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 March 31, 2005

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 April 29, 2005, there were 140,116,081 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 March 31, 2005 (Unaudited)
	and December 31, 2004	3
	Consolidated Statements of Income for the Three Months Ended
	March 31, 2005 and 2004 (Unaudited)	5
	Consolidated Statements of Comprehensive Income for the
	Three Months Ended March 31, 2005 and 2004 (Unaudited)	6
	Consolidated Statements of Shareholders’ Equity for the
	Three Months Ended March 31, 2005 and 2004 (Unaudited)	7
	Consolidated Statements of Cash Flows for the Three Months Ended
	March 31, 2005 and 2004 (Unaudited)	8
	Notes to Unaudited Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and
	Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 4.	Controls and Procedures	47
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 6.	Exhibits	49
Signatures		51

2

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

	(Unaudited)
	March 31,	December 31,
	2005	2004
ASSETS
Investments:
Fixed maturities at fair value (amortized cost: 2005, $25,082,838;             2004, $24,452,348)	$25,381,382	$25,100,194
Equity securities, at fair value (cost: 2005, $768,915; 2004, $778,117)	924,347	962,920
Short-term investments, at fair value (amortized cost: 2005, $1,895,772;             2004, $1,738,845)	1,907,029	1,760,714
Total investments available for sale	28,212,758	27,823,828
Investments in affiliates	2,042,343	1,936,852
Other investments	265,913	305,160
Total investments	30,521,014	30,065,840
Cash and cash equivalents	2,287,562	2,304,303
Accrued investment income	305,135	326,510
Deferred acquisition costs	1,006,724	845,422
Prepaid reinsurance premiums	1,107,039	992,260
Premiums receivable	4,919,185	3,838,228
Reinsurance balances receivable	1,203,813	1,095,739
Unpaid losses and loss expenses recoverable	6,744,778	6,971,356
Goodwill and other intangible assets	1,824,148	1,827,782
Deferred tax asset, net	277,088	288,599
Other assets	670,517	689,430
Total assets	$50,867,003	$49,245,469
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Unpaid losses and loss expenses	$19,907,703	$19,837,669
Deposit liabilities	6,400,602	5,974,726
Future policy benefit reserves	4,223,049	4,335,056
Unearned premiums	6,331,537	5,191,368
Notes payable and debt	2,721,672	2,721,431
Reinsurance balances payable	1,603,711	1,565,689
Net payable for investments purchased	304,143	273,535
Other liabilities	1,487,048	1,533,860
Minority interest	72,469	73,440
Total liabilities	$43,051,934	$41,506,774

See accompanying Notes to Unaudited Consolidated Financial Statements

3

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

	(Unaudited)
	March 31,	December 31,
	2005	2004
Commitments and Contingencies
Shareholders’ Equity:
Series A preference ordinary shares, 9,200,000 authorized,             par value $0.01 Issued and outstanding: 2005 and 2004, 9,200,000	$ 92	$ 92
Series B preference ordinary shares, 11,500,000 authorized,             par value $0.01 Issued and outstanding: 2005 and 2004, 11,500,000;	115	115
Series C preference ordinary shares, 20,000,000 authorized,             par value $0.01 Issued and outstanding 2005 and 2004, nil.	—	—
Class A ordinary shares, 999,990,000 authorized, par value $0.01             Issued and outstanding: 2005, 139,997,086; 2004, 138,932,481	1,400	1,389
Additional paid in capital	4,028,382	3,950,175
Accumulated other comprehensive income	137,441	460,273
Deferred compensation	(122,888)	(69,988)
Retained earnings	3,770,527	3,396,639
Total shareholders’ equity	$ 7,815,069	$ 7,738,695
Total liabilities and shareholders’ equity	$50,867,003	$49,245,469

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)
	Three Months Ended
	March 31,
	2005	2004
Revenues:
Net premiums earned — general operations	$1,766,269	$1,593,246
Net premiums earned — life and annuity operations	81,471	91,808
Net premiums earned — financial operations	51,695	47,748
Net investment income — general operations	171,930	146,946
Net investment income — life and annuity operations	59,903	44,901
Net investment income — financial operations	76,372	47,220
Net realized gains on investments	60,671	115,337
Net realized and unrealized gains on derivative instruments	45,178	7,767
Net income from investment affiliates	70,512	63,493
Fee income and other	17,160	6,907
Total revenues	$2,401,161	$2,165,373
Expenses:
Net losses and loss expenses incurred — general operations	$1,135,865	$978,398
Claims and policy benefits — life and annuity operations	125,627	115,276
Net losses and loss expenses incurred – financial operations	7,196	8,860
Acquisition costs	294,394	277,270
Operating expenses	247,156	245,300
Foreign exchange losses (gains)	10,922	(10,724)
Interest expense	88,286	50,250
Amortization of intangible assets	2,793	3,257
Total expenses	$1,912,239	$1,667,887
Income before minority interest, income tax and equity in net loss of       insurance and financial affiliates	$ 488,922	$ 497,486
Minority interest in net income of subsidiary	2,275	4,660
Income tax	52,874	35,885
Net income from operating affiliates	19,252	5,308
Net income	$ 453,025	$ 462,249
Preference share dividends	(10,080)	(10,080)
Net income available to ordinary shareholders	$ 442,945	$ 452,169
Weighted average ordinary shares and ordinary share equivalents       outstanding — basic	138,035	137,624
Weighted average ordinary shares and ordinary share equivalents       outstanding — diluted	139,147	139,044
Earnings per ordinary share and ordinary share equivalent — basic	$ 3.21	$ 3.29
Earnings per ordinary share and ordinary share equivalent — diluted	$ 3.18	$ 3.25

See accompanying Notes to Unaudited Consolidated Financial Statements

5

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

	(Unaudited)
	Three Months Ended
	March 31,
	2005	2004
Net income	$ 453,025	$ 462,249
Change in net unrealized appreciation of investments	(341,058)	115,205
Change in derivative loss	156	—
Foreign currency translation adjustments	18,070	26,582
Comprehensive income	$ 130,193	$ 604,036

See accompanying Notes to Unaudited Consolidated Financial Statements

6

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

	(Unaudited)
	Three Months Ended
	March 31,
	2005	2004
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	$ 1,389	$ 1,373
Issue of shares	8	6
Exercise of stock options	4	1
Repurchase of shares	(1)	—
Balance — end of period	$ 1,400	$ 1,380
Additional Paid in Capital:
Balance — beginning of year	$3,950,175	$3,949,421
Issue of shares	61,629	42,634
Stock option expense	4,177	2,399
Exercise of stock options	16,238	4,723
Repurchase of shares	(3,837)	—
Issue of debt related to equity security units	—	(112,301)
Balance — end of period	$4,028,382	$3,886,876
Accumulated Other Comprehensive Income:
Balance — beginning of year	$ 460,273	$ 490,195
Net change in unrealized gains on investment portfolio, net of tax	(344,238)	110,876
Net change in unrealized gains on investment portfolio of other             investments, net of tax	3,180	4,329
Change in derivative loss	156	—
Currency translation adjustments	18,070	26,582
Balance — end of period	$ 137,441	$ 631,982
Deferred Compensation:
Balance — beginning of year	$ (69,988)	$ (46,124)
Issue of restricted shares	(62,031)	(42,857)
Amortization	9,131	4,786
Balance — end of period	$ (122,888)	$ (84,195)
Retained Earnings:
Balance — beginning of year	$3,396,639	$2,541,843
Net income	453,025	462,249
Dividends on Series A and B preference ordinary shares	(10,080)	(10,080)
Dividends on Class A ordinary shares	(69,057)	(67,535)
Repurchase of ordinary shares	—	—
Balance — end of period	$3,770,527	$2,926,477
Total Shareholders’ Equity	$7,815,069	$7,362,727

See accompanying Notes to Unaudited Consolidated Financial Statements

7

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

	(Unaudited)
	Three Months Ended
	March 31,
	2005	2004
Cash flows provided by operating activities:
Net income	$ 453,025	$ 462,249
Adjustments to reconcile net income to net cash provided by operating       activities:
Net realized (gains) on sales of investments	(60,671)	(115,337)
Net realized and unrealized (gains) on derivative instruments	(45,178)	(7,767)
Amortization of discounts on fixed maturities	17,191	21,883
Amortization of intangible assets	2,793	3,257
Amortization of deferred compensation	9,131	4,786
Accretion of convertible debt	241	6,381
Accretion of deposit liabilities	46,327	23,430
Net income from investment, financial and operating affiliates	(89,764)	(68,801)
Unpaid losses and loss expenses	70,034	163,620
Unearned premiums	1,140,169	1,373,950
Premiums receivable	(1,080,957)	(1,478,787)
Unpaid losses and loss expenses recoverable	226,578	(1,816)
Future policy benefit reserves	(112,007)	20,000
Prepaid reinsurance premiums	(114,779)	(136,226)
Reinsurance balances receivable	(108,074)	75,794
Reinsurance balances payable	38,022	208,850
Deferred acquisition costs	(161,302)	(218,595)
Deferred tax asset	11,511	53,132
Other	28,279	136,131
Total adjustments	(182,456)	63,885
Net cash provided by operating activities	$ 270,569	$ 526,134
Cash flows used in investing activities:
Proceeds from sale of fixed maturities and short-term investments	5,430,909	5,685,716
Proceeds from redemption of fixed maturities and short-term investments	391,782	305,168
Proceeds from sale of equity securities	242,684	67,274
Purchases of fixed maturities and short-term investments	(6,387,489)	(7,119,358)
Purchases of equity securities	(243,666)	(126,914)
Investments in affiliates, net of dividends received	18,159	(51,654)
Other investments	18,701	1,671
Net cash used in investing activities	$ (528,920)	$(1,238,097)
Cash flows provided by financing activities:
Proceeds from exercise of stock options	16,242	4,724
Repurchase of shares	(3,837)	—
Dividends paid	(79,137)	(77,615)
Net cash flow from securities lending	(69,725)	(186,270)
Proceeds from notes payable and issue of equity units	—	800,195
Deposit liabilities	379,549	225,587
Net cash provided by financing activities	$ 243,092	$ 766,621
Effects of exchange rate changes on foreign currency cash	(1,482)	2,808
Increase (decrease) in cash and cash equivalents	(16,741)	57,466
Cash and cash equivalents — beginning of period	2,304,303	2,829,627
Cash and cash equivalents — end of period	$ 2,287,562	$ 2,887,093

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 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 inter-company 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 this change in presentation.

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

2.     Significant Accounting Policies

(a) Derivatives

For the three months ended March 31, 2005, the Company amended the presentation of certain credit derivative transactions (described below) in the consolidated statements of income to include certain components of the change in fair value in “gross premiums written”, “net premiums earned”, “net losses and loss expenses incurred” and in the consolidated balance sheet, certain components of the fair value in “unearned premiums” and “unpaid loss and loss expenses.” Previously, the change in fair value of all of its derivative transactions was reflected in one line item under “net realized and unrealized gains and losses on derivative instruments”, and the fair value had been reflected in “other assets” and “other liabilities.” There was no effect on net income as a result of this change and prior period results have been reclassified to reflect this presentation. This change in presentation is applicable only to credit default swaps issued by the Company that are investment grade and that the Company intends, and has the ability to hold to, maturity and is consistent with practices in the financial guaranty insurance industry for reporting the results of such instruments.

