clause (i) of this paragraph (g)
if such reports set forth separately, in accordance with GAAP, line items
corresponding to such aggregate book values) and (ii) a calculation showing the
portion of each of such aggregate amounts which portion is attributable to
transactions among wholly-owned Subsidiaries of XL Capital;

                  (h) within 90 days after the end of each of the first three
fiscal quarters of each fiscal year and within 135 days after the end of each
fiscal year of XL Capital (commencing with the fiscal year ending December 31,
2004), a statement of a Financial Officer of XL Capital listing,





                                      -36-

as of the end of the immediately preceding fiscal quarter of XL Capital, the
amount of cash and the securities of the Account Parties and their Subsidiaries
that have been posted as collateral under Section 7.03(f); and

                  (i) promptly following any request therefor, such other
information regarding the operations, business affairs and financial condition
of XL Capital or any of its Subsidiaries, or compliance with the terms of this
Agreement, as the Lender may reasonably request.

                  SECTION 6.02. NOTICES OF MATERIAL EVENTS. Each Account Party
will furnish to the Lender prompt written notice of the following:

                  (a) the occurrence of any Default; and

                  (b) any event or condition constituting, or which could
reasonably be expected to have a Material Adverse Effect.

Each notice delivered under this Section shall be accompanied by a statement of
a Financial Officer or other executive officer of the relevant Account Party
setting forth the details of the event or development requiring such notice and
any action taken or proposed to be taken by such Account Party with respect
thereto.

                  SECTION 6.03. PRESERVATION OF EXISTENCE AND FRANCHISES. Each
Account Party will, and will cause each of its Significant Subsidiaries to,
maintain its corporate existence and its material rights and franchises in full
force and effect in its jurisdiction of incorporation; PROVIDED that the
foregoing shall not prohibit any merger or consolidation permitted under Section
7.01. Each Account Party will, and will cause each of its Subsidiaries to,
qualify and remain qualified as a foreign corporation in each jurisdiction in
which failure to receive or retain such qualification would have a Material
Adverse Effect.

                  SECTION 6.04. INSURANCE. Each Account Party will, and will
cause each of its Significant Subsidiaries to, maintain with financially sound
and reputable insurers, insurance with respect to its properties in such amounts
as is customary in the case of corporations engaged in the same or similar
businesses having similar properties similarly situated.

                  SECTION 6.05. MAINTENANCE OF PROPERTIES. Each Account Party
will, and will cause each of its Subsidiaries to, maintain or cause to be
maintained in good repair, working order and condition the properties now or
hereafter owned, leased or otherwise possessed by and used or useful in its
business and will make or cause to be made all needful and proper repairs,
renewals, replacements and improvements thereto so that the business carried on
in connection therewith may be properly conducted at all times except if the
failure to do so would not have a Material Adverse Effect, PROVIDED, HOWEVER,
that the foregoing shall not impose on such Account Party or any Subsidiary of
such Account Party any obligation in respect of any property leased by such
Account Party or such Subsidiary in addition to such Account Party's obligations
under the applicable document creating such Account Party's or such Subsidiary's
lease or tenancy.

                  SECTION 6.06. PAYMENT OF TAXES AND OTHER POTENTIAL CHARGES AND
PRIORITY CLAIMS; PAYMENT OF OTHER CURRENT LIABILITIES. Each Account Party will,
and will cause each of its Subsidiaries to, pay or discharge:




                                      -37-

                  (a) on or prior to the date on which penalties attach thereto,
all taxes, assessments and other governmental charges or levies imposed upon it
or any of its properties or income;

                  (b) on or prior to the date when due, all lawful claims of
materialmen, mechanics, carriers, warehousemen, landlords and other like Persons
which, if unpaid, might result in the creation of a Lien upon any such property;
and

                  (c) on or prior to the date when due, all other lawful claims
which, if unpaid, might result in the creation of a Lien upon any such property
(other than Liens not forbidden by Section 7.03) or which, if unpaid, might give
rise to a claim entitled to priority over general creditors of such Account
Party or such Subsidiary in any proceeding under the Bermuda Companies Law or
Bermuda Insurance Law, or any insolvency proceeding, liquidation, receivership,
rehabilitation, dissolution or winding-up involving such Account Party or such
Subsidiary;

PROVIDED that unless and until foreclosure, distraint, levy, sale or similar
proceedings shall have been commenced, such Account Party or such Subsidiary
need not pay or discharge any such tax, assessment, charge, levy or claim (i) so
long as the validity thereof is contested in good faith and by appropriate
proceedings diligently conducted and so long as such reserves or other
appropriate provisions as may be required by GAAP or SAP, as the case may be,
shall have been made therefor or (ii) so long as such failure to pay or
discharge would not have a Material Adverse Effect.

                  SECTION 6.07. FINANCIAL ACCOUNTING PRACTICES. Such Account
Party will, and will cause each of its consolidated Subsidiaries to, make and
keep books, records and accounts which, in reasonable detail, accurately and
fairly reflect its transactions and dispositions of its assets and maintain a
system of internal accounting controls sufficient to provide reasonable
assurances that transactions are recorded as necessary to permit preparation of
financial statements required under Section 6.01 in conformity with GAAP and
SAP, as applicable, and to maintain accountability for assets.

                  SECTION 6.08. COMPLIANCE WITH APPLICABLE LAWS. Each Account
Party will, and will cause each of its Subsidiaries to, comply with all
applicable Laws (including but not limited to the Bermuda Companies Law and
Bermuda Insurance Laws) in all respects; PROVIDED that such Account Party or any
Subsidiary of such Account Party will not be deemed to be in violation of this
Section as a result of any failure to comply with any such Law which would not
(i) result in fines, penalties, injunctive relief or other civil or criminal
liabilities which, in the aggregate, would have a Material Adverse Effect or
(ii) otherwise impair the ability of such Account Party to perform its
obligations under this Agreement.

                  SECTION 6.09. USE OF LETTERS OF CREDIT AND PROCEEDS. No part
of the proceeds of any Loan and no Letter of Credit will be used, whether
directly or indirectly, for any purpose that entails a violation of any of the
Regulations of the Board, including Regulations U and X. Each Account Party will
use the Letters of Credit issued for its account hereunder in the ordinary
course of business of, and will use the proceeds of all Loans made to it for the
general corporate purposes of, such Account Party and its Affiliates. For the
avoidance of doubt, the parties agree that any Account Party may apply for a
Letter of Credit hereunder to support the obligations of any Affiliate of XL
Capital, it being understood that such Account Party shall nonetheless remain
the account party and as such be liable with respect to such Letter of Credit.




                                      -38-
<
                  SECTION 6.10. CONTINUATION OF AND CHANGE IN BUSINESSES. Each
Account Party and its Significant Subsidiaries will continue to engage in
substantially the same business or businesses it engaged in (or proposes to
engage in) on the date of this Agreement and businesses related or incidental
thereto.

                  SECTION 6.11. VISITATION. Each Account Party will permit such
Persons as the Lender may reasonably designate to visit and inspect any of the
properties of such Account Party, to discuss its affairs with its financial
management, and provide such other information relating to the business and
financial condition of such Account Party at such times as the Lender may
reasonably request. Each Account Party hereby authorizes its financial
management to discuss with the Lender the affairs of such Account Party.

                                  ARTICLE VII

                               NEGATIVE COVENANTS
                               ------------------

                  Until the Commitment has expired or terminated, the principal
of and interest on each Loan and all fees payable hereunder have been paid in
full, all Letters of Credit have expired or terminated and all LC Disbursements
have been reimbursed, each of the Account Parties covenants and agrees with the
Lender that:

                  SECTION 7.01. MERGERS. No Account Party will merge with or
into or consolidate with any other Person, except that if no Default shall occur
and be continuing or shall exist at the time of such merger or consolidation or
immediately thereafter and after giving effect thereto (a) any Account Party may
merge or consolidate with any other corporation, including a Subsidiary, if such
Account Party shall be the surviving corporation, (b) XL Capital may merge with
or into or consolidate with any other Person in a transaction that does not
result in a reclassification, conversion, exchange or cancellation of the
outstanding shares of capital stock of XL Capital (other than the cancellation
of any outstanding shares of capital stock of XL Capital held by the Person with
whom it merges or consolidates) and (c) any Account Party may enter into a
merger or consolidation which is effected solely to change the jurisdiction of
incorporation of such Account Party and results in a reclassification,
conversion or exchange of outstanding shares of capital stock of such Account
Party solely into shares of capital stock of the surviving entity.

                  SECTION 7.02. DISPOSITIONS. No Account Party will, nor will it
permit any of its Significant Subsidiaries to, sell, convey, assign, lease,
abandon or otherwise transfer or dispose of, voluntarily or involuntarily (any
of the foregoing being referred to in this Section as a "DISPOSITION" and any
series of related Dispositions constituting but a single Disposition), any of
its properties or assets, tangible or intangible (including but not limited to
sale, assignment, discount or other disposition of accounts, contract rights,
chattel paper or general intangibles with or without recourse), except:

                  (a) Dispositions in the ordinary course of business involving
current assets or other invested assets classified on such Account Party's or
its respective Subsidiaries' balance sheet as available for sale or as a trading
account;

                  (b) sales, conveyances, assignments or other transfers or
dispositions in immediate exchange for cash or tangible assets, PROVIDED that
any such sales, conveyances or transfers





                                      -39-

shall not individually, or in the aggregate for the Account Parties and their
respective Subsidiaries, exceed $500,000,000 in any calendar year; or

                  (c) Dispositions of equipment or other property which is
obsolete or no longer used or useful in the conduct of the business of such
Account Party or its Subsidiaries.

                  SECTION 7.03. LIENS. No Account Party will, nor will it permit
any of its Subsidiaries to, create, incur, assume or permit to exist any Lien on
any property or assets, tangible or intangible, now owned or hereafter acquired
by it, except:

                  (a) Liens existing on the date hereof (and extension, renewal
and replacement Liens upon the same property, PROVIDED that the amount secured
by each Lien constituting such an extension, renewal or replacement Lien shall
not exceed the amount secured by the Lien theretofore existing) and listed on
Part B of Schedule I;

                  (b) Liens arising from taxes, assessments, charges, levies or
claims described in Section 6.06 that are not yet due or that remain payable
without penalty or to the extent permitted to remain unpaid under the provision
of Section 6.06;

                  (c) Liens on property securing all or part of the purchase
price thereof to such Account Party and Liens (whether or not assumed) existing
on property at the time of purchase thereof by such Account Party (and
extension, renewal and replacement Liens upon the same property); PROVIDED (i)
each such Lien is confined solely to the property so purchased, improvements
thereto and proceeds thereof, and (ii) the aggregate amount of the obligations
secured by all such Liens on any particular property at any time purchased by
such Account Party, as applicable, shall not exceed 100% of the lesser of the
fair market value of such property at such time or the actual purchase price of
such property;

                  (d) zoning restrictions, easements, minor restrictions on the
use of real property, minor irregularities in title thereto and other minor
Liens that do not in the aggregate materially detract from the value of a
property or asset to, or materially impair its use in the business of, such
Account Party or any such Subsidiary;

                  (e) Liens securing Indebtedness permitted by Section 7.07(b)
covering assets whose market value is not materially greater than the amount of
the Indebtedness secured thereby plus a commercially reasonable margin;

                  (f) Liens on cash and securities of an Account Party or any of
its Subsidiaries incurred as part of the management of its investment portfolio
including, but not limited to, pursuant to any International Swaps and
Derivatives Association, Inc. ("ISDA") documentation or any Specified
Transaction Agreement in accordance with XL Capital's Statement of Investment
Policy Objectives and Guidelines as in effect on the date hereof or as it may be
changed from time to time by a resolution duly adopted by the board of directors
of XL Capital (or any committee thereof);

                  (g) Liens on cash and securities not to exceed $500,000,000 in
the aggregate securing obligations of an Account Party or any of its
Subsidiaries arising under any ISDA documentation or any other Specified
Transaction Agreement (it being understood that in no event shall this clause
(g) preclude any Person (other than any Subsidiary of XL Capital) in which XL
Capital or any of its Subsidiaries shall invest (each an "INVESTEE") from
granting Liens on such Person's as-