(b) Stock based compensation

Effective January 1, 2003, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards (“FAS”) No. 123 Accounting for Stock-Based Compensation (“FAS 123”), as amended by FAS No. 148 Accounting for Stock-Based Compensation – Transition and Disclosure (“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 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 share if the fair value method had been applied to all outstanding and unvested awards in each period:

9

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

2.     Significant Accounting Policies (Continued)

	(Unaudited)
	Three Months Ended
(U.S. dollars in thousands, except per share amounts)	March 31,
	2005	2004
Net income available to ordinary shareholders — as reported	$442,945	$452,169
Add: Stock based employee compensation expense included in reported       net income, net of related tax	4,177	2,399
Deduct: Total stock based employee compensation expense determined       under fair value based method for all awards, net of related tax effects	(8,129)	(12,786)
Pro forma net income available to ordinary shareholders	$438,993	$441,782
Earnings per share:
Basic — as reported	$ 3.21	$ 3.29
Basic — pro forma	$ 3.18	$ 3.21
Diluted — as reported	$ 3.18	$ 3.25
Diluted — pro forma	$ 3.15	$ 3.18

3.     Recent Accounting Pronouncements

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. SOP 03-3 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. SOP 03-3 is effective for loans acquired in fiscal years beginning after December 15, 2004. The adoption of SOP 03-3 did not have a material effect on the Company’s financial condition or results of operations.

In December 2004, the Financial Accounting Standards Board (“FASB”) issued FAS No. 123 (Revised), Share- Based Payment (“FAS 123 (Revised)”), which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based at their fair values. This statement will be effective for the first fiscal year beginning after June 15, 2005. The Company adopted the fair-value based method of accounting for share-based payments effective January 1, 2003 using the prospective method described in FAS 148. FAS 123 (Revised) must be applied not only to new awards but to previously granted awards that are not fully vested on the effective date. However, had the Company adopted FAS 123 (Revised) in prior periods, the impact of that standard would have approximated the impact of FAS 123 as described in the disclosure of pro forma net income and earnings per share in Note 2 (b) – Stock based compensation above.

In March 2005, the FASB issued FASB Staff Position (“FSP”) FIN 46(R)-5, Implicit Variable Interests Under FASB Interpretation No. 46(R), which requires an enterprise to consider whether it holds an implicit variable interest in a Variable Interest Entity (“VIE”) and what effect this may have on the calculation of expected losses and residual returns of the VIE and the determination of which party, if any, is considered the primary beneficiary of the VIE. This statement will be effective for the first quarterly reporting period beginning after March 3, 2005 and is not expected to have a material impact on the Company’s financial condition or results of operations.

10

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

4.     Segment Information

The Company is organized into three operating segments — Insurance, Reinsurance and Financial Products and Services — in addition to a corporate segment that 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.

During the three months ended March 31, 2005, following changes in certain executive management responsibilities, the Company changed the reporting segments under which certain business units are reported in order to reflect these changes in responsibilities.

• Results of business structured by XL Financial Solutions Ltd (“XLFS”) are now included entirely within the Financial Products and Services segment whereas previously this unit was reported in all three segments depending on the nature of individual contracts.

• Certain blocks of U.S.-based term life mortality reinsurance business previously included in the Financial Products and Services segment are now included in the Reinsurance segment as management of these contracts was transferred to the life reinsurance business units in order to centralize the Company’s management of traditional mortality-based reinsurance business.

• Political risk insurance business units will now report to executive management of the Financial Products and Services segment and, as such, future earnings from this business will no longer be reported in the Insurance segment but included with financial operations.

• All operations of business units within the Financial Products and Services segment, including municipal reinvestment contracts and funding agreements, are now reported under financial operations in order to consolidate businesses with similar operating characteristics and risks.

• All net investment income and net income from affiliates generated by assets and interest expense incurred on liabilities of the business units within the Financial Products and Services segment is reported under financial operations. This income and expense is included in financial operations as it relates to interest on portfolios of separately identified and managed assets and deposit liabilities.

11

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

4.     Segment Information (continued)

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

Three months ended March 31, 2005:
(U.S. dollars in thousands, except ratios)
(Unaudited)

			Financial
			Products
	Insurance	Reinsurance	and Services	Total
General Operations:
Net premiums earned	$1,082,518	$683,751	$ —	$1,766,269
Fee income and other	3,927	17	—	3,944
Net losses and loss expenses	725,515	410,350	—	1,135,865
Acquisition costs	138,743	142,190	—	280,933
Operating expenses (1)	125,868	41,406	—	167,274
Foreign exchange (gains) losses	14,315	(3,614)	—	10,701
Underwriting profit	$ 82,004	$ 93,436	$ —	$ 175,440
Life and Annuity Operations:
Life premiums earned	$ —	$ 81,471	$ —	$ 81,471
Fee income and other	—	65	—	65
Claims and policy benefits	—	125,627	—	125,627
Acquisition costs	—	6,351	—	6,351
Operating expenses (1)	—	4,183	—	4,183
Foreign exchange (gains) losses	—	270	—	270
Net investment income	—	59,903	—	59,903
Net income from life and annuity operations	$ —	$ 5,008	$ —	$ 5,008
Financial Operations:
Net premiums earned			$51,695	$ 51,695
Fee income and other			13,151	13,151
Net losses and loss expenses			7,196	7,196
Acquisition costs			7,110	7,110
Operating expenses (1)			17,556	17,556
Foreign exchange (gains) losses			(49)	(49)
Underwriting profit			$33,033	$ 33,033
Net investment income — financial guaranty			$14,518	$ 14,518
Net investment income – structured products			61,854	61,854
Interest expense – structured products			42,410	42,410
Net results from derivatives (2)			16,078	16,078
Operating expenses — structured products (1)			9,758	9,758
Net income from financial and investment             affiliates			6,628	6,628
Minority interest			2,275	2,275
Contribution from financial operations			$77,668	$ 77,668

See footnotes on following page.

12

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

4.     Segment Information (continued)

Three months ended March 31, 2005: (continued)
(U.S. dollars in thousands, except ratios)
(Unaudited)

			Financial
			Products
	Insurance	Reinsurance	and Services	Total
Net investment income — general operations				$171,930
Net realized and unrealized gains on investments             and derivative instruments (4)				89,771
Net income from investment and operating             affiliates				83,136
Interest expense (3)				45,876
Amortization of intangible assets				2,793
Corporate operating expenses				48,385
Income tax				52,874
Net Income				$453,025
General Operations:
Loss and loss expense ratio (5)	67.0%	60.0%		64.3%
Underwriting expense ratio (5)	24.5%	26.9%		25.4%
Combined ratio (5)	91.5%	86.9%		89.7%

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

     (2)     Includes net realized and unrealized gains on credit derivatives of $10.3 million, weather and energy derivatives of $6.0 million and losses on structured financial derivatives of $0.2 million.

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

     (4)     Includes net realized gains on investments of $60.7 million and net realized and unrealized gains on investment derivatives of $29.1 million.

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

13

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

4.     Segment Information (continued)

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

Three months ended March 31, 2004:
(U.S. dollars in thousands, except ratios)
(Unaudited)

			Financial
			Products
	Insurance	Reinsurance	and Services	Total
General Operations:
Net premiums earned	$878,521	$714,725	$ —	$1,593,246
Fee income and other	2,159	71	—	2,230
Net losses and loss expenses	542,789	435,609	—	978,398
Acquisition costs	118,339	147,311	—	265,650
Operating expenses (1)	127,982	42,426	—	170,408
Foreign exchange losses (gains)	1,638	(11,808)	—	(10,170)
Underwriting profit	$ 89,932	$101,258	$ —	$ 191,190
Life and Annuity Operations:
Life premiums earned	$ —	$ 91,808	$ —	$ 91,808
Fee income and other	—	115	—	115
Claims and policy benefits	—	115,276	—	115,276
Acquisition costs	—	6,170	—	6,170
Operating expenses (1)	—	2,350	—	2,350
Foreign exchange (gains) losses	—	(40)	—	(40)
Net investment income	—	44,901	—	44,901
Interest expense		276		276
Net income from life and annuity operations	$ —	$ 12,792	$ —	$ 12,792
Financial Operations:
Net premiums earned			$47,748	$47,748
Fee income and other			4,562	4,562
Net losses and loss expenses			8,860	8,860
Acquisition costs			5,450	5,450
Operating expenses (1)			15,534	15,534
Foreign exchange (gains) losses			(514)	(514)
Underwriting profit			$22,980	$ 22,980
Net investment income — financial guaranty			$ 8,133	$ 8,133
Net investment income — structured products			39,087	39,087
Interest expense — structured products			16,271	16,271
Net results from derivatives (2)			4,181	4,181
Operating expenses — weather and energy (1)			15,406	15,406
Net income from financial and investment             affiliates			535	535
Minority interest			4,660	4,660
Contribution from financial operations			$38,579	$ 38,579

See footnotes on following page.

14

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

4.     Segment Information (continued)

Three months ended March 31, 2004: (continued)
(U.S. dollars in thousands, except ratios)
(Unaudited)

			Financial
			Products
	Insurance	Reinsurance	and Services	Total
Net investment income — general operations				$146,946
Net realized and unrealized gains on investments             and derivative instruments (4)				118,923
Net income from investment and operating             affiliates				68,266
Interest expense (3)				33,703
Amortization of intangible assets				3,257
Corporate operating expenses				41,602
Income tax				35,885
Net Income				$462,249
General Operations:
Loss and loss expense ratio (5)	61.8%	60.9%		61.4%
Underwriting expense ratio (5)	28.0%	26.6%		27.4%
Combined ratio (5)	89.8%	87.5%		88.8%

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

     (2)     Includes net realized and unrealized gains on credit derivatives of $9.5 million, losses on weather and energy derivatives of $4.7 million and losses on structured financial derivatives of $0.7 million.

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

     (4)     Includes net realized gains on investments of $115.3 million and net realized and unrealized gains on investment derivatives of $3.6 million.

     (5)     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)

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

Three months ended March 31, 2005:
(U.S. dollars in thousands)
(Unaudited)

			Financial
			Products
	Insurance	Reinsurance	and Services
General Operations:
Professional liability	$ 365,268	$ 90,593	$—
Casualty	285,655	225,983	—
Property catastrophe	19,880	65,963	—
Other property	161,608	183,110	—
Marine, energy, aviation and satellite	206,865	41,275	—
Accident and health	58	9,053	—
Other (1)	43,184	67,774	—
Total general operations	$1,082,518	$683,751	$—
Life and Annuity Operations	—	81,471	—
Financial Operations	—	—	51,695
Total	$1,082,518	$765,222	$51,695

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

16

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

4.     Segment Information (continued)

Three months ended March 31, 2004:
(U.S. dollars in thousands)
(Unaudited)

			Financial
			Products
	Insurance	Reinsurance	and Services
General Operations:
Professional liability	$273,587	$ 86,023	$—
Casualty	223,931	199,631	—
Property catastrophe	11,573	63,173	—
Other property	122,246	194,201	—
Marine, energy, aviation and satellite	220,850	54,316	—
Accident and health	1,413	10,393	—
Other (1)	24,921	106,988	—
Total general operations	$878,521	$714,725	$—
Life and Annuity Operations	—	91,808	—
Financial Operations	—	—	47,748
Total	$878,521	$806,533	$47,748

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

5.     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, typically the timely repayment of principal and interest, of an obligor to a third party. The Company’s potential liability in the event of non-payment by the issuer of an 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 par exposure as at March 31, 2005 of financial guaranty aggregate insured portfolios was $77.1 billion, which includes credit default swap exposures of $10.9 billion. The net liability for these credit default swaps has a carrying value of $31.6 million.

6.     Derivative Instruments

The Company enters into investment, structured financial and weather and energy derivative instruments for both risk management and trading purposes. The Company enters into credit derivatives in connection with its Financial Products and Services business and the Company intends to hold these contracts to maturity. The Company is exposed to potential loss from various market risks and manages its market risks based on guidelines established by senior 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.