                                      -40-

sets to secure hedging obligations of such Person, so long as such obligations
are non-recourse to XL Capital or any of its Subsidiaries (other than any
investees)), PROVIDED that, for purposes of determining the aggregate amount of
cash and/or securities subject to such Liens under this clause (g), the
aggregate amount of cash and/or securities on which any Account Party or any
Subsidiary shall have granted a Lien in favor of a counterparty at any time
shall be netted against the aggregate amount of cash and/or securities on which
such counterparty shall have granted a Lien in favor of such Account Party or
such Subsidiary, as the case may be, at such time, so long as the relevant
agreement between such Account Party or such Subsidiary, as the case may be,
provides for the netting of their respective obligations thereunder;

                  (h) Liens on (i) assets received, and on actual or imputed
investment income on such assets received, incurred as part of its business
including activities utilizing ISDA documentation or any Specified Transaction
Agreement relating and identified to specific insurance payment liabilities or
to liabilities arising in the ordinary course of any Account Parties' or any of
their Subsidiary's business as an insurance or reinsurance company (including
GICs and Stable Value Instruments) or corporate member of The Council of Lloyd's
or as a provider of financial or investment services or contracts, or the
proceeds thereof (including GICs and Stable Value Instruments), in each case
held in a segregated trust, trust or other account and securing such
liabilities, or (ii) any other assets subject to any trust or other account
arising out of or as a result of contractual, regulatory or any other
requirements; PROVIDED that in no case shall any such Lien secure Indebtedness
and any Lien which secures Indebtedness shall not be permitted under this clause
(h);

                  (i) statutory and common law Liens of materialmen, mechanics,
carriers, warehousemen and landlords and other similar Liens arising in the
ordinary course of business; and

                  (j) Liens existing on property of a Person immediately prior
to its being consolidated with or merged into any Account Party or any of their
Subsidiaries or its becoming a Subsidiary, and Liens existing on any property
acquired by any Account Party or any of their Subsidiaries at the time such
property is so acquired (whether or not the Indebtedness secured thereby shall
have been assumed) (and extension, renewal and replacement Liens upon the same
property, PROVIDED that the amount secured by each Lien constituting such an
extension, renewal or replacement Lien shall not exceed the amount secured by
the Lien theretofore existing), PROVIDED that (i) no such Lien shall have been
created or assumed in contemplation of such consolidation or merger or such
Person's becoming a Subsidiary or such acquisition of property and (ii) each
such Lien shall extend solely to the item or items of property so acquired and,
if required by terms of the instrument originally creating such Lien, other
property which is an improvement to or is acquired for specific use in
connection with such acquired property.

                  SECTION 7.04. TRANSACTIONS WITH AFFILIATES. No Account Party
will, nor will it permit any of its Significant Subsidiaries to, enter into or
carry out any transaction with (including purchase or lease property or services
to, loan or advance to or enter into, suffer to remain in existence or amend any
contract, agreement or arrangement with) any Affiliate of such Account Party, or
directly or indirectly agree to do any of the foregoing, except (i) transactions
involving guarantees or co-obligors with respect to any Indebtedness described
in Part A of Schedule I, (ii) transactions among the Account Parties and their
wholly-owned Subsidiaries and (iii) transactions with Affiliates in good faith
in the ordinary course of such Account Party's business consistent with past
practice and on terms no less favorable to such Account Party or any Subsidiary
than those that could have been obtained in a comparable transaction on an arm's
length basis from an unrelated Person.





                                      -41-

                  SECTION 7.05. RATIO OF TOTAL FUNDED DEBT TO TOTAL
CAPITALIZATION. XL Capital will not permit its ratio of (a) Total Funded Debt to
(b) the sum of Total Funded Debt PLUS Consolidated Net Worth to be greater than
0.35:1.00 at any time.

                  SECTION 7.06. CONSOLIDATED NET WORTH. XL Capital will not
permit its Consolidated Net Worth to be less than $5,000,000,000 at any time.

                  SECTION 7.07. INDEBTEDNESS. No Account Party will, nor will it
permit any of its Subsidiaries to, at any time create, incur, assume or permit
to exist any Indebtedness, or agree, become or remain liable (contingent or
otherwise) to do any of the foregoing, except:

                  (a) Indebtedness created hereunder;

                  (b) secured Indebtedness (including secured reimbursement
obligations with respect to letters of credit) of any Account Party or any
Subsidiary in an aggregate principal amount (for all Account Parties and their
respective Subsidiaries) not exceeding at any time outstanding 15% of
Consolidated Net Worth;

                  (c) other unsecured Indebtedness, so long as upon the
incurrence thereof no Default would occur or exist;

                  (d) Indebtedness consisting of accounts or claims payable and
accrued and deferred compensation (including options) incurred in the ordinary
course of business by any Account Party or any Subsidiary;

                  (e) Indebtedness incurred in transactions described in Section
7.03(f) and (g); and

                  (f) Indebtedness existing on the date hereof and described in
Part A of Schedule I and extensions, renewals and replacements of any such
Indebtedness that do not increase the outstanding principal amount thereof.

                  SECTION 7.08. FINANCIAL STRENGTH RATINGS. None of XL Capital,
XL Insurance and XL Re will permit at any time its financial strength ratings to
be less than "A-" from A.M. Best & Co. (or its successor).

                  SECTION 7.09. PRIVATE ACT. No Account Party will become
subject to a Private Act other than the X.L. Insurance Company, Ltd. Act, 1989.

                                  ARTICLE VIII

                                EVENTS OF DEFAULT
                                -----------------

                  If any of the following events ("EVENTS OF DEFAULT") shall
occur:

                  (a) any Account Party shall fail to pay any principal of any
Loan or any reimbursement obligation in respect of any LC Disbursement when and
as the same shall become due and payable, whether at the due date thereof or at
a date fixed for prepayment thereof or otherwise;




                                      -42-

                  (b) any Account Party shall fail to pay any interest on any
Loan or LC Disbursement or any fee payable under this Agreement or any other
amount (other than an amount referred to in clause (a) of this Article) payable
under this Agreement, when and as the same shall become due and payable, and
such failure shall continue unremedied for a period of 5 or more days;

                  (c) any representation or warranty made or deemed made by any
Account Party in or in connection with this Agreement or any amendment or
modification hereof, or in any certificate or financial statement furnished
pursuant to the provisions hereof, shall prove to have been false or misleading
in any material respect as of the time made (or deemed made) or furnished;

                  (d) any Account Party shall fail to observe or perform any
covenant, condition or agreement contained in Article VII;

                  (e) any Obligor shall fail to observe or perform any covenant,
condition or agreement contained in this Agreement (other than those specified
in clause (a), (b) or (d) of this Article or the reporting requirement pursuant
to Section 6.01(h)) and such failure shall continue unremedied for a period of
20 or more days after notice thereof from the Lender to such Obligor;

                  (f) any Account Party or any of its Subsidiaries shall default
(i) in any payment of principal of or interest on any other obligation for
borrowed money in principal amount of $50,000,000 or more, or any payment of any
principal amount of $50,000,000 or more under Hedging Agreements, in each case
beyond any period of grace provided with respect thereto, or (ii) in the
performance of any other agreement, term or condition contained in any such
agreement (other than Hedging Agreements) under which any such obligation in
principal amount of $50,000,000 or more is created, if the effect of such
default is to cause or permit the holder or holders of such obligation (or
trustee on behalf of such holder or holders) to cause such obligation to become
due prior to its stated maturity or to terminate its commitment under such
agreement, PROVIDED that this clause (f) shall not apply to secured Indebtedness
that becomes due as a result of the voluntary sale or transfer of the property
or assets securing such Indebtedness;

                  (g) a decree or order by a court having jurisdiction in the
premises shall have been entered adjudging any Account Party a bankrupt or
insolvent, or approving as properly filed a petition seeking reorganization of
such Account Party under the Bermuda Companies Law or the Cayman Islands
Companies Law (2004 Revision) or any other similar applicable Law, and such
decree or order shall have continued undischarged or unstayed for a period of 60
days; or a decree or order of a court having jurisdiction in the premises for
the appointment of an examiner, receiver or liquidator or trustee or assignee in
bankruptcy or insolvency of such Account Party or a substantial part of its
property, or for the winding up or liquidation of its affairs, shall have been
entered, and such decree or order shall have continued undischarged and unstayed
for a period of 60 days;

                  (h) any Account Party shall institute proceedings to be
adjudicated a voluntary bankrupt, or shall consent to the filing of a bankruptcy
proceeding against it, or shall file a petition or answer or consent seeking
reorganization under the Bermuda Companies Law or the Cayman Islands Companies
Law (2004 Revision) or any other similar applicable Law, or shall consent to the
filing of any such petition, or shall consent to the appointment of an examiner,
receiver or liquidator or trustee or assignee in bankruptcy or insolvency of it
or a substantial part of its property, or shall make an assignment for the
benefit of creditors, or shall admit in writing its inability to pay its debts




                                      -43-

generally as they become due, or corporate or other action shall be taken by
such Account Party in furtherance of any of the aforesaid purposes;

                  (i) one or more judgments for the payment of money in an
aggregate amount in excess of $100,000,000 shall be rendered against any Account
Party or any of its Subsidiaries or any combination thereof and the same shall
not have been vacated, discharged, stayed (whether by appeal or otherwise) or
bonded pending appeal within 45 days from the entry thereof;

                  (j) an ERISA Event (or similar event with respect to any
Non-U.S. Benefit Plan) shall have occurred that, in the opinion of the Lender,
when taken together with all other ERISA Events and such similar events that
have occurred, could reasonably be expected to result in liability of the
Account Parties and their Subsidiaries in an aggregate amount exceeding
$100,000,000;

                  (k) a Change in Control shall occur;

                  (l) XL Capital shall cease to own, beneficially and of record,
directly or indirectly all of the outstanding voting shares of capital stock of
XL Insurance, XL Re or XL America; or

                  (m) the guarantee contained in Article III shall terminate or
cease, in whole or material part, to be a legally valid and binding obligation
of each Guarantor or any Guarantor or any Person acting for or on behalf of any
of such parties shall contest such validity or binding nature of such guarantee
itself or the Transactions, or any other Person shall assert any of the
foregoing;

then, and in every such event (other than an event with respect to any Account
Party described in clause (g) or (h) of this Article), and at any time
thereafter during the continuance of such event, the Lender shall, by notice to
the Account Parties, take either or both of the following actions, at the same
or different times: (i) terminate the Commitment, and thereupon the Commitment
shall terminate immediately, and (ii) declare the Loans then outstanding to be
due and payable in whole (or in part, in which case any principal not so
declared to be due and payable may thereafter be declared to be due and
payable), and thereupon the principal of the Loans so declared to be due and
payable, together with accrued interest thereon and all fees and other
obligations of the Account Parties accrued hereunder, shall become due and
payable immediately, without presentment, demand, protest or other notice of any
kind, all of which are hereby waived by the Account Parties; and in case of any
event with respect to any Account Party described in clause (g) or (h) of this
Article, the Commitment shall automatically terminate and the principal of the
Loans then outstanding, together with accrued interest thereon and all fees and
other obligations of the Account Parties accrued hereunder, shall automatically
become due and payable, without presentment, demand, protest or other notice of
any kind, all of which are hereby waived by the Account Parties.

                  If an Event of Default shall occur and be continuing and XL
Capital receives notice from the Lender demanding the deposit of cash collateral
for the aggregate LC Exposure of the Lender pursuant to this paragraph, the
Account Parties shall immediately deposit into an account established and
maintained on the books and records of the Lender, which account may be a
"securities account" (within the meaning of Section 8-501 of the Uniform
Commercial Code as in effect in the State of New York (the "UNIFORM COMMERCIAL
CODE")), in the name of the Lender, an amount in cash equal to the total LC
Exposure as of such date plus any accrued and unpaid interest thereon; PROVIDED
that the




                                      -44-

obligation to deposit such cash collateral shall become effective immediately,
and such deposit shall become immediately due and payable, without demand or
other notice of any kind, upon the occurrence of any Event of Default with
respect to any Account Party described in clause (g) or (h) of this Article.
Such deposit shall be held by the Lender as collateral for the LC Exposure under
this Agreement.

                  In addition to the provisions of this Article, each Account
Party agrees that upon the occurrence and during the continuance of any Event of
Default the Lender which has issued any Alternative Currency Letter of Credit
may, by notice to XL Capital: (a) declare that all fees and other obligations of
the Account Parties accrued in respect of Alternative Currency Letters of Credit
issued by the Lender shall become due and payable immediately, without
presentment, demand, protest or other notice of any kind, all of which are
hereby waived by each Account Party and (b) demand the deposit of cash
collateral from the Account Parties in immediately available funds in the
currency of such Alternative Currency Letter of Credit or, at the option of the
Lender, in Dollars in an amount equal to the then aggregate undrawn face amount
of all such Alternative Currency Letters of Credit and in such manner as
previously agreed to by the Account Parties and the Lender; PROVIDED that, in
the case of any of the Events of Default specified in clause (g) or (h) of this
Article, without any notice to any Account Party or any other act by the Lender,
all fees and other obligations of the Account Parties accrued in respect of all
Alternative Currency Letters of Credit shall become due and payable immediately,
without presentment, demand, protest or other notice of any kind, all of which
are hereby waived by each Account Party.

                                   ARTICLE IX

                                  MISCELLANEOUS
                                  -------------

                  SECTION 9.01. NOTICES. Except in the case of notices and other
communications expressly permitted to be given by telephone, all notices and
other communications provided for herein shall be in writing and shall be
delivered by hand or overnight courier service, mailed by certified or
registered mail or sent by telecopy, as follows:

                  (a) if to any Account Party, to XL Capital at XL House, One
Bermudiana Road, Hamilton HM 11 Bermuda, Attention of Roderick Gray (telecopy
no. (441) 296-6399); with a copy to Paul Giordano, Esq. at the same address and
telecopy no. (441) 295-4867);

                  (b) if to the Lender, to Deutsche Bank AG, New York Branch, 60
Wall Street, 38th Floor, New York, New York 10005, Attention of Global
Technology & Operations--Loan Division (Telecopy No. (212) 797-0403; Telephone
No. (212) 250-1014), with a copy to Deutsche Bank Securities Inc., 60 Wall
Street, New York, New York 10005, Attention of Ruth Leung (Telecopy No. (212)
797-0270; Telephone No. (212) 250-8650).

                  Any party hereto may change its address or telecopy number for
notices and other communications hereunder by notice to the other parties
hereto. All notices and other communications given to any party hereto in
accordance with the provisions of this Agreement shall be deemed to have been
given on the date of receipt.

                  Notices and other communications to the Lender hereunder may
be delivered or furnished by electronic communications; PROVIDED that the
foregoing shall not apply to notices pursuant





                                      -45-

to Article II unless otherwise agreed by the Lender. Any Account Party may, in
its discretion, agree to accept notices and other communications to it hereunder
by electronic communications pursuant to procedures approved by it; PROVIDED
that approval of such procedures may be limited to particular notices or
communications. Without limiting the foregoing, the Account Parties may furnish
to the Lender the financial statements required to be furnished by it pursuant
to Section 6.01(a), 6.01(b) or 6.01(c) by electronic communications.

                  SECTION 9.02. WAIVERS; AMENDMENTS

                  (a) NO DEEMED WAIVERS; REMEDIES CUMULATIVE. No failure or
delay by the Lender in exercising any right or power hereunder shall operate as
a waiver thereof, nor shall any single or partial exercise of any such right or
power, or any abandonment or discontinuance of steps to enforce such a right or
power, preclude any other or further exercise thereof or the exercise of any
other right or power. The rights and remedies of the Lender hereunder are
cumulative and are not exclusive of any rights or remedies that they would
otherwise have. No waiver of any provision of this Agreement or consent to any
departure by the Account Parties therefrom shall in any event be effective
unless the same shall be permitted by paragraph (b) of this Section, and then
such waiver or consent shall be effective only in the specific instance and for
the purpose for which given. Without limiting the generality of the foregoing,
the making of a Loan or issuance of a Letter of Credit shall not be construed as
a waiver of any Default, regardless of whether the Lender may have had notice or
knowledge of such Default at the time.

                  (b) AMENDMENTS. Neither this Agreement nor any provision
hereof may be waived, amended or modified except pursuant to an agreement or
agreements in writing entered into by the Obligors and the Lender.

                  SECTION 9.03. EXPENSES; INDEMNITY; DAMAGE WAIVER.

                  (a) COSTS AND EXPENSES. The Account Parties jointly and
severally agree to pay all out-of-pocket expenses incurred by the Lender,
including the fees, charges and disbursements of one legal counsel for the
Lender, in connection with the enforcement or protection of its rights in
connection with this Agreement, including its rights under this Section, or in
connection with the Loans made or Letters of Credit issued hereunder, including
in connection with any workout, restructuring or negotiations in respect
thereof.

                  (b) INDEMNIFICATION BY THE ACCOUNT PARTIES. The Account
Parties shall jointly and severally indemnify the Lender and its Related Party
(each such Person being called an "INDEMNITEE") against, and to hold each
Indemnitee harmless from, any and all losses, claims, damages, liabilities and
related expenses, including the fees, charges and disbursements of any counsel
for any Indemnitee (but not including Excluded Taxes), incurred by or asserted
against any Indemnitee arising out of, in connection with, or as a result of (i)
the execution or delivery of this Agreement or any agreement or instrument
contemplated hereby, the performance by the parties hereto of their respective
obligations hereunder or the consummation of the Transactions or any other
transactions contemplated hereby, (ii) any Loan or the use of the proceeds
thereof or any Letter of Credit or the use thereof (including any refusal by the
Lender to honor a demand for payment under a Letter of Credit if the documents
presented in connection with such demand do not strictly comply with the terms
of such Letter of Credit), (iii) any actual or alleged presence or release of
Hazardous Materials on or from any property owned or operated by any Account
Party or any of its Subsidiaries, or any Envi-





                                      -46-

ronmental Liability related in any way to any Account Party or any of its
Subsidiaries, or (iv) any actual or prospective claim, litigation, investigation
or proceeding relating to any of the foregoing, whether based on contract, tort
or any other theory and regardless of whether any Indemnitee is a party thereto;
PROVIDED that such indemnity shall not, as to any Indemnitee, be available to
the extent that such losses, claims, damages, liabilities or related expenses
result from or arise out of the gross negligence or willful misconduct of such
Indemnitee.

                  (c) WAIVER OF CONSEQUENTIAL DAMAGES, ETC. To the extent
permitted by applicable law, no Account Party shall assert, and each Account
Party hereby waives, any claim against any Indemnitee, on any theory of
liability, for special, indirect, consequential or punitive damages (as opposed
to direct or actual damages) arising out of, in connection with, or as a result
of, this Agreement or any agreement or instrument contemplated hereby, the
Transactions, any Loan or Letter of Credit or the use of the proceeds thereof.

                  (d) PAYMENTS. All amounts due under this Section shall be
payable promptly after written demand therefor.

                  SECTION 9.04. SUCCESSORS AND ASSIGNS.

                  (a) ASSIGNMENTS GENERALLY. The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns permitted hereby, except that no party hereto
may assign or otherwise transfer any of its rights or obligations hereunder
without the prior written consent of the other parties hereto (and any attempted
assignment or transfer by an Account Party without such consent shall be null
and void). Nothing in this Agreement, expressed or implied, shall be construed
to confer upon any Person (other than the parties hereto, their respective
successors and assigns permitted hereby, and, to the extent expressly
contemplated hereby, the Related Parties of the Lender) any legal or equitable
right, remedy or claim under or by reason of this Agreement.

                  (b) CERTAIN PLEDGES. The Lender may at any time pledge or
assign a security interest in all or any portion of its rights under this
Agreement to secure obligations of the Lender, including any such pledge or
assignment to secure obligations to a Federal Reserve Bank, and this Section
shall not apply to any such pledge or assignment of a security interest;
PROVIDED that no such pledge or assignment of a security interest shall release
the Lender from any of its obligations hereunder or substitute any such pledgee
or assignee for the Lender as a party hereto.

                  SECTION 9.05. SURVIVAL. All covenants, agreements,
representations and warranties made by the Account Parties herein and in the
certificates or other instruments delivered in connection with or pursuant to
this Agreement shall be considered to have been relied upon by the other parties
hereto and shall survive the execution and delivery of this Agreement and the
making of any Loans and the issuance of any Letters of Credit, regardless of any
investigation made by any such other party or on its behalf and notwithstanding
that the Lender may have had notice or knowledge of any Default or incorrect
representation or warranty at the time any credit is extended hereunder, and
shall continue in full force and effect as long as the principal of, or any
accrued interest on, any Loan or any fee or any other amount payable under this
Agreement is outstanding and unpaid or any Letter of Credit is outstanding and
so long as the Commitment has not expired or terminated. The provisions of
Sections 2.14, 2.15, 2.16 and 9.03 and Article VIII shall survive and remain in
full force and effect regardless of the consummation of the transactions
contemplated hereby, the repayment of the Loans,





                                      -47-

the expiration or termination of the Letters of Credit and the expiration or
termination of the Commitment or the termination of this Agreement or any
provision hereof.

                  SECTION 9.06. COUNTERPARTS; INTEGRATION; EFFECTIVENESS. This
Agreement may be executed in counterparts (and by different parties hereto on
different counterparts), each of which shall constitute an original, but all of
which when taken together shall constitute a single contract. This Agreement and
any separate letter agreements with respect to fees payable to the Lender
constitute the entire contract between and among the parties relating to the
subject matter hereof and supersede any and all previous agreements and
understandings, oral or written, relating to the subject matter hereof. Except
as provided in Section 5.01, this Agreement shall become effective when it shall
have been executed by the Lender and when the Lender shall have received
counterparts hereof which, when taken together, bear the signatures of each of
the other parties hereto, and thereafter shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns.
Delivery of an executed counterpart of a signature page to this Agreement by
telecopy shall be effective as delivery of a manually executed counterpart of
this Agreement.

                  SECTION 9.07. SEVERABILITY. Any provision of this Agreement
held to be invalid, illegal or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such invalidity, illegality
or unenforceability without affecting the validity, legality and enforceability
of the remaining provisions hereof; and the invalidity of a particular provision
in a particular jurisdiction shall not invalidate such provision in any other
jurisdiction.

                  SECTION 9.08. RIGHT OF SETOFF. If an Event of Default shall
have occurred and be continuing, the Lender is hereby authorized at any time and
from time to time, to the fullest extent permitted by law, to set off and apply
any and all deposits (general or special, time or demand, provisional or final)
at any time held and other indebtedness at any time owing by the Lender to or
for the credit or the account of any Account Party against any of and all the
obligations of such Account Party now or hereafter existing under this Agreement
held by the Lender, irrespective of whether or not the Lender shall have made
any demand under this Agreement and although such obligations may be unmatured.
The rights of the Lender under this Section are in addition to other rights and
remedies (including other rights of setoff) which the Lender may have.

                  SECTION 9.09. GOVERNING LAW; JURISDICTION; ETC.

                  (a) GOVERNING LAW. This Agreement shall be construed in
accordance with and governed by the law of the State of New York.

                  (b) SUBMISSION TO JURISDICTION. Each Obligor hereby
irrevocably and unconditionally submits, for itself and its property, to the
nonexclusive jurisdiction of the Supreme Court of the State of New York sitting
in New York County and of the United States District Court of the Southern
District of New York, and any appellate court from any thereof, in any action or
proceeding arising out of or relating to this Agreement, or for recognition or
enforcement of any judgment, and each of the parties hereto hereby irrevocably
and unconditionally agrees that all claims in respect of any such action or
proceeding may be heard and determined in such New York State or, to the extent
permitted by law, in such Federal court. Each of the parties hereto agrees that
a final judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law. Nothing in this Agree-





                                      -48-

ment shall affect any right that the Lender may otherwise have to bring any
action or proceeding relating to this Agreement against any Obligor or its
properties in the courts of any jurisdiction.