17

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

6.     Derivative Instruments (continued)

The following table summarizes the net realized and unrealized gains on derivative instruments included in net income for the three months ended March 31, 2005 and 2004:

	(Unaudited)
	Three Months Ended
(U.S. dollars in thousands)	March 31,
	2005	2004
Credit default swaps	$10,249	$ 9,530
Weather and energy risk management products	6,054	(4,664)
Other non-investment derivatives	(225)	(685)
Net results from derivatives — financial operations	$16,078	$ 4,181
Investment derivatives	29,100	3,586
Net realized and unrealized gains on derivative instruments	$45,178	$ 7,767

The Company records premiums received from sales of investment grade credit derivatives in gross written premiums and establishes and loss reserves for its derivative business. These loss reserves represent the Company’s best estimate of the probable losses expected under these contracts. Net realized and unrealized gains and losses on credit derivative instruments are computed as the difference between fair value and the net of unpaid losses and loss expenses and unpaid losses and loss expenses recoverable. Changes in unrealized gains and losses on credit derivative instruments are reflected in the consolidated statements of income. Cumulative unrealized gains and losses are reflected as assets and liabilities, respectively, in the Company’s consolidated balance sheets. Net realized and unrealized gains and losses resulting from changes in the fair value of derivatives occur because of changes in interest rates, credit spreads, recovery rates, the credit ratings of the referenced entities and other market factors.

The following table summarizes activities related to credit default swap derivative instruments:

	(Unaudited)
	Three Months Ended
(U.S. dollars in thousands)	March 31,
	2005	2004
Statement of Income:
Net earned premiums	$ 8,177	$8,357
Net losses and loss expenses	$ 2,126	$4,527
Net realized and unrealized gains (losses) on credit derivatives	$10,249	$9,530
	(Unaudited)
	As at	As at
(U.S. dollars in thousands)	March 31,	December 31,
	2005	2004
Balance sheet:
Unpaid losses and loss expenses recoverable	$ 78	$ 419
Other assets	$23,226	$16,475
Unpaid losses and loss expenses	$27,393	$26,090
Other liabilities	$27,490	$28,982

7.     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 $3.6 billion as of December 31, 2004.

18

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

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

	(Unaudited)
	Three Months Ended
(U.S. dollars and shares in thousands, except per share amounts)	March 31,
	2005	2004
Basic earnings per ordinary share:
Net income	$453,025	$462,249
Less: preference share dividends	(10,080)	(10,080)
Net income available to ordinary shareholders	$442,945	$452,169
Weighted average ordinary shares outstanding	138,035	137,624
Basic earnings per ordinary share	$ 3.21	$ 3.29
Diluted earnings per ordinary share:
Net income	$453,025	$462,249
Less: preference share dividends	(10,080)	(10,080)
Net income available to ordinary shareholders	$442,945	$452,169
Weighted average ordinary shares outstanding — basic	138,035	137,624
Average stock options outstanding	1,112	1,420
Weighted average ordinary shares outstanding — diluted	139,147	139,044
Diluted earnings per ordinary share	$ 3.18	$ 3.25
Dividends per ordinary share	$ 0.50	$ 0.49

9.     Commitments and Contingencies

Included in unpaid loss and loss expenses recoverable at March 31, 2005 is an unsecured reinsurance recoverable from Winterthur Swiss Insurance Company (the “Seller”) of $1.45 billion, related to certain contractual arrangements with the sale and purchase agreement, as amended (“SPA”), relating to the Company’s acquisition of Winterthur International in July 2001. The Seller is currently rated “A-” by S&P. The Seller provides the Company with post-closing protection determined as of June 30, 2004 with respect to, among other things, adverse development incurred losses and premium balances relating to the acquired Winterthur International business (“Winterthur 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 an independent actuarial process for determining the net amount due to the Company from the Seller. In this process, each of the Company and the Seller submits their respective net reserves and seasoned premium amounts. The independent actuary develops its own value of the seasoned net reserves and seasoned premium amounts and the actual final seasoned amount would be in each case, the submission that is closest to the number developed by the independent actuary.

As the Company and the Seller were unable to come to an agreement, the Company submitted to the Seller notice to trigger the independent actuarial process as contemplated by the SPA. On February 3, 2005, both the Company and the Seller have made submissions for the independent actuarial process. The Company’s submissions would result in a net payable to the Company of approximately $1.45 billion in aggregate and the Seller’s submissions would result in a net payable to the Company of $541.0 million in aggregate. At the completion of the independent actuarial process, the Company will be entitled to a lump sum payment.

19

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

9.     Commitments and Contingencies (continued)

In addition, the Seller provides protection to the Company with respect to third party reinsurance receivables and recoverables related to the Winterthur Business which are approximately $1.8 billion in the aggregate as of March 31, 2005. There are two levels of protection from the Seller for these balances:

1.

At the time of the Winterthur International acquisition, the seller provided to the Company a liquidity facility. At the time of the payment of the net reserve seasoned amount as described above. The Company has the right to repay up to the balances outstanding on this facility by assignment to the Seller of an equal amount of receivables relating to reinsurance recoverables selected by the Company. The payable balance related to this facility is included within other liabilities on the Company’s balance sheet at March 31, 2005 and amounted to approximately $276 million at that date.

2.

Under two retrocession agreements the Company has reinsurance protection on the remaining portion of reinsurance recoverables with respect to incurred losses seasoned as of June 30, 2004 to the extent that the Company does not receive payment of such amounts from applicable reinsurers with one agreement providing a limit of $1.3 billion for the insurance written in the period to June 30, 2001 and the other agreement providing a limit of $1.3 billion for the insurance written prior to December 31, 2000.

At March 31, 2005, certain reinsurers responsible for some portions of the reinsurance of the Winterthur business have raised issues as to whether amounts claimed are due and the resolution of those discussions is also currently ongoing.

The Company may record a loss in future periods if any or some of the following occur:

(i)	A submission of the Seller is closer to the valuation developed by the independent actuary, in which case the Company may record a loss of approximately $900 million.
(ii)	There is deterioration of the net reserves and premium balances, relating to the Winterthur Business, from what is reported in the Company’s December 31, 2004 financial statements;
(iii)	The Company is unable to make full recovery of the reinsurance recoverables related to the Winterthur Business, either from third parties or from the Seller under the additional protections; and/or
(iv)	Any amount due from the Seller proves to be uncollectible from the Seller for any reason.

The Company recently met with the independent actuary and the Seller with respect to the post-closing seasoning process relating to the Company’s acquisition of Winterthur International from the Seller. Based on these discussions, the Company expects that the independent actuary’s final report will be issued in the fourth quarter of this year.

20

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 that 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 included 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, 2004.

Executive Overview

See “Executive Overview” in Item 7 of the Company’s Form 10-K for the year ended December 31, 2004.

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 March 31, 2005 and 2004.

(U.S. dollars and shares in thousands, except per share amounts)	(Unaudited)
	Three Months Ended
	March 31,
	2005	2004
Net income available to ordinary shareholders	$442,945	$452,169
Earnings per ordinary share — basic	$ 3.21	$ 3.29
Earnings per ordinary share — diluted	$ 3.18	$ 3.25
Weighted average number of ordinary shares and ordinary share       equivalents — basic	138,035	137,624
Weighted average number of ordinary shares and ordinary share       equivalents — diluted	139,147	139,044

The Company’s net income and other financial measures as shown below for the three months ended March 31, 2005 have been affected, among other things, by the following significant items:

1)	Continuing competitive underwriting environment;
2)	Stable reported losses; and
3)	Growing asset base and positive performance from investment affiliates.

21

1.     Continuing competitive underwriting environment.

Overall market conditions are still attractive and the Company continues to pull back in areas where risk assumption is not being adequately rewarded. Given the differing dynamics of the markets in which the Company operates, moderation of pricing is taking place at different paces in different markets. Market conditions vary considerably by geographic region and product line.

With respect to property and casualty market conditions, while competition is present in most areas, rate levels remain adequate with some exceptions. In insurance, the Company saw rate decreases of approximately 7% on average. Property and professional lines continued to see the most pressure with rates down in the 10-15% range on average. Specialty rates were down in the low to mid single digits and casualty lines saw decreases in the low single-digits. Reinsurance renewal rates at January 1, 2005 exhibited similar trends.

Performance by segment is further discussed in the segment analysis below.

2.      Stable reported losses.

The Company’s loss and loss expense ratio on general business for the three months ended March 31, 2005 was 64.3% compared with 61.4% for the same period in 2004, the increase was primarily due to pricing moderation in the quarter and higher levels of catastrophic losses. Catastrophic losses in the quarter were $49.9 million, net of tax, related to European storm Erwin. This is further discussed in the segment analysis below.

3.     Growing asset base and positive performance from investment affiliates.

Net investment income was $308.2 million for the three months ended March 31, 2005 compared to $239.1 million for the three months ended March 31, 2004 due to a higher investment base and higher investment yields primarily due to increases in U.S. interest rates. The investment portfolio increased due to positive operating cash flows and growth in structured and spread balances through 2004. Net income from investment affiliates was $70.5 million for the three months ended March 31, 2005 compared to $63.5 million for the three months ended March 31, 2004. These results reflect strong performance in the Company’s alternative affiliate funds and particularly in two of the Company’s private equity affiliate funds.

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 per share amounts)	(Unaudited)
	Three Months Ended
	March 31,
	2005	2004
Underwriting profit — general operations	$175,440	$191,190
Combined ratio — general operations	89.7%	88.8%
Investment income — general operations	$171,930	$146,946
Annualized return on average ordinary shareholders’ equity	24.4%	27.3%
	(Unaudited)
	At March 31,	At December 31,
	2005	2004
Book value per ordinary share	$52.13	$51.98

22

Underwriting profit — general operations

One way that 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 and expenses related to the underwriting activities. Underwriting profits in the three months ended March 31, 2005 are 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% indicates an underwriting profit and greater than 100% reflects an underwriting loss. The increase in the Company’s combined ratio for the three months ended March 31, 2005 compared to the same period in the previous year was a result of an increased loss and loss expense ratio partially offset by a decrease in the underwriting expense ratio. The increase in the loss and loss expense ratio was primarily due to less favorable pricing, European storm Erwin and adverse development in professional insurance lines. The decrease in the underwriting expense ratio was due to a decrease in both the acquisition cost ratio and the operating expense ratio.

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. 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 outstanding during the three months ended March 31, 2005 has increased as compared to the same period in 2004 due primarily to positive cash flows over the year. Total investments as at March 31, 2005 were $30.5 billion as compared to $24.3 billion as at March 31, 2004.

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. While net income increased during the three months ended March 31, 2005, the net unrealized gain position of the investment portfolio decreased, primarily as a result of increases in U.S. interest rates and the resulting decreases in market value of the fixed income portfolio.

Return on average ordinary shareholders’ equity

Return on average ordinary shareholders’ 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 movement in this financial measure is due to the key operating factors noted above offset with a decrease in return related specifically to the net realized gains recognized in the period.

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, 2004. That discussion is updated with the disclosures set forth below.

23

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 the Seller. The Company recently met with the independent actuary and the Seller with respect to the post-closing seasoning process relating to the Company’s acquisition of Winterthur International from Winterthur Swiss. Based on these discussions, the Company expects that the independent actuary’s final report will be issued in the fourth quarter of this year. For further information regarding the settlement and collection under the SPA, see “Unpaid Losses and Loss Expenses Recoverable and Reinsurance Balances Receivable” 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, 2004.

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, 2004.

Segments

The Company operates through three business segments: Insurance, Reinsurance and Financial Products and Services. These business segments were determined in accordance with FAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”.

During the three months ended March 31, 2005, following changes in certain executive management responsibilities, the Company changed the reporting segments under which certain business units are reported in order to reflect these changes in responsibilities.

The following areas have been changed for all periods presented:

• Results of business structured by XL Financial Solutions Ltd (“XLFS”) are now included entirely within the Financial Products and Services segment whereas previously this unit was reported in all three segments depending on the nature of individual contracts.

• Certain blocks of U.S.-based term life mortality reinsurance business previously included in the Financial Products and Services segment are now included in the Reinsurance segment as management of these contracts was transferred to the life reinsurance business units in order to centralize the Company’s management of traditional mortality-based reinsurance business.

• Political risk insurance business units will now report to executive management of the Financial Products and Services segment and, as such, future earnings from this business will no longer be reported in the Insurance segment but included with financial operations.

• All operations of business units within the Financial Products and Services segment, including municipal reinvestment contracts and funding agreements, are now reported under financial operations in order to consolidate businesses with similar operating characteristics and risks.

• All net investment income and net income from affiliates generated by assets and interest expense incurred on liabilities of the business units within the Financial Products and Services segment is reported under financial operations. This income and expense is included in financial operations as it relates to interest on portfolios of separately identified and managed assets and deposit liabilities. The Company believes this change will better reflect the nature of spread focused business.

24

In addition the Company has changed its presentation of certain credit derivatives and now records premiums received from sales of these derivatives in gross written premiums and establishes unearned premium reserves and loss reserves for its investment grade credit derivative business. Previously all components of the Company’s consolidated statements of income impact related to credit default swaps had been reported on one line, “Net Realized and Unrealized Gains (Losses) on Derivative Instruments.” Prior periods have been re-presented for consistency in presentation.

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, professional liability, aviation and satellite insurance, employment practices liability insurance, surety, marine, equine and certain other insurance coverages including program business. The Company expects to discontinue writing surety business by the end of 2005.

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
	March 31,
	2005	2004	% Change
General:
Gross premiums written	$1,677,775	$1,713,720	(2.1)%
Net premiums written	1,280,150	1,289,959	(0.8)%
Net premiums earned	1,082,518	878,521	23.2%
Fee income and other	3,927	2,159	81.9%
Net losses and loss expenses	725,515	542,789	33.7%
Acquisition costs	138,743	118,339	17.2%
Operating expenses	125,868	127,982	(1.7)%
Exchange losses	14,315	1,638	NM
Underwriting profit	$ 82,004	$ 89,932	(8.8)%

* NM — Not Meaningful

Gross and net premiums written decreased by 2.1% and 0.8%, respectively, in the three months ended March 31, 2005 compared with the three months ended March 31, 2004. These decreases are primarily due to continued competitive pricing across most lines and were partially offset by favorable foreign exchange movements. The most significant pricing pressure was seen in property and professional lines of business where prices decreased between 10-15%. The new insurance initiative in U.S. primary casualty, started in 2004, added approximately $33.0 million to gross premiums written in the first quarter of 2005. The weakening of the U.S. dollar against U.K. sterling and the Euro since the first quarter of 2004 accounted for approximately $72.0 million of gross premiums written in the three months ended March 31, 2005. The decrease in net premiums written was less than that of gross premiums due to the strategic decision to increase retentions in certain lines of business, most notably professional lines.

Net premiums earned in the three months ended March 31, 2005 increased 23.2% when compared to the same period in 2004 primarily as a result of the earn out of increased gross premiums written through 2004, including new business initiatives and increased net retentions. Net premiums earned in the first quarter of 2004 had not yet begun to show the growth of subsequent quarters and were negatively impacted by an adjustment to experience rated ceded premium in certain Lloyd’s portfolios.

25

Exchange losses in the three months ended March 31, 2005 were primarily due to the strengthening of U.S. dollar against the Euro and U.K. sterling in those European entities with net U.S. dollar liabilities. These losses were partially offset by gains in those entities whose functional currency is the U.S. dollar and which are exposed to net non-U.S. dollar liabilities.

The decrease in the underwriting profit in the first quarter of 2005 as compared with the performance in the first quarter of 2004 was also reflective of the combined ratios, as shown below.

The following table presents the ratios for this segment:

	(Unaudited)
	Three Months Ended
	March 31,
	2005	2004
Loss and loss expense ratio	67.0%	61.8%
Underwriting expense ratio	24.5%	28.0%
Combined ratio	91.5%	89.8%

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 March 31, 2005 increased compared with the three months ended March 31, 2004 largely due to less favorable premium rates combined with unfavorable prior year net loss development of $48.0 million largely in professional lines.

The decrease in the underwriting expense ratio in the three months ended March 31, 2005 compared to the same period in 2004 was due to a decrease in the operating expense ratio of 2.9 points (11.7% as compared to 14.6%) combined with a reduction in the acquisition expense ratio of 0.6 points (12.8% as compared to 13.4%). The decrease in the operating expense ratio was due primarily to the increase in net premiums earned and a reduction in certain compensation expenses. The reduction in the acquisition expense ratio is due primarily to changes in the commission structure with certain brokers and a favorable change in the mix of business earned during the quarter compared to the same quarter in the prior year.

Reinsurance

Reinsurance — General Operations

General reinsurance business written includes casualty, property, marine, aviation and other specialty reinsurance on a global basis. The Company’s reinsurance property 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 endeavors to manage 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.

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

(U.S. dollars in thousands)	(Unaudited)
	Three Months Ended
	March 31,
	2005	2004	% Change
General:
Gross premiums written	$1,694,202	$1,705,462	(0.7)%
Net premiums written	1,567,870	1,513,785	3.6%
Net premiums earned	683,751	714,725	(4.3)%
Fee income and other	17	71	(76.0)%

26

	(Unaudited)
	Three Months Ended
	March 31,
	2005	2004	% Change
Net losses and loss expenses	410,350	435,609	(5.8)%
Acquisition costs	142,190	147,311	(3.5)%
Operating expenses	41,406	42,426	(2.4)%
Foreign exchange (gains) losses	(3,614)	(11,808)	(69.4)%
Underwriting profit	$ 93,436	$ 101,258	(7.7)%

Gross premiums written decreased 0.7% in the first quarter of 2005 as compared to the first quarter of 2004. The decline in gross premiums written was primarily due to selective underwriting and rate reductions particularly in casualty and professional lines. In addition increased retentions by ceding companies have been noted in many lines of business. Net premiums written increased in the quarter reflecting higher retentions and timing changes on certain renewals of ceded reinsurance programs, partially offset by the above gross changes. Favorable foreign exchange movements have had a favorable impact on gross premiums written. The net decrease in new and renewal business written reflects underlying rate pressures on the U.S. and London casualty portfolio and rate declines generally in the range of up to 10% across property and marine lines. Casualty lines which saw less upward movement in the preceding years have not had rates decrease as quickly. Partially off-setting this decrease was increased business flows in the Bermuda specialty book and the continued growth of the segments continental European platform. The first quarter is the major renewal season for the Company’s general reinsurance business and generated between 40% and 50% of the full year’s gross written premiums for 2003 and 2004.

Net premiums earned in the first quarter of 2005 decreased 4.3% as compared to the first quarter of 2004 as a result of the earning out of rate pressures noted over the last year partially offset by reduced retrocessions, as noted above.

The following table presents the ratios for this segment:

	(Unaudited)
	Three Months Ended
	March 31,
	2005	2004
Loss and loss expense ratio	60.0%	60.9%
Underwriting expense ratio	26.9%	26.6%
Combined ratio	86.9%	87.5%

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 decrease in the loss and loss expense ratio in the three months ended March 31, 2005 compared to the same period in 2004 primarily reflected the release of net prior period reserves of $20.5 million mainly in property lines compared to $14.0 million adverse development in the same period in 2004. These improvements were offset by $45.3 million in losses related to European storm Erwin.

The underwriting expense ratio in the first quarter of 2005 was consistent with the first quarter of 2004.

Foreign exchange gains in the three months ended March 31, 2005 were mainly attributable to a strengthening in the value of the U.S. dollar in the quarter in those operations with U.S. dollars as their functional currency and non-U.S. dollar liabilities.

Reinsurance — Life and Annuity Operations

Life 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

27

these contracts, premium volume may vary significantly from period to period. In addition, certain closed block U.S. life and annuity reinsurance contracts previously included in the Financial Products and Services segment are now included in the Reinsurance segment as management of these contracts was transferred to the traditional life reinsurance business units in order to centralize management of mortality based life and annuity reinsurance business.

The following summarizes net income from life and annuity operations:

(U.S. dollars in thousands)	(Unaudited)
	Three Months Ended
	March 31,
	2005	2004	% Change
Life and Annuity:
Gross premiums written	$ 91,009	$ 91,664	(0.7)%
Net premiums written	81,256	90,938	(10.6)%
Net premiums earned	81,471	91,808	(11.3)%
Fee income and other	65	115	(43.5)%
Claims and policy benefits	125,627	115,276	9.0%
Acquisition costs	6,351	6,170	2.9%
Operating expenses	4,183	2,350	78.0%
Net investment income	59,903	44,901	33.4%
Interest expense	—	276	NM
Foreign exchange losses (gains)	270	(40)	NM
Net income from life and annuity operations	$ 5,008	$ 12,792	(60.8)%

     *     NM — Not Meaningful

Gross premiums written in the first quarter of 2005 were flat compared to the same period in 2004. New regular premium programs entered into over the last year were offset by the continued run off at certain U.S. life and annuity reinsurance blocks. Net premiums written and earned have decreased as the Company has entered into several new ceded reinsurance treaties related to European mortality risk in the quarter.

Claims and policy benefits include the movement in policy benefit reserves related to contracts where investment assets are acquired with the assumption of the policy benefit reserves at the inception of the contract. Claims and policy benefits increased in the first quarter of 2005 as a result of increased losses associated with certain closed blocks of U.S. life and annuity business.

Operating expenses and net investment income increased in the first quarter of 2005 as compared to the first quarter of 2004 in line with the expansion of this business.

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 large single premium annuity contracts were written in 2004, which significantly increased the life business invested assets.

Financial Products and Services

Financial Products and Services business written includes insurance, reinsurance and derivative solutions for complex financial property and casualty and mortality risks, including financial guaranty insurance and reinsurance, political risk insurance and weather and energy risk management products. In addition, the segment results also includes the Company’s XLFS operations, which provide a wide range of structured credit, market risk management and other structured financial products, including property and casualty insurance and reinsurance, asset backed securitizations, mortality and business enterprise risk transactions. Many of these transactions are unique and tailored to the specific needs of the customer.

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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 credit default swap form provide coverage for losses upon the occurrence of specified credit events set forth in the swap documentation.

The Company commenced writing municipal reinvestment contracts in 2002 and funding agreements in 2003. In both cases, the Company receives deposits at contractual interest rates and invests the proceeds. 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.

Political risk insurance generally covers risks arising from expropriation, currency inconvertibility, contract frustration, non-payment and war on land or political violence (including terrorism) mainly in developing regions of the world. Political risk insurance is typically provided to financial institutions, equity investors, exporters, importers, export credit agencies and multilateral agencies in connection with investments and contracts in emerging market countries.

The Company’s weather and energy risk management products are designed to assist corporate customers, primarily energy companies and utilities, to manage their exposures to variations in underlying weather conditions and related energy markets.