                  (c) WAIVER OF VENUE. Each Obligor hereby irrevocably and
unconditionally waives, to the fullest extent it may legally and effectively do
so, any objection which it may now or hereafter have to the laying of venue of
any suit, action or proceeding arising out of or relating to this Agreement in
any court referred to in paragraph (b) of this Section. Each of the parties
hereto hereby irrevocably waives, to the fullest extent permitted by law, the
defense of an inconvenient forum to the maintenance of such action or proceeding
in any such court.

                  (d) SERVICE OF PROCESS. By the execution and delivery of this
Agreement, XL Capital, XL Insurance and XL Re acknowledge that they have by a
separate written instrument, designated and appointed CT Corporation System, 111
Eighth Avenue, 13th floor, New York, New York 10011 (or any successor entity
thereto), as its authorized agent upon which process may be served in any suit
or proceeding arising out of or relating to this Agreement that may be
instituted in any federal or state court in the State of New York. Each party to
this Agreement irrevocably consents to service of process in the manner provided
for notices in Section 9.01. Nothing in this Agreement will affect the right of
any party to this Agreement to serve process in any other manner permitted by
law.

                  (e) WAIVER OF IMMUNITIES. To the extent that any Account Party
has or hereafter may acquire any immunity from jurisdiction of any court or from
any legal process (whether through service of notice, attachment prior to
judgment, attachment in aid of execution or execution, on the ground of
sovereignty or otherwise) with respect to itself or its property, it hereby
irrevocably waives, to the fullest extent permitted by applicable law, such
immunity in respect of its obligations under this Agreement.

                  SECTION 9.10. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE
TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF
OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER
BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES
THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT
AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY,
AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.

                  SECTION 9.11. HEADINGS. Article and Section headings and the
Table of Contents used herein are for convenience of reference only, are not
part of this Agreement and shall not affect the construction of, or be taken
into consideration in interpreting, this Agreement.

                  SECTION 9.12. TREATMENT OF CERTAIN INFORMATION;
CONFIDENTIALITY.

                  (a) TREATMENT OF CERTAIN INFORMATION. Each of the Account
Parties acknowledge that from time to time financial advisory, investment
banking and other services may be of-





                                      -49-

fered or provided to any Account Party or one or more of their Subsidiaries (in
connection with this Agreement or otherwise) by the Lender or by one or more of
its subsidiaries or affiliates and each of the Account Parties hereby authorizes
the Lender to share any information delivered to it by such Account Party and
its Subsidiaries pursuant to this Agreement, or in connection with the decision
of the Lender to enter into this Agreement, to any such subsidiary or affiliate,
it being understood that (i) any such information shall be used only for the
purpose of advising the Account Parties or preparing presentation materials for
the benefit of the Account Parties and (ii) any such subsidiary or affiliate
receiving such information shall be bound by the provisions of paragraph (b) of
this Section as if it were a Lender hereunder. Such authorization shall survive
the repayment of the Loans, the expiration or termination of the Letters of
Credit, the expiration or termination of the Commitment or the termination of
this Agreement or any provision hereof.

                  (b) CONFIDENTIALITY. The Lender agrees to maintain the
confidentiality of the Information (as defined below), except that Information
may be disclosed (i) to its and its Affiliates' directors, officers, employees
and agents, including accountants, legal counsel and other advisors (it being
understood that the Persons to whom such disclosure is made will be informed of
the confidential nature of such Information and instructed to keep such
Information confidential), (ii) to the extent requested by any regulatory
authority (including self-regulating organizations) having jurisdiction over the
Lender, (iii) to the extent required by applicable laws or regulations or by any
subpoena or similar legal process, (iv) to any other party to this Agreement,
(v) in connection with the exercise of any remedies hereunder or any suit,
action or proceeding relating to this Agreement or the enforcement of rights
hereunder, (vi) subject to an agreement in writing containing provisions
substantially the same as those of this paragraph and for the benefit of the
Account Parties, to (a) any assignee of, or any prospective assignee of, any of
its rights or obligations under this Agreement or (b) any actual or prospective
counterparty (or its advisors) to any swap or derivative transaction relating to
any Account Party and its obligations, (vii) with the consent of the Account
Parties or (viii) to the extent such Information (A) becomes publicly available
other than as a result of a breach of this paragraph or (B) becomes available to
the Lender on a nonconfidential basis from a source other than an Account Party.
For the purposes of this paragraph, "INFORMATION" means all information received
from an Account Party relating to an Account Party or its business, other than
any such information that is available to the Lender on a nonconfidential basis
prior to disclosure by such Account Party; PROVIDED that, in the case of
information received from an Account Party after the date hereof, such
information is clearly identified at the time of delivery as confidential. Any
Person required to maintain the confidentiality of Information as provided in
this Section shall be considered to have complied with its obligation to do so
if such Person has exercised the same degree of care to maintain the
confidentiality of such Information as such Person would accord to its own
confidential information. Notwithstanding the foregoing, the Lender agrees that
it will not trade the securities of any of the Account Parties based upon
non-public Information that is received by it.

                  SECTION 9.13. JUDGMENT CURRENCY. This is an international loan
transaction in which the obligations of each Account Party under this Agreement
to make payment hereunder shall be satisfied only in Dollars and only if such
payment shall be made in New York City, and the obligations of each Account
Party under this Agreement to make payment to (or for account of) the Lender in
Dollars shall not be discharged or satisfied by any tender or recovery pursuant
to any judgment expressed in or converted into any other currency or in another
place except to the extent that such tender or recovery results in the effective
receipt by the Lender in New York City of the full amount of Dollars payable to
the Lender under this Agreement. If for the purpose of obtaining judgment in any
court





                                      -50-

it is necessary to convert a sum due hereunder in Dollars into another currency
(in this Section called the "JUDGMENT CURRENCY"), the rate of exchange that
shall be applied shall be that at which in accordance with normal banking
procedures the Lender could purchase such Dollars at the principal office of the
Lender in New York City with the judgment currency on the Business Day next
preceding the day on which such judgment is rendered. The obligation of each
Account Party in respect of any such sum due from it to the Lender hereunder (in
this Section called an "ENTITLED PERSON") shall, notwithstanding the rate of
exchange actually applied in rendering such judgment, be discharged only to the
extent that on the Business Day following receipt by such Entitled Person of any
sum adjudged to be due hereunder in the judgment currency such Entitled Person
may in accordance with normal banking procedures purchase and transfer Dollars
to New York City with the amount of the judgment currency so adjudged to be due;
and each Account Party hereby, as a separate obligation and notwithstanding any
such judgment, agrees to indemnify such Entitled Person against, and to pay such
Entitled Person on demand, in Dollars, the amount (if any) by which the sum
originally due to such Entitled Person in Dollars hereunder exceeds the amount
of the Dollars so purchased and transferred.

                  SECTION 9.14. USA PATRIOT ACT. The Lender hereby notifies the
Account Parties that pursuant to the requirements of the USA Patriot Act (Title
III of Pub. L. 107-56 (signed into law October 26, 2001)), it is required to
obtain, verify and record information that identifies the Account Parties, which
information includes the name and address of the Account Parties and other
information that will allow the Lender to identify each Account Party in
accordance with said Act.





                  IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their respective authorized officers as of the
day and year first above written.

                                 X.L. AMERICA, INC.,
                                 as an Account Party and a Guarantor


                                 By:   /s/ CAROL A. MCFATE
                                       -----------------------------------------
                                       Name: Carol A. McFate
                                       Title: Managing Director, Treasury Dept.


                                 U.S. FEDERAL TAX IDENTIFICATION NO.: 06-1516268


                                 XL INSURANCE (BERMUDA) LTD,
                                 as an Account Party and a Guarantor


                                 By:   /s/ DANIEL E. SUSSMAN
                                       -----------------------------------------
                                       Name: Daniel E. Sussman
                                       Title: Executive Vice President


                                 U.S. FEDERAL TAX IDENTIFICATION NO.: 98-0354869


                                 XL RE LTD,
                                 as an Account Party and a Guarantor


                                 By:   /s/ JAMES O'SHAUGHNESSY
                                       -----------------------------------------
                                       Name: James O'Shaughnessy
                                       Title: SVP and CFO


                                 U.S. FEDERAL TAX IDENTIFICATION NO.: 98-0351953







                  IN WITNESS WHEREOF, XL Capital has caused this Agreement to be
duly executed as a Deed by an authorized officer as of the day and year first
above written.

                                EXECUTED AS A DEED by XL CAPITAL LTD,
                                as an Account Party and a Guarantor


                                /s/ PAUL S. GIORDANO
                                ------------------------------------------------
                                witness


                                By:   /s/ JERRY DE ST PAER
                                      ------------------------------------------
                                      Name: Jerry de St Paer
                                      Title: Chief Financial Officer


                                U.S. FEDERAL TAX IDENTIFICATION NO.: 98-0191089







                                DEUTSCHE BANK AG NEW YORK BRANCH,
                                as Lender


                                By:   /s/ RUTH LEUNG
                                      ------------------------------------------
                                      Name: Ruth Leung
                                      Title: Director


                                By:   /s/ CLINTON JOHNSON
                                      ------------------------------------------
                                      Name: Clinton Johnson
                                      Title: Managing Director

EX-31

                    CERTIFICATION OF CHIEF EXECUTIVE OFFICER
                                 XL CAPITAL LTD
            PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
                     (CHAPTER 98, TITLE 15 U.S.C. SS. 7241)

I, Brian M. O'Hara, certify that:

1.   I have reviewed this Quarterly Report on Form 10-Q of XL Capital Ltd;

2.   Based on my knowledge, this report does not contain any untrue statement of
     a material  fact or omit to state a  material  fact  necessary  to make the
     statements made, in light of the circumstances  under which such statements
     were made,  not  misleading  with  respect  to the  period  covered by this
     report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information  included  in  this  report,  fairly  present  in all  material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

     a)   Designed  such  disclosure  controls  and  procedures,  or caused such
          disclosure   controls  and   procedures  to  be  designed   under  our
          supervision,  to ensure  that  material  information  relating  to the
          registrant,  including its consolidated subsidiaries, is made known to
          us by others within those entities,  particularly during the period in
          which this report is being prepared;

     b)   Evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures and presented in this report our conclusions  about the
          effectiveness of the disclosure controls and procedures, as of the end
          of the period covered by this report based on such evaluation; and

     c)   Disclosed  in this  report  any  change in the  registrant's  internal
          control over financial reporting that occurred during the registrant's
          most recent fiscal quarter (the registrant's  fourth fiscal quarter in
          the case of an annual  report)  that has  materially  affected,  or is
          reasonably  likely to materially  affect,  the  registrant's  internal
          control over financial reporting; and

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent evaluation of internal control over financial reporting, to
     the registrant's auditors and the audit committee of the registrant's board
     of directors (or persons performing the equivalent functions):

     a)   All significant  deficiencies and material weaknesses in the design or
          operation  of internal  control  over  financial  reporting  which are
          reasonably  likely to  adversely  affect the  registrant's  ability to
          record, process, summarize and report financial information; and



     b)   Any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          control over financial reporting.