The following table summarizes the underwriting results for this segment:

(U.S. dollars in thousands)	(Unaudited)
	Three Months Ended
	March 31,
	2005	2004	% Change
General:
Gross premiums written	$60,947	$70,966	(14.1)%
Net premiums written	52,629	66,656	(21.0)%
Net premiums earned	51,695	47,748	8.3%
Fee income and other	13,151	4,562	NM
Net losses and loss expenses	7,196	8,860	(18.8)%
Acquisition costs	7,110	5,450	30.5%
Operating expenses	17,556	15,534	13.0%
Foreign exchange (gains)	(49)	(514)	NM
Underwriting profit	$33,033	$22,980	43.7%
Investment income — financial guaranty	14,518	8,133	78.5%
Investment income — structured products	61,854	39,087	58.2%
Interest expense — structured products	42,410	16,271	160.6%
Net results from derivatives	16,078	4,181	NM
Operating expenses — structured products	9,758	15,406	(36.7)%
Net income from financial and investment affiliates	6,628	535	NM
Minority interest	2,275	4,660	(51.2)%
Net contribution from financial operations	$77,668	$38,579	101.3%

     *     NM — Not Meaningful

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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. In addition to the financial guaranty premiums, segment premiums also include premiums received from political risk and other structured property and casualty business lines. Decreases in gross and net premiums written of 14.1% and 21.0%, respectively, in the first quarter of 2005 as compared to the same period in 2004 were primarily due to decreased upfront and installment premiums on financial guaranty business. Premiums declined in the quarter due to tight credit spreads and intense competition from the insured and the reinsured markets. The Company expects competition to remain intense for at least the short term.

Net premiums earned increased in the first quarter of 2005 as compared to the same period in 2004. This increase occurred because these 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.

The following table provides a line of business breakdown of the Financial Products and Services segment’s net premiums earned:

(U.S. dollars in thousands)	(Unaudited)
	Three Months Ended
	March 31,
	2005	2004	% Change
Financial Guaranty	$39,607	$38,860	1.9%
Political Risk	7,051	6,802	3.7%
Other (1)	5,037	2,086	141.5%

     (1)     Includes structured financial and alternative risk transfer products and weather and energy risk management products

Net losses and loss expenses include current year net losses incurred and adverse or favorable development of prior year net loss and loss expense reserves. Net losses and loss expenses in the three months ended March 31, 2005 decreased by 18.8% compared to the first quarter of 2004. This decrease was primarily a result of financial guaranty exposures written in prior periods being less than originally reserved for, resulting in a release of prior period financial guaranty reserves, partially offset by increased reserves on structured products.

In the three months ended March 31, 2005, acquisition costs as a percentage of net premiums earned, increased as compared to the first quarter of 2004, due to increased amortization of the deferred costs associated with the growth of the platform.

Operating expenses increased in the first quarter of 2005 as compared to the first quarter of 2004 due to increases in certain compensation and consulting costs.

Net investment income related to financial guaranty business increased by 78.5% in the three months ended March 31, 2005 due to the larger investment portfolio created by increased premium receipts and a $125.0 million capital infusion in the fourth quarter of 2004. In addition, $2.3 million in investment income relates to the Company’s investment in Financial Security Assurance International Ltd (“FSAI”), which is now reported as investment income in accordance with EITF 02-14 as opposed to net income from financial affiliates as in 2004.

Net investment income related to structured products increased by 58.2% as a result of significant increases in the combined average funding agreement and guaranteed investment contract balances from $2.3 billion to $3.7 billion.

Interest expenses on structured products relate to the accretion charges on deposit liabilities related to funding agreements, guaranteed investment contracts and certain structured insurance and reinsurance contracts. The increase in interest expenses in the three months ended March 31, 2005 compared to the same period in 2004 related primarily to the increase in the number of funding agreements in place during the three months ended March 31, 2005 combined with the commutation of certain structured reinsurance contracts in 2004.

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Net results from derivatives represent changes in the market value of the Company’s insured credit derivative portfolio, weather and energy derivative instruments and certain index derivatives. The net results from derivatives in the three months ended March 31, 2005 related primarily to the fair value adjustment for credit derivatives. These gains were mainly unrealized and related to the improvement of credit quality for certain credit pools. These gains were combined with realized weather derivative gains as a result of favorable critical day temperature positions in Europe.

Net income from financial and investment affiliates includes, earnings on the Company’s investment in Primus Guaranty, Ltd (“Primus”) and certain of the Company’s investment affiliates. The increase in the first quarter of 2005 as compared to the first quarter of 2004 was due primarily increased returns from Primus. Partially offsetting this increase was the reclassification of income from FSAI to net investment income as described above. Primus specializes in providing credit risk protection through credit derivatives. Primus had a positive mark-to-market adjustment in the quarter.

The decrease in minority interest in 2005 and 2004 was due to a decrease in the profitability of XL Financial Assurance Ltd., of which 15% is held by a minority shareholder.

Investment Activities

The following table illustrates the change in net investment income from general operations, equity in net income from investment affiliates, net realized gains on investments and net realized and unrealized gains on investment derivative instruments for the three months ended March 31, 2005 and 2004.

(U.S. dollars in thousands)	(Unaudited)
	Three Months Ended
	March 31,
	2005	2004	% Change
Net investment income — general operations	$171,930	$146,946	17.0%
Net income from investment affiliates – general operations	67,914	60,368	12.5%
Net realized gains on investments	60,671	115,337	(47.4)%
Net realized and unrealized gains on investment derivative       instruments — general operations	29,100	3,586	NM

     *     NM — Not Meaningful

Net investment income related to general operations increased in the first quarter of 2005 as compared to the first quarter of 2004 due primarily to a higher investment base as well as increases in the yield of the portfolio. The growth in the investment base reflected the Company’s cash flow from operations, as well as growth in asset value due to the weakening U.S. dollar. The market yield to maturity on the fixed income portfolio was 4.3% at March 31, 2005 as compared to 3.6% at March 31, 2004.

Net income from investment affiliates increased in the first quarter of 2005 compared to the first quarter of 2004 due to strong performance in both alternative fund affiliates and particularly in private equity fund affiliates.

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The Company manages its investment grade fixed income securities using an asset/liability management framework. Due to the unique nature of the underlying liabilities, customized benchmarks are used to measure investment performance and comparison to standard market indices is not meaningful. Investment performance is not monitored for certain assets primarily consisting of operating cash and special regulatory deposits. The following is a summary of the investment portfolio returns for the general account asset/liability portfolios, structured and spread product portfolios and risk asset portfolios:

	(Unaudited)	(Unaudited)
	Three Months	Three Months
	Ended	Ended
	March 31, 2005 (1)	March 31, 2004 (1)
General Account Asset/Liability portfolios
USD fixed income portfolio	(0.3)%	2.2%
Non USD fixed income portfolio	0.0%	2.4%
Structured and Spread Products portfolios
USD fixed income portfolio	0.7%	2.9%
Non USD fixed income portfolio	0.8%	1.7%
Risk Asset portfolios
Alternative portfolio (2)	2.9%	4.0%
Equity portfolio	(0.7)%	5.0%
High-Yield fixed income portfolio	(1.4)%	1.7%

     (1)     Portfolio returns are calculated by dividing the sum of net investment income, realized gains (losses) and unrealized gains (losses) by the daily weighted average market value of each portfolio.

     (2)     Performance on the alternative portfolio reflects the three months to February 28, 2005 and February 29, 2004, respectively.

Net Realized Gains and Losses and Other Than Temporary Declines in the Value of Investments

Net realized gains on investments in the first quarter of 2005 included net realized gains of $83.9 million from sales of investments and net realized losses of approximately $23.2 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 these investments.

Net realized gains on investments in the first quarter of 2004 included net realized gains of $115.7 million from sales of investments and net realized losses of approximately $0.4 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 for the three months ended March 31, 2005 resulted from the Company’s investment strategy to economically hedge certain interest, credit and foreign exchange risk within the investment portfolio.

Net Unrealized Gains and Losses on Investments

At March 31, 2005, the Company had net unrealized gains on fixed income securities of $309.8 million and net unrealized gains on equities of $155.4 million. Of these amounts, gross unrealized losses on fixed income securities

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and equities were $220.9 million and $11.8 million respectively. The information presented below for the gross unrealized losses on the Company’s investments at March 31, 2005 shows the potential effect upon 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 March 31, 2005, approximately 8,400 fixed income securities out of a total of approximately 16,900 securities were in an unrealized loss position. The largest single unrealized loss in the fixed income portfolio was $2.7 million. Approximately 400 equity securities out of a total of approximately 1,600 securities were in an unrealized loss position at March 31, 2005 with the largest individual loss being $0.7 million.

The following is an analysis of how long each of those securities with an unrealized loss at March 31, 2005 had been in a continual unrealized loss position:

(U.S. dollars in thousands)		(Unaudited)	(Unaudited)
		Amount of	Fair Value of Securities
	Length of time in a continual	unrealized loss at	in unrealized loss position
Type of Securities	unrealized loss position	March 31, 2005	at March 31, 2005
Fixed Income and       Short-Term	Less than six months	$126,090	$ 9,229,903
	At least 6 months but less than 12 months	17,450	1,094,508
	At least 12 months but less than 2 years	76,790	2,451,983
	2 years and over	611	7,722
	Total	$220,941	$12,784,116
Equities	Less than six months	$ 10,255	$ 183,573
	At least 6 months but less than 12 months	123	549
	At least 12 months but less than 2 years	488	1,633
	2 years and over	889	3,056
	Total	$ 11,755	$ 188,811

At March 31, 2005, 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)	(Unaudited)
Maturity profile in years of fixed	Amount of	Fair value of securities
income securities in a continual	unrealized loss at	in unrealized loss positions
unrealized loss position	March 31, 2005	at March 31, 2005
Less than 1 year remaining	$ 5,325	$ 1,209,114
At least 1 years but less than 5 years remaining	58,554	3,681,438
At least 5 years but less than 10 years remaining	52,477	2,241,708
At least 10 years but less than 20 years remaining	5,501	296,071
At least 20 years or more remaining	11,360	644,664
Mortgage and asset backed securities	87,724	4,711,121
Total	$220,941	$12,784,116

The Company operates a risk asset portfolio that includes high yield (below investment grade) fixed income securities. These represented approximately 4.1% of the total fixed income portfolio market value at March 31, 2005. Fair values of these securities have a higher volatility than investment grade securities. Of the total gross unrealized losses in the Company’s fixed income portfolio at March 31, 2005, $15.1 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:

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(U.S. dollars in thousands)	(Unaudited)	(Unaudited)
	Amount of	Fair value of securities
Length of time in a continual	unrealized loss at	in unrealized loss position
unrealized loss position	March 31, 2005	at March 31, 2005
Less than six months	$12,454	$768,626
At least 6 months but less than 12 months	1,147	24,679
At least 12 months but less than 2 years	1,319	17,158
2 years and over	197	2,471
Total	$15,117	$812,934

Other Revenues and Expenses

The following table sets forth other revenues and expenses for the three months ended March 31, 2005 and 2004:

(U.S. dollars in thousands)	(Unaudited)
	Three Months Ended
	March 31,
	2005	2004	% Change
Net income from operating affiliates	$15,222	$  7,898	92.7%
Amortization of intangible assets	2,793	3,257	(14.2)%
Corporate operating expenses	48,385	41,602	16.3%
Interest expense	45,876	33,703	36.1%
Income tax expense	52,874	35,885	47.3%

Net income from operating affiliates was significantly improved during the three months ended March 31, 2005 when compared to the same period in the prior year. This increase is due to a $6.4 million increase in the performance of fund management affiliates, which increased to $13.3 million as compared to $6.9 million for the three months ended March 31, 2004.

Corporate operating expenses in the three months ended March 31, 2005 increased compared to the three months ended March 31, 2004, primarily due to an increase in certain compensation costs partially off-set by the conscious efforts toward cost reduction across the Company since late 2004.

The increase in interest expense primarily reflected the increase in outstanding debt throughout 2004. For more information on the Company’s financing structure, see “Liquidity and Capital Resources.”

The increase in the Company’s income taxes arose principally from an improvement in the profitability of the Company’s U.S. and European operations.

Investments

The primary objectives of the investment strategy are to support the liabilities arising from the operations of the Company, generate stable investment income and to build book value for the Company over the longer term. The strategy strives to maximize investment returns while taking into account market and credit risk. The Company’s overall investment portfolio is structured to take into account a number of variables including local regulatory requirements, business needs, collateral management and risk tolerance.

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At March 31, 2005 and December 31, 2004, total investments and cash and cash equivalents were $32.5 billion and $32.1 billion, respectively. The following table summarizes the composition of the Company’s invested assets:

(U.S. dollars in thousands)	(Unaudited)
	Market Value at		Market Value at
	March 31,	Percent of	December 31,	Percent of
	2005	Total	2004	Total
Cash and cash equivalents	$ 2,287,562	7.0%	$ 2,304,303	7.2%
Net payable for investments purchased	(304,143)	(0.9)%	(273,535)	(0.9)%
Fixed maturities	25,381,382	78.1%	25,100,194	78.2%
Short-term investments	1,907,029	5.9%	1,760,714	5.5%
Equity securities	924,347	2.8%	962,920	3.0%
Investments in affiliates	2,042,343	6.3%	1,936,852	6.0%
Other investments	265,913	0.8%	305,160	1.0%
Total investments and cash and cash equivalents	$32,504,433	100%	$32,096,608	100%

The Company reviews, on a regular basis, its corporate debt concentration, credit quality and compliance with established guidelines. At March 31, 2005 and December 31, 2004, the average credit quality of the Company’s total fixed income portfolio was “AA”. Approximately 58% of the fixed income portfolio was rated “AAA” by one or more of the principal ratings agencies. Approximately 4% was below investment grade or not rated.

Unpaid Losses and Loss Expenses.

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 reflects management’s judgment concerning sound financial practice and do not represent any admission of liability with respect to any claims made against the Company.

Unpaid losses and loss expenses relates primarily to the casualty insurance and reinsurance business written by the Company. The balance was $19.9 billion at March 31, 2005, and $19.8 billion at December 31, 2004.

The table below represents a reconciliation of the Company’s unpaid losses and loss expenses for the three months ended March 31, 2005 (unaudited):

(U.S. dollars in thousands)		Unpaid	Net unpaid
	Gross unpaid	losses and	losses
	Losses and loss	loss expenses	and loss
	expenses	recoverable	expenses
Balance as at December 31, 2004	$19,837,669	$6,971,356	$12,866,313
Losses and loss expense incurred	1,531,236	388,176	1,143,060
Losses and loss expense paid /recovered	(1,211,791)	(454,068)	(757,723)
Foreign exchange and other	(249,411)	(160,686)	(88,725)
Balance as at March 31, 2005	$19,907,703	$6,744,778	$13,162,925

While the Company reviews the adequacy of established reserves for unpaid losses and loss expenses regularly, no assurance can be given that actual claims made and payments related thereto will not be in excess of the amounts reserved. In the future, if such reserves develop adversely, such deficiency would have a negative impact on future results of operations. See “Unpaid Losses and Loss Expenses” in Item 1, “Critical Accounting Policies and Estimates” in Item 7 and Item 8, Note 9 to the Consolidated Financial Statements, each in the Company’s Form 10-K for the year ended December 31, 2004, for further discussion.

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Unpaid Losses and Loss Expenses Recoverable and Reinsurance Balances Receivable

As a significant portion of the Company’s net premium written incepts in the first quarter of the year, certain assets and liabilities have increased at March 31, 2005 compared to December 31, 2004. This includes deferred acquisition costs, unearned premiums, premiums receivable and prepaid reinsurance premiums.

In the normal course of business, the Company seeks to reduce the potential amount of loss arising from claims events by reinsuring certain levels of risk assumed in various areas of exposure with other insurers or reinsurers. While reinsurance agreements are designed to limit the Company’s losses from large exposures and permit recovery of a portion of direct unpaid losses, reinsurance does not relieve the Company of its ultimate liability to its insureds. Accordingly, the losses and loss expense reserves on the balance sheet represent the Company’s total unpaid gross losses. Unpaid losses and loss expenses recoverable relates to estimated reinsurance recoveries on the unpaid loss and loss expense reserves.

Unpaid losses and loss expenses recoverables was $6.7 billion at March 31, 2005 and $7.0 billion at December 31, 2004. The table below presents the Company’s net reinsurance recoverable at March 31, 2005 and December 31, 2004.

(U.S. dollars in thousands)	(Unaudited)
	March 31	December 31
	2005	2004
Reinsurance balances receivable	$1,211,368	$1,097,709
Bad debt reserve on reinsurance balances receivable	(7,555)	(1,970)
Reinsurance recoverable on future policy benefits	13,849	23,585
Unpaid losses and loss expenses recoverable	7,020,080	7,226,480
Bad debt reserve on unpaid losses and loss expenses	(289,151)	(278,709)
Net paid and unpaid losses and loss expenses recoverable and reinsurance balances receivable	$7,948,591	$8,067,095

Included in unpaid losses and loss expenses recoverable at March 31, 2005 is an unsecured reinsurance recoverable from Winterthur Swiss Insurance Company (the “Seller”) of $1.45 billion, related to certain contractual arrangements with the sale and purchase agreement, as amended (“SPA”), relating to the Company’s acquisition of Winterthur International in July 2001. The Seller is currently rated “A-” by S&P. The Seller provides the Company with post-closing protection determined as of June 30, 2004 with respect to, among other things, adverse development incurred losses and premium balances relating to the acquired Winterthur International business (“Winterthur 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 an independent actuarial process for determining the net amount due to the Company from the Seller. In this process, each of the Company and the Seller submits their respective net reserves and seasoned premium amounts. The independent actuary develops its own value of the seasoned net reserves and seasoned premium amounts and the actual final seasoned amount would be in each case, the submission that is closest to the number developed by the independent actuary.

As the Company and the Seller were unable to come to an agreement, the Company submitted to the Seller notice to trigger the independent actuarial process as contemplated by the SPA. On February 3, 2005, both the Company and the Seller made submissions for the independent actuarial process. The Company’s submissions would result in a net payable to the Company of approximately $1.45 billion in aggregate and the Seller’s submissions would result in a net payable to the Company of $541.0 million in aggregate. At the completion of the independent actuarial process, the Company will be entitled to a lump sum payment.

In addition, the Seller provides protection to the Company with respect to third party reinsurance receivables and recoverables related to the Winterthur Business which are approximately $1.8 billion in the aggregate as of March 31, 2005. There are two levels of protection from the Seller for these balances:

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1.

At the time of the Winterthur International acquisition, the Seller provided to the Company a liquidity facility. At the time of the payment of the net reserve seasoned amount as described above. The Company has the right to repay up to the balances outstanding on this facility by assignment to the Seller of an equal amount of receivables relating to reinsurance recoverables selected by the Company. The payable balance related to this facility is included within other liabilities on the Company’s balance sheet at March 31, 2005 and amounted to approximately $276.0 million at that date.

2.

Under two retrocession agreements the Company has reinsurance protection on the remaining portion of reinsurance recoverables with respect to incurred losses seasoned as of June 30, 2004 to the extent that the Company does not receive payment of such amounts from applicable reinsurers with one agreement providing a limit of $1.3 billion for the insurance written in the period to June 30, 2001 and the other agreement providing a limit of $1.3 billion for the insurance written prior to December 31, 2000.

At March 31, 2005, certain reinsurers responsible for some portions of the reinsurance of the Winterthur business have raised issues as to whether amounts claimed are due and the resolution of those discussions is also currently ongoing.

The Company may record a loss in future periods if any or some of the following occur:

(i)	A submission of the Seller is closer to the valuation developed by the independent actuary, in which case the Company may record a loss of approximately $900 million.
(ii)	There is deterioration of the net reserves and premium balances, relating to the Winterthur Business, from what is reported in the Company’s December 31, 2004 financial statements;
(iii)	The Company is unable to make full recovery of the reinsurance recoverables related to the Winterthur Business, either from third parties or from the Seller under the additional protections; and /or
(iv)	Any amount due from the Seller proves to be uncollectible from the Seller for any reason.

The Company recently met with the independent actuary and the Seller with respect to the post-closing seasoning process relating to the Company’s acquisition of Winterthur International from the Seller. Based on these discussions, the Company expects that the independent actuary’s final report will be issued in the fourth quarter of this year.

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 the Company operates in 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 (express 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.

Liquidity

Liquidity is a measure of the Company’s ability to generate sufficient cash flows to meet the short and long term cash requirements of the Company’s business operations.

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The Company’s operating subsidiaries provide liquidity in that premiums are generally received months or even years before losses are paid under the policies related to such premiums. Historically, cash receipts from operations, consisting of insurance premiums and investment income, have provided more than sufficient funds to pay losses, operating expenses and dividends to the Company.

New cash from operations was approximately $270.6 million in the first three months of 2005 compared with $526.1 million in the same period in 2004. The reduction was primarily due to an increase in paid losses related to the 2004 hurricane. Net new cash in 2005 was due to premium receipts increasing at a greater rate than paid losses and operating expenses.

Capital Resources

At March 31, 2005, the Company had total shareholders’ equity of $7.8 billion. In addition to ordinary and preferred share capital, the Company depends on external sources of financing such as debt, credit facilities and contingent capital to support its underwriting activities.

The Company does not intend, subject to the terms and conditions at the Series A or Series B preference ordinary shares as set forth in the relevant prospectus supplement, to redeem either the Series A or Series B preference ordinary shares unless replaced with capital having at least the equivalent credit.

As at March 31, 2005, the Company had revolving credit facilities and loan facilities from a variety of sources, including commercial banks, totaling $3.4 billion of which $2.7 billion in debt was outstanding. In addition, the Company had letters of credit facilities amounting to $4.4 billion of which $3.2 billion was utilized to provide of letters of credit in issue at Match 31, 2005, 6.4% of which were collateralized by the Company’s investment portfolio. Such letters of credit principally support the Company’s U.S. non-admitted business and the Company’s capital requirements at Lloyd’s.

In the event that the amount developed by the independent actuary in the net reserve seasoning process is closer to the amount submitted by the Seller (as more fully described under Unpaid Losses and Loss Expenses Recoverable and Reinsurance Balance Receivable, above) the Company may need to raise additional capital.

Debt

The following table presents the Company’s indebtedness under outstanding debt securities and lenders’ commitments as at March 31, 2005:

				Payments Due By Period
Notes Payable And Debt			Year Of	Less Than	1 To 3	4 To 5	After 5
(U.S. dollars in thousands)	Commitment	In Use	Expiry	1 Year	Years	Years	Years
364-day revolver	$ 60,000	$ —	2005	$ —	$ —	$ —	$ —
364-day and 3 year			2005/
revolvers (1)	600,000	—	2007
7.15% Senior Notes       due 2005	100,000	100,000	2005	100,000
2.53% Senior Notes       due 2009 (3)	825,000	825,000	2009		825,000
6.58% Guaranteed Senior       Notes due 2011	255,000	255,000	2011				255,000
6.50% Guaranteed Senior       Notes due 2012 (2)	597,800	597,800	2012				600,000
5.25% Senior Notes       due 2014 (2)	593,872	593,872	2014				600,000
6.375% Senior Notes       due 2024 (2)	350,000	350,000	2024				350,000
Total debt	$3,381,672	$2,721,672		$100,000	$825,000	$ —	$1,805,000

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(1)	The syndicated revolving credit and letter of credit facilities created in June 2004 consist of a $1.0 billion 364-day facility that expires in June 2005 and a $2.0 billion 3-year facility that expires in June 2007. The combined revolving credit sub-limit of these facilities is $600.0 million.
(2)	“Commitment” and “In Use” data represent March 31, 2005, accreted values. “After 5 years” data represent ultimate redemption values.
(3)	The 2.53% Senior Notes due 2009 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 paid on forward purchase contracts for ordinary shares for a total distribution per annum on the Units of 6.50%. The forward purchase contracts will be settled on May 15, 2007 and the Senior Notes will mature on May 15, 2009.