DATED: NOVEMBER 5, 2004

                                         /s/ BRIAN M. O'HARA
                                         -----------------------------------
                                         BRIAN M. O'HARA
                                         PRESIDENT AND CHIEF EXECUTIVE OFFICER



                    CERTIFICATION OF CHIEF FINANCIAL OFFICER
                                 XL CAPITAL LTD
            PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
                     (CHAPTER 98, TITLE 15 U.S.C. SS. 7241)

I, Jerry de St. Paer, certify that:

1.   I have reviewed this Quarterly Report on Form 10-Q of XL Capital Ltd;

2.   Based on my knowledge, this report does not contain any untrue statement of
     a material  fact or omit to state a  material  fact  necessary  to make the
     statements made, in light of the circumstances  under which such statements
     were made,  not  misleading  with  respect  to the  period  covered by this
     report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information  included  in  this  report,  fairly  present  in all  material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

     a)   Designed  such  disclosure  controls  and  procedures,  or caused such
          disclosure   controls  and   procedures  to  be  designed   under  our
          supervision,  to ensure  that  material  information  relating  to the
          registrant,  including its consolidated subsidiaries, is made known to
          us by others within those entities,  particularly during the period in
          which this report is being prepared;

     b)   Evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures and presented in this report our conclusions  about the
          effectiveness of the disclosure controls and procedures, as of the end
          of the period covered by this report based on such evaluation; and

     c)   Disclosed  in this  report  any  change in the  registrant's  internal
          control over financial reporting that occurred during the registrant's
          most recent fiscal quarter (the registrant's  fourth fiscal quarter in
          the case of an annual  report)  that has  materially  affected,  or is
          reasonably  likely to materially  affect,  the  registrant's  internal
          control  over  financial  reporting;  and

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent evaluation of internal control over financial reporting, to
     the registrant's auditors and the audit committee of the registrant's board
     of directors  (or persons  performing  the  equivalent  functions):

     a)   All significant  deficiencies and material weaknesses in the design or
          operation  of internal  control  over  financial  reporting  which are
          reasonably  likely to  adversely  affect the  registrant's  ability to
          record, process, summarize and report financial information; and



     b)   Any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          control over financial reporting.

DATED: NOVEMBER 5, 2004


                                         /s/ JERRY DE ST. PAER
                                         ----------------------------------
                                         JERRY DE ST. PAER
                                         EXECUTIVE VICE PRESIDENT AND
                                         CHIEF FINANCIAL OFFICER

EX-32

                  CERTIFICATION ACCOMPANYING FORM 10-Q REPORT
                                       OF
                                 XL CAPITAL LTD
            PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
              (CHAPTER 63, TITLE 18 U.S.C. SS.SS. 1350(a) AND (b))

Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 (Chapter 63, Title 18
U.S.C.  ss.ss.  1350(a) and (b)), each of the undersigned  hereby certifies that
the Quarterly  Report on Form 10-Q for the period ended September 30, 2004 of XL
Capital Ltd (the  "Company")  fully  complies with the  requirements  of Section
13(a) or  Section  15(d)  of the  Securities  Exchange  Act of 1934 and that the
information  contained in such Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.


                    DATED: NOVEMBER 5, 2004


                    /s/ BRIAN M. O'HARA
                    ------------------------------
                    BRIAN M. O'HARA
                    PRESIDENT AND CHIEF EXECUTIVE OFFICER
                    XL CAPITAL LTD




                    DATED: NOVEMBER 5, 2004


                    /s/ JERRY DE ST. PAER
                    --------------------------------
                    JERRY DE ST. PAER
                    EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
                    XL CAPITAL LTD

A signed  original of this written  statement  required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature that
appears in typed form within the  electronic  version of this written  statement
required  by  Section  906,  has been  provided  to XL  Capital  Ltd and will be
retained  by XL  Capital  Ltd  and  furnished  to the  Securities  and  Exchange
Commission or its staff upon request.

EX-99.1

                                                                    EXHIBIT 99.1




XL CAPITAL ASSURANCE INC.
AND SUBSIDIARY
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003













XL CAPITAL ASSURANCE INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------



                                                                              AS AT             AS AT
                                                                           SEPTEMBER 30,      DECEMBER 31,
                                                                               2004              2003
                                                                           -------------      ------------
                                                                                         
ASSETS

Investments:
Fixed maturities available for sale, at fair value
   (amortized cost: 2004 - $267,661; 2003 - $237,589)                       $ 270,834          $ 239,629
Short-term investments, at fair value
   (amortized cost: 2004 - $3,647; 2003 - $8,812)                               3,647              8,814
                                                                            ---------          ---------

         TOTAL INVESTMENTS                                                    274,481            248,443

Cash and cash equivalents                                                      40,865             76,854
Accrued investment income                                                       1,552              2,324
Prepaid reinsurance premiums                                                  322,856            291,530
Premiums receivable                                                             6,496              2,712
Reinsurance balances recoverable on unpaid losses                              79,134             22,998
Intangible assets - acquired licenses                                          11,529             11,529
Deferred Federal income tax assets                                             14,386             13,560
Other assets                                                                   11,216             12,703
                                                                            ---------          ---------
         TOTAL ASSETS                                                       $ 762,515          $ 682,653
                                                                            ---------          ---------
LIABILITIES AND SHAREHOLDER'S EQUITY

Liabilities:
   Unpaid losses and loss adjustment expenses                               $  82,858          $  25,009
   Deferred premium revenue                                                   361,813            318,547
   Deferred ceding commissions, net                                            34,349             33,738
   Reinsurance premiums payable                                                10,891             33,422
   Accounts payable and accrued expenses                                       17,212             19,482
   Current Federal income tax payable                                           6,754              6,754
   Intercompany payable to affiliates                                          12,995              8,473
                                                                            ---------          ---------
         TOTAL LIABILITIES                                                    526,872            445,425
                                                                            ---------          ---------
Shareholder's Equity:

Common stock (par value $7,500 per share at September 30, 2004
   and December 31, 2003; authorized shares - 8,000 at September 30, 2004
   and December 31, 2003; issued and outstanding shares - 2,000
   at September 30, 2004 and December 31, 2003)                                15,000             15,000
   Additional paid-in capital                                                 239,173            239,173
   Accumulated other comprehensive income (Net of deferred
   Federal income tax liability of: 2004 - $1,111; 2003 - $715)                 2,062              1,327
   Accumulated deficit                                                        (20,592)           (18,272)
                                                                            ---------          ---------
         TOTAL SHAREHOLDER'S EQUITY                                           235,643            237,228
                                                                            ---------          ---------
         TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY                         $ 762,515          $ 682,653
                                                                            =========          =========


     See accompanying notes to condensed consolidated financial statements.



XL CAPITAL ASSURANCE INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
(U.S. DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------



                                                                                  THREE MONTHS ENDED           NINE MONTHS ENDED
                                                                                    SEPTEMBER 30,                SEPTEMBER 30,

                                                                                2004           2003           2004          2003
                                                                              ---------     ---------     -----------    ----------
                                                                                                             
REVENUES
      Gross premiums written                                                  $  47,537     $  72,755     $   141,705    $  183,881
      Ceded premiums written                                                    (42,608)      (64,535)       (121,215)     (165,685)
                                                                              ---------     ---------     -----------    ----------
                Net premiums written                                              4,929         8,220          20,490        18,196
      Change in deferred premium revenue                                         (2,104)       (6,511)        (11,940)      (13,834)
                                                                              ---------     ---------     -----------    ----------
                Net premiums earned (net of ceded earned premium for              2,825         1,709           8,550         4,362
                the nine months of $89,890 in 2004 and $50,868 in 2003)
      Net investment income                                                       2,879         1,515           7,928         4,369
      Net realized losses on investments                                            (15)         (429)           (704)         (233)
      Net realized and unrealized gains on credit derivatives                       226           500           1,758         1,471
      Other income                                                                  100         1,200             100         1,200
                                                                              ---------     ---------     -----------    ----------
                Total revenues                                                    6,015         4,495          17,632        11,169
                                                                              ---------     ---------     -----------    ----------

EXPENSES
      Net losses and loss adjustment expenses (net of ceded losses                  791           140           2,051         1,028
           and loss adjustment expenses for the nine months of
           $57,265 in 2004 and $8,607 in 2003)
      Net operating expenses                                                      7,229         4,009          19,123        13,431
                                                                              ---------     ---------     -----------    ----------
                Total expenses                                                    8,020         4,149          21,174        14,459
                                                                              ---------     ---------     -----------    ----------
                (Loss) Income before Federal income tax (benefit) expense        (2,005)          346          (3,542)       (3,290)
                                                                              ---------     ---------     -----------    ----------
      Deferred Federal income tax (benefit) expense                                (715)           12          (1,222)       (1,152)
                                                                              ---------     ---------     -----------    ----------
                Total Federal income tax (benefit) expense                         (715)           12          (1,222)       (1,152)
                                                                              ---------     ---------     -----------    ----------
                NET (LOSS) INCOME                                                (1,290)          334          (2,320)       (2,138)
                                                                              =========     =========     ===========    ==========

COMPREHENSIVE INCOME (LOSS)
      Other comprehensive income (loss)                                           3,731        (1,225)            735          (208)
                                                                              ---------     ---------     -----------    ----------

                COMPREHENSIVE INCOME (LOSS)                                   $   2,441     $    (891)    $    (1,585)   $   (2,346)
                                                                              =========     =========     ===========    ==========



     See accompanying notes to condensed consolidated financial statements.



XL CAPITAL ASSURANCE INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(UNAUDITED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------



                                                                                        NINE MONTHS ENDED      YEAR ENDED
                                                                                          SEPTEMBER 30,        DECEMBER 31,
                                                                                              2004                2003
                                                                                        -----------------      -----------
COMMON SHARES
                                                                                                         
      Number of shares, beginning of year                                                       2,000               2,000
                                                                                          -----------          ----------
                Number of shares, end of period                                                 2,000               2,000
                                                                                          ===========          ==========

COMMON STOCK
      Balance - beginning of year                                                         $    15,000          $   15,000
                                                                                          -----------          ----------
                Balance- end of period                                                         15,000              15,000
                                                                                          ===========          ==========

ADDITIONAL PAID-IN CAPITAL
      Balance - beginning of year                                                             239,173             139,154
      Capital contribution                                                                          -             100,019
                                                                                          -----------          ----------
                Balance- end of period                                                        239,173             239,173
                                                                                          ===========          ==========

ACCUMULATED OTHER COMPREHENSIVE INCOME
      Balance - beginning of year                                                               1,327               2,812
      Net change in unrealized appreciation of investments, net of
           deferred Federal tax expense (benefit) of $396 in 2004 and $(847) in 2003              735              (1,485)
                                                                                          -----------          ----------
                Balance- end of period                                                          2,062               1,327
                                                                                          ===========          ==========

ACCUMULATED DEFICIT
      Balance - beginning of year                                                             (18,272)            (14,504)
      Net loss                                                                                 (2,320)             (3,768)
                                                                                          -----------          ----------
                Balance- end of period                                                        (20,592)            (18,272)
                                                                                          ===========          ==========
TOTAL SHAREHOLDER'S EQUITY                                                                $   235,643          $  237,228
                                                                                          ===========          ==========


     See accompanying notes to condensed consolidated financial statements.



XL CAPITAL ASSURANCE INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(U.S. DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------



                                                                                        NINE MONTHS ENDED
                                                                                           SEPTEMBER 30,
                                                                                    2004                     2003
                                                                                ------------             -------------
                                                                                                   
CASH FLOWS FROM OPERATING ACTIVITIES:
      Net loss                                                                  $     (2,320)            $      (2,138)
Adjustments to reconcile net loss to net cash used in
operating activities
           Net realized losses on sale of investments                                    704                       233
           Net realized and unrealized gains on credit derivatives
                excluding cash received and paid                                        (401)                     (544)
           Amortization of premium on bonds                                              913                       782
           Decrease (increase) in accrued investment income                              772                      (128)
           Increase in premiums receivable                                            (3,784)                   (4,132)
           Deferred Federal income tax assets                                         (1,222)                   (1,152)
           Increase in unpaid losses and loss adjustment expenses, net                 1,713                       699
           Increase in deferred premium revenue, net                                  11,940                    13,834
           Increase in deferred ceding commissions, net                                  611                    17,995
           (Decrease) increase in reinsurance premiums payable                       (22,531)                   12,616
           (Decrease) increase in accounts payable and accrued expenses               (3,979)                    1,402
           Increase (decrease) in intercompany payable to affiliates                   4,522                    (1,224)
           Other                                                                       2,277                    (1,139)
                                                                                ------------             -------------

                     Total adjustments                                                (8,465)                   39,242
                                                                                ------------             -------------

                     Net cash (used in) provided by operating activities             (10,785)                   37,104
                                                                                ------------             -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
      Proceeds from sale of fixed maturities and short-term investments              175,591                    72,095
      Proceeds from maturity of fixed maturities and short-term investments              485                    26,129
      Purchase of fixed maturities and short-term investments                       (202,600)                 (117,733)
      Increase in payable for securities purchased                                     1,320                       978
                                                                                ------------             -------------

                     Net cash used in investing activities                           (25,204)                  (18,531)
                                                                                ------------             -------------

Decrease in cash and cash equivalents                                                (35,989)                   18,573

Cash and cash equivalents- beginning of year                                          76,854                    44,714
                                                                                ------------             -------------

Cash and cash equivalents- end of period                                        $     40,865             $      63,287
                                                                                ============             =============



     See accompanying notes to condensed consolidated financial statements.