The total pre-tax interest expense on the borrowing described above was $36.0 million and $22.3 million for the three months ended March 31, 2005 and March 31, 2004, respectively.

Credit facilities, contingent capital and other sources of collateral.

The Company is in the process of renewing its 364-day letter of credit facility that expires on June 22, 2005. The Company expects that the new facility will be at least $1.5 billion in size and have a tenure of five years.

The following table presents the Company’s letter of credit facilities available, in use, and expiration dates as at March 31, 2005:

				Amount of Commitment
Other Commercial				Expiration Per Period
Commitments			Year Of	Less Than	1 To 3	4 To 5	After 5
(U.S. dollars in thousands)	Commitment	In Use	Expiry	1 Year	Years	Years	Years
7 Letter of Credit       facilities	$1,508,745	$726,353	2005	$1,508,745	$ —	$ —	$ —
1 Letter of Credit       facility	846,585	731,106	2006		846,585
1 Letter of Credit       facility	2,000,000	1,733,350	2007		2,000,000
9 Letter of Credit       facilities	$4,355,330	$3,190,809		$1,508,840	$2,846,585	$ —	$ —

Of the total letter of credit commitment above, $660.0 million is also included in the revolvers under notes payable and debt.

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 United States and capital requirements at Lloyd’s. Several of the facilities are scheduled for renewal during the remainder of 2005. In addition to letters of credit, the Company has established insurance trusts in the U.S. that provide cedants 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 cedants. 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 loss experience of such business.

In addition to funded debt transactions, the Company and a majority-owned subsidiary XL Financial Assurance Ltd. (“XLFA”) have entered into contingent capital transactions as further described below. No up-front proceeds were received by the Company or XLFA under these transactions, however, in the event that the associated irrevocable put option agreements are exercised, proceeds previously raised from investors from the issuance of pass-through trust securities would be received in return for the issuance of preferred shares by the Company or XLFA, as applicable.

On December 10, 2004, XLFA entered into a put option agreement and an asset trust expense reimbursement agreement with Twin Reefs Asset Trust (the “Asset Trust”). The put option agreement provides XLFA with the irrevo

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cable right to require the Asset Trust at any time and from time to time to purchase XLFA’s non-cumulative perpetual Series B Preferred Shares with an aggregate liquidation preference of up to $200 million. There is no limit to the number of times that XLFA may exercise the put option, redeem the Series B Preferred Shares from the Asset Trust and exercise the put option again. XLFA is obligated to reimburse the Asset Trust for certain fees and ordinary expenses. To the extent that any Series B Preferred Shares are put to the Asset Trust and remain outstanding, a corresponding portion of such fees and ordinary expenses will be payable by XLFA pursuant to the asset trust expense reimbursement agreement. The put option agreement is perpetual but would terminate on delivery of notice by XLFA on or after December 9, 2009, or under certain defined circumstances, such as the failure of XLFA to pay the put option premium when due or bankruptcy. The premium payable by XLFA is the sum of certain trustee and investment managers expenses, the distribution of income paid to holders of the pass-through trust securities, less the investment yield on the eligible assets purchased using the proceeds originally raised from the issuance of the pass-through securities.

In July 2003, the Company entered into a contingent capital transaction with an aggregate value of $500.0 million. This transaction provides the Company with an insurance trust that provides the Company with statutory relief under state insurance regulations in the U.S. Under the terms of this facility, the Company has acquired an irrevocable put option to issue preference ordinary shares into a trust in return for proceeds raised from investors. This put option may be exercised by the Company at any time. In addition, the Company may be required to issue preference ordinary shares to the trust under certain circumstances, including, but not limited to, the non-payment of the put option premium and a ratings downgrade of the Company. In connection with this transaction, the fair value of the put premiums and other related costs, in total of $111.9 million was transferred from “Additional paid in capital” to a deferred liability which was established (included with “Other liabilities”) in the consolidated balance sheet at December 31, 2003.

Ratings

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. 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	(Ratings Watch Negative)
A.M. Best	A+	(Outlook Negative)
Moody’s Investor Services	Aa2	(Outlook Negative except members of the XL America Pool, XL Re Ltd and XL Life Insurance and Annuity Company, which are rated Aa3.)

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

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

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Other

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, 2004.

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 three months ended March 31, 2005, 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. See Part II, Item 2 “Unregistered Sales of Equity Securities and Use of Proceeds”, below.

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 Form 10-K, other 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 which 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 which include the words “expect”, “intend”, “plan”, “believe”, “project”, “anticipate”, “will”, 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 adequacy of rates and in terms and conditions may not be as sustainable as the Company is currently projecting; (ii) 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 Winterthur Swiss Insurance Company (a) in connection with the independent actuarial process or (b) under other contractual arrangements; (iii) the projected amount of ceded reinsurance recoverables and the ratings and creditworthiness of reinsurers may change; (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 which 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; (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

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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, there have been no material changes in the Company’s market risk exposures, or how those exposures are managed, since December 31, 2004. 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, 2004.

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 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” in Item 2.

Credit Default Swaps

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. In addition, the Company enters into credit default swap transactions as part of its overall investment strategy.

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 that do not have quoted market prices requires management judgment in determining amounts that 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.

The following table summarizes the movement in the fair value of weather and energy contracts outstanding during the three months ended March 31, 2005.

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(U.S. dollars in thousands)	(Unaudited)
	Three Months
	Ended March 31,
	2005
Fair value of contracts outstanding, beginning of the year	$ 7,219
Net option premiums realized (1)	3,135
Reclassification of settled contracts to realized (2)	682
Other changes in fair value (3)	3,048
Fair value of contracts outstanding, end of period	$14,084

     (1)     The Company paid $0.1 million of premiums and realized $3.0 million of premiums on expired transactions for a net increase in the balance sheet derivative asset of $3.1 million.

     (2)     The Company paid $0.7 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.

The change in the fair value of contracts outstanding at March 31, 2005 as compared to the beginning of the year is primarily due to favorable weather development in the European weather portfolio and the impact on seasonal contracts that are at the end of their risk periods.

The following table summarizes the maturity of contracts outstanding as of March 31, 2005:

(U.S. dollars in thousands)
(Unaudited)
	Less Than			Greater Than	Total
Source Of Fair Value	1 Year	1-3 Years	4-5 Years	5 Years	Fair Value
Prices actively quoted	$ —	$ —	$ —	$—	$ —
Prices based on models and other       valuation methods	3,734	10,699	(349)	—	14,084
Total fair value of contracts       outstanding	$3,374	$10,699	$(349)	$—	$14,084

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 March 31, 2005 were $108.9 million, $101.5 million and $115.1 million, respectively. The corresponding levels for the weather risk management portfolio during the period ended March 31, 2004 were $168.5 million, $154.1 million and $187.0 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 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 March 31, 2005 were $17.1 million, $15.3 million, and $20.3 million, respectively. The corresponding amounts during the period ended March 31, 2004 were $2.8 million, $2.6 million, and $2.9 million, respectively.

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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. dollars and foreign currencies.

Through the structure of the Company’s investment portfolio, the Company’s earnings and book value are directly affected by changes in the valuations of the securities and investments held in the investment portfolio. These valuation changes reflect changes in interest rates (e.g. changes in the level, slope and curvature of the yield curves, volatility of interest rates, mortgage prepayment speeds and credit spreads), credit quality, 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 earnings and book value.

The Company 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. These allocation decisions are made relative to the liability profile of the Company and the Company’s surplus. 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 Company’s external investment professionals. Additional constraints are generally agreed with the external investment professionals which 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, reference 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, credit risk and replicating permitted investments, 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 to economically leverage the portfolio outside of the stated guidelines is generally not permitted. 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 Company’s total investment portfolio at March 31, 2005, based on a 95% confidence level with a one month holding period, was approximately $464.4 million as compared to $487.3 million as at December 31, 2004. The VaR of all investment related derivatives as at March 31, 2005 was approximately $15.4 million as compared to $15.1 million as at December 31, 2004. The Company’s investment portfolio VaR as at March 31, 2005 is not necessarily indicative of future VaR levels.

To complement the VaR analysis which is based on normal market environments, the Company considers the potential impact on the investment portfolio of 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 tolerance. Given the investment portfolio allocations as at March 31, 2005, the Company would expect to lose approximately 5.4% of the portfolio if the most damaging event stress tested was repeated, all other things held equal, as compared to 5.7% at December 31, 2004. Given the investment portfolio allocations as at March 31, 2005, the Company would expect to gain approximately 19.3% on the portfolio if the most favorable event stress tested was repeated, all other things held equal, as compared to 18.4% at December 31, 2004. 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.

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Fixed Income Portfolio

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

As at March 31, 2005, the value of the Company’s fixed income portfolio, including cash and cash equivalents and net payable for investments purchased, was approximately $29.3 billion as compared to approximately $28.9 billion as at December 31, 2004. As at March 31, 2005, the fixed income portfolio consisted of approximately 89.2% of the total investment portfolio (including cash and cash equivalents, accrued investment income and net payable for investments purchased) as compared to approximately 89.1% as at December 31, 2004.

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 March 31, 2005.

	Total
AAA	58.4%
AA	11.1%
A	16.3%
BBB	10.1%
BB & BELOW	4.0%
NR	0.1%
Total	100.0%

At March 31, 2005, the average credit quality of the Company’s total fixed income portfolio was “AA”.

As at March 31, 2005, the top 10 corporate holdings, which exclude government guaranteed and government sponsored enterprises, represented approximately 4.1% of the total fixed income portfolio and approximately 19.9% of all corporate holdings. The top 10 corporate holdings listed below represent the direct exposure to the corporations listed below, including their subsidiaries, and excludes any securitized, credit enhanced and collateralized asset or mortgage backed securities, and excludes any reduction to this exposure through credit default swaps, if applicable.

	Percentage of Total
Top 10 Corporate Holdings	Fixed Income Portfolio (1)
General Electric Company	0.6%
HBOS plc	0.5%
Royal Bank of Scotland Group plc	0.5%
Citigroup Inc	0.4%
HSBC Holdings plc	0.4%
JPMorgan Chase & Co	0.4%
Bank of America Corporation	0.4%
Goldman Sachs Group Inc	0.3%
Banco Santander Central Hispano SA	0.3%
Wells Fargo & Co	0.3%

     (1)     Including fixed maturities, short-term investments, cash and cash equivalents and net payable for investments purchased.

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 March 31, 2005 would decrease the fair value of the Company’s fixed income portfolio by approximately 4.2% or $1.2 billion as compared to approximately 4.4% or $1.3 billion as at December 31, 2004. 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.

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Equity Portfolio

As at March 31, 2005, the Company’s equity portfolio, which for financial reporting purposes includes certain fixed income mutual fund investments that do not have the risk characteristics of equity investments, was $924.3 million as compared to $963.0 million as at December 31, 2004. As at March 31, 2005, the Company’s allocation to equity securities was approximately 2.8% of the total investment portfolio (including cash and cash equivalents, accrued investment income and net payable for investments purchased) as compared to approximately 3.0% as at December 31, 2004.

As at March 31, 2005, approximately 59% of the equity portfolio was invested in U.S. companies as compared to approximately 60% as at December 31, 2004. As at March 31, 2005, the top ten equity holdings represented approximately 7.5% of the Company’s total equity portfolio as compared to approximately 8.0% as at December 31, 2004.

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 affect the fair value of the portfolio by approximately $92.4 million as at March 31, 2005 as compared to $96.3 million as at December 31, 2004.