XL CAPITAL ASSURANCE INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------

1. ORGANIZATION AND OWNERSHIP

XL Capital  Assurance  Inc. and  subsidiary  (the  "Company")  is a wholly owned
subsidiary of XL  Reinsurance  America Inc.  ("XL RE AM"),  which is an indirect
wholly owned subsidiary of X.L. America, Inc. ("XLA"). XLA is an indirect wholly
owned subsidiary of XL Insurance  (Bermuda) Ltd. ("XL Insurance").  XL Insurance
is an indirect  wholly owned  subsidiary  of XL Capital Ltd. ("XL  Capital"),  a
holding company  incorporated  in the Cayman  Islands.  XLA is XL Capital's U.S.
holding company.

The Company is an  insurance  company  domiciled  in the State of New York.  The
Company is engaged in the business of providing  credit  enhancement  by writing
financial  guaranty  insurance  policies  on  asset-backed  structured  finance,
essential   infrastructure   project  finance,   future  flow,   public  finance
transactions,  and credit default swap obligations. The Company issued its first
insurance contract in December 2000.

The Company was formed on September 13, 1999 and became  licensed as a financial
guaranty  insurer  in New York upon its  merger  with an  affiliate,  X.L.  Risk
Solutions, Inc. on September 30, 1999.

On February 22, 2001 XL RE AM acquired all the outstanding  shares of The London
Assurance of America, Inc. ("LAA"). LAA was incorporated in New York on July 25,
1991. Prior to its purchase by XL RE AM, LAA was a New  York-domiciled  property
and casualty  insurance  company that was licensed in 44 states and the District
of Columbia. The business previously underwritten through LAA, together with all
the liabilities of LAA, was reinsured  effective July 1, 2000 to an affiliate of
LAA under a reinsurance assignment and assumption agreement. XL RE AM caused the
Company  to merge with and into LAA on the day of the  acquisition  (with LAA as
the  surviving  entity)  and for LAA to  simultaneously  change  its  name to XL
Capital Assurance Inc.

On May 15, 2002, the Company  capitalized XL Capital  Assurance  (U.K.) Limited,
("XLCA-UK"),  an insurance company organized under the laws of England.  XLCA-UK
is a direct wholly owned subsidiary of the Company.

In  addition to its New York  headquarters  and London  subsidiary  (which has a
Madrid branch),  the Company maintains branch offices domestically in California
and abroad in Singapore.

2. BASIS OF PRESENTATION AND CONSOLIDATION

The  accompanying   condensed  consolidated  financial  statements  include  the
accounts  of the  Company  and its  subsidiary  and are  unaudited.  The results
include the consolidation of XLCA-UK,  accounted for as a subsidiary with effect
from April 24,  2002.  In the  opinion of  management,  all  adjustments,  which
include only normal recurring adjustments, necessary for a fair statement of the
financial  position,  results of operations and cash flows at September 30, 2004
and for all periods presented,  have been made and all significant  intercompany
accounts and transactions have been eliminated.

Certain information and footnote  disclosures  normally included in consolidated
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been  condensed or omitted.  These
statements  should be read in conjunction  with the Company's  December 31, 2003
consolidated  financial statements and notes thereto. The accompanying condensed
consolidated  balance  sheet as of December  31, 2003 was derived  from  audited
financial  statements,   but  does  not  include  all  disclosures  required  by
accounting  principles  generally accepted in the United States of America.  The
results of operations  for the three and nine month periods ended  September 30,
2004 and 2003 are not  necessarily  indicative of the operating  results for the
full year.



XL CAPITAL ASSURANCE INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------

The  preparation  of  condensed   consolidated   financial  statements  requires
management to make estimates and assumptions that affect the reported amounts of
assets and  liabilities  and disclosure of contingent  assets and liabilities at
the date of the condensed  consolidated  financial  statements  and the reported
amounts of revenues and expenses  during the reporting  period.  Actual  results
could differ from those  estimates.  Any such  adjustments  are reflected in the
condensed   consolidated  statement  of  income  in  the  period  in  which  the
adjustments are made. The Company's  principal estimates and assumptions used to
determine the condensed consolidated financial statements are the calculation of
gross loss reserves and the fair value of credit default swap instruments.

3. CREDIT DEFAULT SWAPS

Credit  default  swaps are  recorded at fair value which is  determined  using a
model  developed  by the  Company  and is  dependent  upon a number  of  factors
including changes in interest rates, credit spreads,  changes in credit quality,
expected  recovery  rates and other market  factors.  The change  resulting from
movements in these  factors is  unrealized  as the credit  default swaps are not
traded to realize  this value and is included in "net  realized  and  unrealized
gains on credit  derivatives".  Other  elements  of the change in fair value are
based upon pricing established at the inception of the contract.  Credit default
swaps are  considered  by the Company to be, in  substance,  financial  guaranty
contracts  due to  similarities  in the  underlying  economics and the Company's
intent to hold them to maturity.

The credit  default swap  portfolio  consists of  structured  pools of corporate
obligations that were awarded  investment grade ratings at the respective deals'
inception.  At September 30, 2004,  approximately 80% of the portfolio was rated
AAA with the remaining  20% allocated to other  investment  grade  ratings.  The
weighted  average term of the contracts in force was  approximately  5.13 years,
and the credit  default  swaps  represented  approximately  11% of the Company's
credit enhancement par exposure at September 30, 2004.

The  components of the Company's net credit  default swap asset and liability at
September  30, 2004 and December  31, 2003 are included in the table below.  The
net credit  default  swap asset and  liability  are included in Other Assets and
Other Liabilities, respectively, in the Company's condensed consolidated balance
sheet.


                                               SEPTEMBER 30,       DECEMBER 31,
(U.S. Dollars in thousands):                       2004               2003
                                               -------------       ------------

ASSETS
Gross credit derivative unrealized gains        $   6,302           $   4,945
                                                ---------           ---------
Reinsurance                                         5,600               4,424
                                                ---------           ---------
      Net assets                                $     702           $     521
                                                =========           =========

LIABILITIES
Gross credit derivative unrealized losses       $   2,478           $   4,718
Reinsurance                                         2,210               4,230
                                                ---------           ---------
      Net liabilities                           $     268           $     488
                                                =========           =========



XL CAPITAL ASSURANCE INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------


The  components  of the Company's  net realized and  unrealized  gains on credit
derivatives  for each of the three and nine month  periods  ended  September 30,
2004 and 2003 are as follows:



                                                        THREE MONTHS ENDED              NINE MONTHS ENDED
                                                           SEPTEMBER 30,                   SEPTEMBER 30,
(U.S. DOLLARS IN THOUSANDS):                           2004             2003            2004            2003
                                                    ----------      ----------       ----------      ----------

                                                                                         
Net premiums earned                                 $      185      $      387       $    1,357      $      816
                                                    ----------      ----------       ----------      ----------
Loss reserves and other adjustments                          -               -                -             111
Net fair value adjustment                                   41             113              401             544
                                                    ----------      ----------       ----------      ----------
      Net realized and unrealized gains
           on credit derivatives                    $      226      $      500       $    1,758      $    1,471
                                                    ==========      ==========       ==========      ==========




4. RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the Financial  Accounting  Standards Board ("FASB") issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
The objective of FIN 46 is to improve financial  reporting by companies involved
with variable interest entities.  This new model for consolidation applies to an
entity in which  either (1) the  powers or rights of the  equity  holders do not
give them sufficient decision making ability;  (2) the equity investment at risk
is insufficient to finance that entity's activities without receiving additional
subordinated  financial  support from other parties or (3) the equity investment
at risk does not absorb the expected  losses or residual  returns of the entity.
FIN 46 requires a variable  interest  entity to be  consolidated  by the company
that is  subject to a majority  of the risk of loss from the  variable  interest
entity's  activities  or that is entitled to receive a majority of the  entity's
residual  returns or both.  In December  2003,  FASB issued a revision to FIN 46
("FIN  46-R") which  clarified  several  provisions  of FIN 46,  superceded  the
related  FASB  Staff  Positions  (FSPs),  and  amended  the  effective  date and
transition  of the  pronouncement,  except for certain  types of  entities.  The
Company  must  apply  the  provisions  of FIN  46-R to those  variable  interest
entities that are not  considered to be special  purpose  entities no later than
March 31, 2004 and was required to apply the provisions of FIN 46 or FIN 46-R to
those entities that are considered to be special-purpose entities as at December
31, 2003.  The adoption of this  standard did not have a material  effect on the
Company's financial condition and results of operation.

5. VARIABLE INTEREST ENTITIES

The  Company  participates  in  transactions  which  utilize  variable  interest
entities in the ordinary  course of  business.  The Company  provides  financial
guaranty  insurance  of  structured  transactions  backed  by pools of assets of
specified  types,  municipal  obligations  supported by the issuers'  ability to
collect  tax or fee  revenue  for  specified  services  or  projects,  and other
structured risk  obligations  including  essential  infrastructure  projects and
obligations  backed by receivables  from future sales of  commodities  and other
specified  services.  The obligations  related to these  transactions  are often
securitized through  off-balance sheet variable interest entities.  In synthetic
transactions,  the Company  guarantees  payment  obligations of  counterparties,
including variable interest  entities,  through credit default swaps referencing
asset portfolios.

The  Company  only  provides  financial  guaranty  insurance  of these  variable
interest  entities  for fixed  premiums  at  market  rates but does not hold any
equity positions or subordinated debt in these  off-balance sheet  arrangements.
Accordingly, these variable interest entities are not consolidated.



XL CAPITAL ASSURANCE INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------

6. TAX SHARING AGREEMENT

The Company's U.S.  Federal income tax return is  consolidated  with XLA and its
subsidiaries.  XLA  maintains a tax  sharing  agreement  with its  subsidiaries,
whereby the  consolidated  U.S.  Federal income tax liability is allocated among
affiliates in the ratio that each affiliate's separate return liability bears to
the sum of the separate return liabilities of all affiliates that are members of
the  consolidated  group.  In  addition,  a  complementary  method is used which
results in  reimbursement  by profitable  affiliates to loss  affiliates for tax
benefits  generated by loss  affiliates.  At September 30, 2004 and December 31,
2003, the Company had net deferred  Federal income tax assets of $14,386,000 and
$13,560,000,  respectively.  Management  has  concluded  that  the net  deferred
federal income tax assets are more likely than not to be realized, therefore, no
valuation allowance has been provided.

7. TREATIES AND AGREEMENTS WITH AFFILIATES

On  October  6,  1999,  the  Company  entered  into a  Facultative  Quota  Share
Reinsurance Treaty (the "Treaty") with XL Financial  Assurance Ltd. ("XLFA"),  a
Bermuda financial  guaranty insurer,  which is 86.8% owned by XL Insurance.  The
remaining  13.2% is owned by Financial  Security  Assurance  Holdings  Ltd.,  an
unrelated  company.  The Treaty was amended and restated on June 22, 2001. Under
the terms of the treaty,  XLFA  agrees to  reinsure  up to 90% of the  Company's
acceptable  risks.  The  Company is allowed  up to a 30%  ceding  commission  on
premiums written ceded under the terms of the Treaty. On April 22, 2004, the New
York Insurance Department approved certain technical amendments to the Treaty in
a Second Amended and Restated Facultative Quota Share Reinsurance Treaty between
the Company and XLFA (the  "Second  Amended and  Restated  Treaty").  The Second
Amended and Restated Treaty had an effective date of May 1, 2004.

XL Insurance entered into a reinsurance agreement dated October 6, 1999 with the
Company,  that unconditionally and irrevocably  guarantees the full and complete
performance of all  obligations of XLFA to the Company under the above described
Facultative  Quota  Share  Reinsurance  Treaty.  In  connection  with the Second
Amended and  Restated  Treaty,  XL Insurance  entered  into another  reinsurance
agreement guarantee on May 1, 2004.

The Company entered into a Facultative  Master  Certificate (the "XL Re Treaty")
with XL RE AM, a New York insurance  corporation with administrative  offices in
Stamford, Connecticut and the direct parent of the Company. The XL Re Treaty was
effective as of November 1, 2002. Under the terms of the XL Re Treaty,  XL RE AM
agrees  automatically  to reinsure risk assumed by the Company  under  financial
guaranty insurance policies up to the amount necessary for the Company to comply
with  single  risk  limitations  set forth in  Section  6904(d)  of the New York
Insurance Laws. The reinsurance provided by XL RE AM may be on an excess of loss
or quota share basis.  The Company is allowed up to a 30% ceding  commission  on
premiums written ceded under the terms of the XL Re Treaty.

The Company entered into a Surplus Maintenance Agreement dated February 20, 2001
pursuant  to which XL RE AM has  agreed  to  maintain  the  Company's  statutory
capital and surplus of at least  $75,000,000.  On April 12,  2004,  the New York
Insurance  Department  approved a three- year  extension  of this  agreement  to
February 20, 2007.

Effective  December 31, 2003, the Company  entered into a commutation  agreement
with XL RE AM whereby the Company assumed business originally ceded to XL RE AM,
which resulted in approximately $845,000 of premiums earned in the first quarter
of 2004.

8. LOSS RESERVE

The Company recorded a provision for loss of approximately $18.4 million, net of
certain  adjustments,  representing  the present  value of a loss expected to be
incurred in the future with respect to an insured



XL CAPITAL ASSURANCE INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------


project  financing.  The  portion  of the  insured  exposure  to which this loss
relates was  reinsured on a first loss basis by an affiliate of the Company and,
accordingly, there was no net impact on the Company's results of operations from
this  loss  provision.  The  total  remaining  par  insured  by the  Company  in
connection with this transaction  aggregated  approximately  $260 million ($45.8
million net of  reinsurance  to affiliates) at September 30, 2004, and amortizes
over many years into the future. The estimate of losses was necessarily based on
assumptions  and estimates  extending over many years into the future.  There is
currently  no  payment  default  with  respect to this  transaction.  Management
continues  to  monitor  the  exposure  and  will  revise  its loss  estimate  as
necessary,  as information  becomes available.  Pursuant to the assumptions upon
which the  estimate  was based,  under its  existing  reinsurance  arrangements,
approximately  17.5% of any  additional  loss  provision in excess of the amount
currently provided will be retained by the Company.

The  financing  vehicle is considered a variable  interest  entity under FIN 46,
however, the Company is not the primary  beneficiary.  If there is ultimately an
event of default, the Company has certain rights, which if exercised, will cause
a reconsideration of the primary beneficiary.  If such events occur, the Company
will likely be required to consolidate the financing vehicle.

EX-99.2

                                                                    EXHIBIT 99.2





XL FINANCIAL ASSURANCE LTD.
(Incorporated in Bermuda)

CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 2004 AND 2003










XL FINANCIAL ASSURANCE LTD.
CONDENSED BALANCE SHEET
AS AT SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
(UNAUDITED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------



                                                                                         2004          2003
                                                                                      ------------------------
                                                                                               
ASSETS:
Investments :
Fixed maturities, at fair value
         (amortized cost: 2004 - $698,525; 2003 - $542,600)                           $ 698,945      $ 543,748
Short-term investments, at fair value
         (amortized cost: 2004 - $26,097; 2003 - $40,286)                                26,139         40,312
                                                                                      ------------------------
                  Total investments available for sale                                  725,084        584,060

Cash and cash equivalents                                                                 6,071         26,346
Accrued investment income                                                                 5,189          7,420
Deferred acquisition costs                                                               70,383         51,477
Prepaid reinsurance premiums                                                             71,216         98,048
Reinsurance balances receivable                                                          13,808         33,446
Unpaid losses and loss expenses recoverable                                              53,803          7,745
Amounts due from parent and affiliates                                                   21,819         18,342
Net receivable for investments sold                                                       2,142             --
Derivative assets                                                                         6,295          4,826
Other assets                                                                                128             52
                                                                                      ------------------------
          TOTAL ASSETS                                                                $ 975,938      $ 831,762
                                                                                      ========================

LIABILITIES, REDEEMABLE PREFERRED SHARES AND SHAREHOLDERS' EQUITY
LIABILITIES:

Unpaid losses and loss expenses                                                       $  92,236      $  35,899
Deferred premium revenue                                                                399,810        348,719
Reinsurance premiums payable                                                              5,287          6,275
Net payable for investments purchased                                                      --               13
Accounts payable and accrued liabilities                                                    719          1,249
Derivative liabilities                                                                    2,851          7,018
Dividend payable on preferred shares                                                      1,458          1,950
                                                                                      ------------------------
          TOTAL LIABILITIES                                                           $ 502,361      $ 401,123
                                                                                      ------------------------

REDEEMABLE PREFERRED SHARES:
Redeemable preferred shares (par value of $120 per share;
10,000 shares authorized; 363 issued and outstanding as at
September 30, 2004 and December 31, 2003, respectively)                               $      44      $      44
Additional paid-in capital                                                               38,956         38,956
                                                                                      ------------------------
          TOTAL REDEEMABLE PREFERRED SHARES                                           $  39,000      $  39,000
                                                                                      ------------------------

SHAREHOLDERS' EQUITY:
Common shares (par value of $120 per share; 10,000 shares
authorized; 2,057 issued and outstanding as at
September 30, 2004 and December 31, 2003, respectively)                               $     247      $     247
Additional paid-in capital                                                              220,653        220,653
Accumulated other comprehensive income                                                      462          1,174
Retained earnings                                                                       213,215        169,565
                                                                                      ------------------------
          TOTAL SHAREHOLDERS' EQUITY                                                  $ 434,577      $ 391,639
                                                                                      ------------------------

          TOTAL LIABILITIES, REDEEMABLE PREFERRED SHARES AND SHAREHOLDERS' EQUITY     $ 975,938      $ 831,762
                                                                                      ========================


         The accompanying notes are an integral part of these condensed
                             financial statements.



XL FINANCIAL ASSURANCE LTD.
CONDENSED  STATEMENTS OF INCOME AND COMPREHENSIVE  INCOME FOR THE THREE AND NINE
MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------



                                                                     THREE MONTHS ENDED             NINE MONTHS ENDED
                                                                        SEPTEMBER 30,                 SEPTEMBER 30,

                                                                    2004             2003          2004          2003
                                                                 --------------------------------------------------------
                                                                                                   
REVENUES:
Net premiums earned                                               $   17,790      $   19,964     $  57,448     $  52,076
Net investment income                                                  6,225           3,904        17,102        11,378
Net realized gains (losses) on investments                              (793)           (609)          726         1,825

Net realized and unrealized gains on derivative instruments              705           5,480        20,525        27,009
                                                                 ---------------------------------------------------------

           Total revenues                                         $   23,927      $   28,739     $  95,801     $  92,288
                                                                 ---------------------------------------------------------

EXPENSES:
Losses and loss expenses                                               7,013      $    2,031     $  13,215     $  12,907
Acquisition costs                                                      7,637           7,905        21,874        21,668
Operating expenses                                                     1,366           1,550         5,551         5,140
                                                                 ---------------------------------------------------------

           Total expenses                                         $   16,016      $   11,486     $  40,640     $  39,715
                                                                 ---------------------------------------------------------

NET INCOME                                                        $    7,911      $   17,253     $  55,161     $  52,573
                                                                 =========================================================

COMPREHENSIVE INCOME
          Net income                                              $    7,911      $   17,253     $  55,161     $  52,573

          Unrealized gains (losses)                                   12,927          (2,447)           14           567
          Less: reclassification for gains (losses) realized
          in income                                                     (793)           (609)          726         1,825
                                                                 ---------------------------------------------------------

Other comprehensive gain (loss)                                   $   13,720      $   (1,838)    $    (712)    $  (1,258)
                                                                 ---------------------------------------------------------

           COMPREHENSIVE INCOME                                   $   21,631      $   15,415     $  54,449     $  51,315
                                                                 =========================================================


         The accompanying notes are an integral part of these condensed
                             financial statements.



XL FINANCIAL ASSURANCE LTD.
CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2004 AND FOR THE
YEAR ENDED DECEMBER 31, 2003
(UNAUDITED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------



                                                                    2004                  2003
                                                              ----------------------------------

                                                                               
COMMON SHARES - AUTHORIZED
Number of  shares, beginning of year and period                      2,057                2,057
                                                              ----------------------------------

            Number of shares, end of year and period                 2,057                2,057
                                                              ==================================

COMMON SHARES - ISSUED
Balance - beginning of year and period                         $       247           $      247
                                                              ----------------------------------

            Balance - end of year and period                   $       247           $      247
                                                              ==================================


ADDITIONAL PAID-IN CAPITAL
Balance - beginning of year and period                         $   220,653           $  220,653
                                                              ----------------------------------

            Balance - end of year and period                   $   220,653           $  220,653
                                                              ==================================


ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance - beginning of year and period                         $     1,174           $    6,095
Other comprehensive loss                                             (712)              (4,921)
                                                              ----------------------------------

            Balance - end of year and period                   $       462           $    1,174
                                                              ==================================


RETAINED EARNINGS
Balance - beginning of year and period                         $   169,565           $  100,046
Net income                                                          55,161               76,161
Dividends on preferred shares                                     (11,511)              (6,642)
                                                              ----------------------------------

            Balance - end of year and period                   $   213,215           $  169,565
                                                              ==================================

TOTAL SHAREHOLDERS' EQUITY                                     $   434,577           $  391,639
                                                              ==================================


         The accompanying notes are an integral part of these condensed
                             financial statements.




XL FINANCIAL ASSURANCE LTD.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
(U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------



                                                                                             2004              2003
                                                                                       ----------------------------------

                                                                                                       
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
    Net income for the period                                                           $      55,161        $      52,573
Adjustments to reconcile net income to net cash provided by operating activities:
           Realized gains on investments                                                        (726)              (1,825)
           Amortization of discount on fixed maturities                                         3,648                (429)
           Net realized gains on investment derivatives                                          (19)              (3,267)
           Net realized and unrealized gains on credit derivatives
           excluding cash received and paid                                                   (5,636)             (13,439)
           Accrued investment income                                                            2,231              (1,269)
           Reinsurance premiums receivable                                                     19,638             (13,139)
           Deferred acquisition costs                                                        (18,906)             (27,083)
           Prepaid reinsurance premiums                                                        26,832             (21,102)
           Unpaid losses and loss expenses recoverable                                       (46,058)              (2,766)
           Amounts due from parent and affiliates                                             (3,477)                3,813
           Accounts payable and accrued liabilities                                             (530)                (434)
           Reinsurance premiums payable                                                         (988)             (14,824)
           Deferred premium revenue                                                            51,091              135,619
           Unpaid losses and loss expenses                                                     56,337               14,018
           Other assets and liabilities                                                          (76)                  (9)
                                                                                       ------------------------------------

           Total adjustments                                                                   83,361               53,864
                                                                                       ------------------------------------

           Net cash provided by operating activities                                          138,522              106,437
                                                                                       ------------------------------------

CASH FLOWS USED IN INVESTING ACTIVITIES:
    Proceeds from sale of fixed maturities and short-term investments                       2,299,403              238,602
    Proceeds from redemption of fixed maturities and short-term investments                   512,150            4,111,110
    Purchase of fixed maturities and short-term investments                               (2,958,347)          (4,552,957)
                                                                                       ------------------------------------

    Net cash used in investing activities                                                   (146,794)            (203,245)
                                                                                       ------------------------------------

CASH FLOWS USED IN FINANCING ACTIVITIES:
    Dividends paid on preferred shares                                                       (12,003)              (6,640)
                                                                                       ------------------------------------

DECREASE IN CASH AND CASH EQUIVALENTS                                                        (20,275)            (103,448)

CASH AND CASH EQUIVALENTS - BEGINNING OF  PERIOD                                               26,346              125,073
                                                                                       ------------------------------------

CASH AND CASH EQUIVALENTS - END OF  PERIOD                                              $       6,071        $      21,625
                                                                                       ====================================


         The accompanying notes are an integral part of these condensed
                             financial statements.




XL FINANCIAL ASSURANCE LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

- --------------------------------------------------------------------------------

1.   ORGANIZATION AND BUSINESS

XL Financial  Assurance  Ltd.  (the  "Company")  was  incorporated  with limited
liability  under the  Bermuda  Companies  Act 1981 on  October  14,  1998 and is
registered as a Class 3 insurer under The Insurance Act 1978, amendments thereto
and related  regulations  ("The Act").  At  September  30, 2004 and December 31,
2003, the Company was approximately  85% owned by XL Insurance  (Bermuda) Ltd (a
wholly-owned  subsidiary of XL Capital Ltd); 6% by Financial  Security Assurance
Inc. (a wholly-owned  subsidiary of Financial  Security Assurance Holdings Ltd.)
and 9% by  Financial  Security  Assurance  International  Ltd.  (owned 20% by XL
Insurance  (Bermuda)  Ltd and 80% by Financial  Security  Assurance  Inc.).  The
Company is an integral part of a joint venture  agreement between XL Capital Ltd
and Financial Security Assurance Holdings Ltd.

The Company is primarily  engaged in the business of  providing  reinsurance  of
financial guaranties on asset-backed and municipal  obligations  underwritten by
XL Insurance  (Bermuda) Ltd,  Financial  Security  Assurance Inc. and XL Capital
Assurance Inc. (a wholly-owned  subsidiary of XL Capital Ltd) and other monoline
and  multiline  insurance  companies.  This  may be in the  form of  traditional
financial guaranty insurance or via a credit derivative execution. The Company's
underwriting  policy is to provide  reinsurance  of  asset-backed  and municipal
obligations  that  would  be of a lower  investment-grade  quality  without  the
benefit of the Company's reinsurance.  The asset-backed obligations reinsured by
the Company are generally  issued in structured  transactions  and are backed by
pools  of  assets  such  as  residential  mortgage  loans,   consumer  or  trade
receivables,  securities  or other  assets  having  ascertainable  cash flows or
market  value.  The  municipal  obligations  reinsured  by the  Company  consist
primarily of general  obligation bonds that are supported by the issuers' taxing
power and of special  revenue bonds and other special  obligations of states and
local  governments  that are  supported  by the  issuers'  ability to impose and
collect fees and charges for public services or specific projects. The Company's
reinsurance  guarantees  payments  when due of scheduled  payments on an insured
obligation.  In the case of a payment  default  on an  insured  obligation,  the
Company is  generally  required  to pay the  principal,  interest  or other such
amounts due in accordance with the obligations' original payment schedule or, at
its option,  to pay such amounts on an accelerated  basis.  The Company conducts
surveillance on its exposures to try and ensure early identification of any loss
events.  In addition,  in the normal  course of business,  the Company  seeks to
reduce the loss that may arise from such events by reinsuring  certain levels of
risks  in  various  areas  of  exposure  with  other  insurance  enterprises  or
reinsurers.

On  October  6,  1999,  the  Company  entered  into a  Facultative  Quota  Share
Reinsurance  Treaty  ("Treaty")  with XL Capital  Assurance Inc.  ("XLCA").  The
Treaty was  amended and  restated  on June 22,  2001 and May 1, 2004.  Under the
terms of this  Treaty,  the  Company  agrees  to  reinsure  up to 90% of  XLCA's
compliant  risks.  The Company is subject to ceding  commissions of up to 30% on
business assumed under the terms of this Treaty.

On December 6, 2000, the Company entered into an excess of loss agreement, which
reinsures 100% of net incurred losses in excess of $250 million up to a limit of
liability  of $100  million.  On June  30,  2003,  the  Company  terminated  the
agreement.  On October  3,  2001,  the  Company  entered  into an excess of loss
reinsurance  agreement with XL Insurance  (Bermuda) Ltd, which  indemnifies  the
Company  up to an  aggregate  limit of  liability  of $500  million in excess of
defined obligor losses.

2.   SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PREPARATION

The  accompanying  condensed  financial  statements  have been  prepared  by the
Company and are unaudited. In the opinion of management, all adjustments,  which
include  only  normal  recurring  adjustments  necessary  to present  fairly the
financial  position,  results of operations and cash flows at September 30, 2004
and for all periods presented,  have been made.



XL FINANCIAL ASSURANCE LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

- --------------------------------------------------------------------------------

Certain  information  and footnote  disclosures  normally  included in financial
statements prepared in accordance with accounting  principles generally accepted
in the United States of America have been condensed or omitted. These statements
should be read in  conjunction  with the Company's  December 31, 2003  financial
statements and notes thereto.  The year-end  condensed balance sheet was derived
from audited financial statements, but does not include all disclosures required
by accounting principles generally accepted in the United States of America. The
results of operations for the periods ended  September 30, 2004 and 2003 are not
necessarily indicative of the operating results for the full year.

The preparation of condensed  financial  statements  requires management to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reporting  period.  Actual results could differ from those estimates.
Any such  adjustments  are  reflected  in  income  in the  period  in which  the
adjustments  are  made.  The  financial  statement  estimates  subject  to  most
uncertainty are estimates for loss reserves and calculation of the fair value of
credit default swap instruments.

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, FASB issued  Interpretation No. 46,  "Consolidation of Variable
Interest Entities",  ("FIN 46"). The objective of FIN 46 is to improve financial
reporting by companies involved with variable interest entities.  This new model
for consolidation  applies to an entity which either (1) the powers or rights of
the equity holders do not give them sufficient decision making powers or (2) the
equity  investment at risk is insufficient  to finance that entity's  activities
without receiving additional  subordinated financial support from other parties.
FIN 46 requires a variable  interest  entity to be  consolidated by a company if
that  company is subject  to a  majority  of the risk of loss from the  variable
interest  entity's  activities or entitled to receive a majority of the entity's
residual returns or both.

In December  2003,  FASB issued a revision to FIN 46 (FIN 46-R) which  clarified
several  provisions  of FIN 46,  superceded  the  related  FASB Staff  Positions
(FSPs),  and amended the effective  date and  transition  of the  pronouncement,
except for  certain  types of  entities.  However,  the  Company has applied the
provisions  of FIN 46 or FIN 46-R to those  entities  that are  considered to be
special-purpose  entities as at September  30, 2004.  The adoption of FIN 46 did
not have a material effect on the Company's  financial  condition and results of
operations.

3.   DERIVATIVE INSTRUMENTS

Credit  derivatives  issued by the Company meet the  definition  of a derivative
under FAS 133. The Company has recorded these products at fair value, modeled on
prevailing market conditions and certain other factors relating to the structure
of the transaction.  The Company  considers  credit  derivatives to be financial
guaranty  contracts,  in  substance,  as the  Company  intends  to hold  them to
maturity.  The Company  determines fair value using a model which calculates the
difference  between the actual remaining  present value of installment  premiums
and an estimated  remaining present value of installment  premiums under current
market  conditions.  In essence,  the model  estimates the cost of an offsetting
position to the original credit derivatives from other comparable counterparties
under the current  market  environment.  The model is dependent upon a number of
factors including changes in credit spreads,  changes in credit quality, foreign
exchange and other market factors.

The Company's credit  derivatives  portfolio  generally  requires the Company to
meet payment  obligations  for  referenced  credits  within the portfolio in the
event of specific  credit  events after  erosion or  exhaustion of various first
loss protection levels. These credit events are contract specific, but generally
cover bankruptcy,  failure to pay and repudiation.  The notional exposure of the
credit  derivatives  portfolio  as of  September  30,  2004  was  $4.6  billion.



XL FINANCIAL ASSURANCE LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

- --------------------------------------------------------------------------------

Approximately  96% of the portfolio is rated AAA, with the remainder being split
amongst AA, A and BBB  respectively.  The weighted average term of the contracts
in force was 5.11 years.  The net fair value  adjustment  for the periods  ended
September  30,  2004 and 2003 was an  unrealized  gain of  $5,636  and  $13,439,
respectively.  At September 30, 2004 and 2003, the Company had a net derivatives
asset (liability) of $3,444 and ($2,829), respectively.

4.   VARIABLE INTEREST ENTITIES

The Company primarily provides  financial guaranty  reinsurance or enters into a
credit  derivative  on the senior  interests,  which  would  otherwise  be rated
investment  grade.  The  obligations  related  to these  transactions  are often
securitized  through variable interest  entities.  The Company does not hold any
equity positions or subordinated debt in these  arrangements.  Accordingly,  the
Company's  interest in these variable  interest  entities is not significant and
therefore, not consolidated.

5.   LOSS RESERVE

The  Company  assumed a loss of  approximately  $18.4  million,  net of  certain
adjustments, representing the present value of losses expected to be incurred in
the future with respect to an insured project financing transaction underwritten
by an  affiliate.  The  portion  of the  reinsured  exposure  to which this loss
relates was  retroceded by the Company,  on a first loss basis,  to an affiliate
and,  accordingly,  there was no impact on the  Company's  results of operations
from this loss  provision.  The total  remaining par reinsured by the Company in
connection with this  transaction  aggregated  approximately  $133.33 million at
September 30, 2004. Such par exposure amortizes over many years into the future.
The  estimate  of losses was  necessarily  based on  assumptions  and  estimates
extending over many years into the future. There is currently no payment default
with respect to this transaction.  Management  continues to monitor the exposure
and  will  revise  its  loss  estimate  as  necessary,  as  information  becomes
available.  Pursuant  to the  assumptions  upon  which the  estimate  was based,
approximately  51.25% of any  additional  loss provision in excess of the amount
currently provided will be retained by the Company

6.   REINSURANCE

The effect of reinsurance on premiums  written and earned for the three and nine
month periods ended September 30, 2004 and 2003 is shown below:



                                                               ASSUMED             CEDED              NET
                                                           ---------------------------------------------------
                                                                                         
Three months ended September 30, 2004
                Premium written                              $    51,690        $    (9,765)      $    41,925
                Premium earned                                    54,057            (36,267)           17,790
                Losses and loss adjustment expenses               51,538            (44,525)            7,013

Three months ended September 30, 2003
                Premium written                              $    78,863        $   (12,442)      $    66,421
                Premium earned                                    26,053             (6,089)           19,964
                Losses and loss adjustment expenses                1,695                 336            2,031





XL FINANCIAL ASSURANCE LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

- --------------------------------------------------------------------------------


                                                                                         
Nine months ended September 30, 2004
                Premium written                              $   159,187        $   (23,816)      $   135,371
                Premium earned                                   108,096            (50,648)           57,448
                Losses and loss adjustment expenses               59,273            (46,058)           13,215

Nine months ended September 30, 2003
                Premium written                              $   206,412        $   (39,820)      $   166,592
                Premium earned                                    70,794            (18,718)           52,076
                Losses and loss adjustment expenses               15,672             (2,765)           12,907