Alternative Investment Portfolio

The Company’s alternative investment portfolio (included in investments in affiliates or other investments) had approximately 80 separate fund investments at March 31, 2005 with a total portfolio of $1.7 billion representing approximately 5.1% of the total investment portfolio (including cash and cash equivalents, accrued investment income and net payable for investments purchased) as compared to December 31, 2004 where the Company had approximately 100 separate fund investments with a total portfolio of $1.7 billion representing approximately 5.2% of the total investment portfolio.

As at March 31, 2005, the alternative investment style allocation was 49% in directional/tactical strategies, 25% in event-driven strategies, 23% in arbitrage strategies, and 3% in multi-strategy strategies. As at December 31, 2004, the alternative investment style allocation was 42% in directional/tactical strategies, 25% in event-driven strategies, 25% in arbitrage strategies, and 8% in multi-strategy strategies.

Private Investment Portfolio

As at March 31, 2005, the Company’s exposure to private investments was approximately $227 million compared to $206 million as at December 31, 2004. As at March 31, 2005, 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 0.6% as at December 31, 2004.

Bond and Stock Index Futures Exposure

As at March 31, 2005, bond and stock index futures outstanding had a net long position of $651.1 million as compared to a net long position of $1.3 billion as at December 31, 2004. A 10% appreciation or depreciation of the underlying exposure to these derivative instruments would have resulted in realized gains or realized losses of $65.1 million as at March 31, 2005 and $129.5 million as at December 31, 2004, 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, unpaid losses and loss expenses and in its investment portfolio. The Company’s net foreign currency denominated payable on foreign exchange contracts as at March 31, 2005 was $51.1 million as compared to $3.8 million as at December 31, 2004, with a net unrealized loss of $5.8 million as compared to $11.8 million as at December 31, 2004.

46

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, premium receivable, reinsurance contracts, claims payable and investments in subsidiaries.

Credit Risk

The Company is exposed to credit risk in the event of non-performance by the other parties to the forward contracts, however the Company does not anticipate non-performance. The difference between the notional principal amounts and the associated market value is the Company’s maximum credit exposure.

ITEM 4. CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure 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 amended, 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.

Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting identified in connection with the Company’s evaluation required pursuant to Rules 13a-15 and 15d-15 promulgated under the Securities Exchange Act of 1934, as amended, that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II — OTHER INFORMATION

ITEM 1.     LEGAL PROCEEDINGS

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. Defendant’s filed a motion to dismiss the Amended Complaint which motion is pending before the Court. 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 the 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 this 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 the Company’s petition. On October 22, 2004, the Company filed an appeal of the District Court’s decision to the United States Court of Appeals for the Second Circuit. The appeal has been fully briefed but oral argument has not yet been scheduled. The AAA arbitration is proceeding and is scheduled for hearing commencing July 2005. The Company intends to vigorously defend against the Claimants’ claims.

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. 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 outcome 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.

Although not a litigation or arbitration, the Company has entered into a binding independent actuarial valuation process related to certain contractual agreements; in the sale and purchase agreement, as amended (“SPA”), relating to the Company’s acquisition of Winterthur International in July 2001. This process is further described in Item 1, Note 9

48

to the Unaudited Consolidated Financial Statements and Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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

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

The following table provides information about purchases by the Company during the three months ended March 31, 2005 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act:

ISSUER PURCHASES OF EQUITY SECURITIES

			Total Number
			of Shares	Approximate Dollar
			Purchased as	Value of Shares
			Part of	that May Yet Be
	Total Number	Average Price	Publicly	Purchased Under
	of Shares	Paid	Announced Plans	the Plans
Period	Purchased (1)	per Share (2)	or Programs	or Programs (3)
January 1-31, 2005	209	$77.65	—	$135.4 million
February 1-28, 2005	538	$75.75	—	$135.4 million
March 1-31, 2005	50,352	$75.07	—	$135.4 million
Total	51,099	$75.09	—	$135.4 million

(1)	All of the shares included in each period were purchased in connection with the vesting of restricted shares granted to employees 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 share repurchase program during the three months ended March 31, 2005. As of March 31, 2005, the Company could repurchase up to approximately $135.4 million of its equity securities under the share repurchase program.

ITEM 6.     EXHIBITS

10.1	Employment Agreement, dated as of January 1, 2005, between XL Capital Ltd and Paul S. Giordano.
10.2	Employment Agreement, dated as of January 1, 2005, between XL Capital Ltd and Henry C.V. Keeling.
10.3	Employment Agreement, dated as of January 1, 2005, between XL Capital Ltd and Fiona E. Luck.
10.4	Employment Agreement, dated as of January 1, 2005, between XL Capital Ltd and Clive Tobin.
10.5	Form of Employment Agreement, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 8, 2005.
10.6	Agreement of Amendment, dated as of February 23, 2004, to the Revolving Credit and Security Agreement, dated as of February 25, 2003, among XL Re Ltd, as Borrower, CAFCO, LLC (formerly Corporate Asset Funding Company, Inc.), CRC Funding, LLC (formerly Corporate Receivables Corporation), CHARTA, LLC (formerly CHARTA Corporation) and CIESCO, LLC (formerly CIESCO, L.P.), as Lenders, Citibank, N.A. and the other Secondary Lenders from time to time parties thereto, as Secondary Lenders, and Citicorp North America, Inc., as Agent, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 23, 2005.
10.7	Agreement of Amendment, dated as of February 18, 2005, to the Revolving Credit and Security Agreement, dated as of February 25, 2003, among XL Re Ltd, as Borrower, CAFCO, LLC (formerly

49

	Corporate Asset Funding Company, Inc.), CRC Funding, LLC (formerly Corporate Receivables Corporation), CHARTA, LLC (formerly CHARTA Corporation) and CIESCO, LLC (formerly CIESCO, L.P.), as Lenders, Citibank, N.A. and the other Secondary Lenders from time to time parties thereto, as Secondary Lenders, and Citicorp North America, Inc., as Agent, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 23, 2005.
10.8	Sellers Retrocession Agreement (in respect of the period to 31 December 2000), dated July 24, 2001, between Winterthur International, as Principal Reinsured, and Winterthur Swiss Insurance Company, as Reinsurer, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 10, 2005.
10.9	Amended and Restated Sellers Retrocession Agreement (in respect of the period to 30 June 2001), dated February 8, 2002, between XL Winterthur International Re, as Principal Reinsured, and Winterthur Swiss Insurance Company, as Reinsurer, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on February 10, 2005.
10.10	SRA Amendment Letter, dated December 24, 2003, between XL Insurance (Bermuda) Ltd, Vitodurum Reinsurance Company and Winterthur Swiss Insurance Company, incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on February 10, 2005.
10.11	Limited Recourse Receivables Financing Facility Agreement, dated July 24, 2001, between Winterthur Swiss Insurance Company and Winterthur International, incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on February 10, 2005.
10.12	Agreement, dated December 24, 2003, between Winterthur Swiss Insurance Company and XL Insurance (Bermuda) Ltd (including the Schedules thereto), relating to the Second Amended and Restated Agreement for the Sale and Purchase of Winterthur International, dated February 15, 2001, incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on February 10, 2005.
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 month periods ended March 31, 2005 and 2004.
99.2	XL Financial Assurance Ltd. condensed financial statements (unaudited) for the three month periods ended March 31, 2005 and 2004.

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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 thereunto duly authorized.

	XL CAPITAL LTD (Registrant)
Date: May 6, 2005	/s/ BRIAN M. O’HARA
	Brian M. O’Hara
	President and Chief Executive Officer
Date: May 6, 2005	/s/ JERRY DE ST. PAER
	Jerry de St. Paer
	Executive Vice President and Chief Financial Officer

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EX-10.1

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                                                                    EXHIBIT 10.1


                              EMPLOYMENT AGREEMENT
                           dated as of January 1, 2005


              AGREEMENT, made and entered into as of the date first above
written, by and between, XL Capital Ltd, a Cayman Islands corporation (the
"Company"), and Paul S. Giordano (the "Executive").

              WHEREAS, the Executive has been in the employ of the Company and
certain of its subsidiaries;

              WHEREAS, the Company and Executive desire to continue such
employment and to memorialize the terms and conditions of such employment by a
written agreement;

              NOW, THEREFORE, in consideration of the premises and mutual
covenants contained herein and for other good and valuable consideration, the
Company, the Guarantors (as hereinafter defined) and the Executive (the
"Parties") agree as follows:

              1.     EMPLOYMENT.

              Subject to Section 3(d) below, the Company hereby employs the
Executive, and the Executive hereby accepts employment with the Company, for the
term of this Agreement as set forth in Section 2, below, in the position and
with duties and responsibilities set forth in Section 3, below, and upon such
other terms and conditions as are hereinafter stated.

              2.     TERM OF EMPLOYMENT.

              Subject to Section 3(d) below, the stated term of employment under
this Agreement shall commence on the date first above written (the "Date of the
Agreement") and shall continue through the close of business on the first
anniversary of the Date of the Agreement, subject to earlier termination as
provided in Section 8, below, and extension as provided in the next succeeding
sentence. On the first anniversary of the Date of the Agreement and on each
anniversary thereafter, the stated term of employment shall be automatically
extended for an additional one year unless the Company gives notice in writing
to the Executive or the Executive gives notice in writing to the Company at
least six months prior to such anniversary that the term is not to be so
extended.

              3.     POSITIONS, DUTIES AND RESPONSIBILITIES.

              (a)    GENERAL. The Executive shall be employed as Executive Vice
President, Chief Executive of the Financial Products & Services operations of
the Company. In such position, the Executive shall have the duties,
responsibilities and authority normally associated with the office, position and
titles of such an officer of an insurance, reinsurance and financial services
company, or holding company, whose shares are publicly traded in the



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                                      -2-


United States. In carrying out his duties and responsibilities, the Executive
shall report to the Chief Executive Officer of XL Capital Ltd. During the term
of this Agreement, the Executive shall devote his full business time to the
business and affairs of the Company, and shall use his best efforts, skills and
abilities to promote the Company's interests.

              (b)    PERFORMANCE OF SERVICES. The Executive's services under
this Agreement, which are global in nature, shall be performed either in the
greater New York City metropolitan area or Bermuda as reasonably requested by
the Company; PROVIDED, HOWEVER, that such services may be performed outside the
United States and in accordance with the guidelines established by the Company
from time to time for the location of the performance of services on behalf of
the Company and its subsidiaries. The Executive acknowledges that the Company
may require the Executive to travel to the extent such travel is reasonably
necessary to perform the services hereunder and that such travel may be
extensive. To the extent reasonably requested by the Company, the Executive
shall allocate greater business time to a location other than his principal
business location, if necessary.

              4.     BASE SALARY.

              The Executive shall be paid a Base Salary by the Company equal to
US$550,000.00, payable in accordance with the Company's regular pay practices.
Such Base Salary shall be subject to annual review in accordance with the
Company's practices for executives as in effect from time to time and may be
increased at the discretion of the Compensation Committee of the Company Board
(the "Compensation Committee").

              5.     BONUSES.

              In addition to the Base Salary provided for in Section 4, above,
the Executive shall be eligible for an annual cash bonus under the Company's
Annual Incentive Compensation Plan as in effect from time to time, with a bonus
opportunity which is substantially similar to that of similarly situated
executives. The Executive may be awarded such annual bonuses thereunder as may
be approved by the Compensation Committee based on corporate, individual and
business unit performance measures, as appropriate, established or approved from
time to time, by the Compensation Committee. Any annual bonus shall be paid in
cash in a lump sum promptly following approval thereof or, at Executive's
option, deferred in accordance with any bonus deferral plans of the Company in
effect from time to time. Nothing in this Section 5 shall confer upon the
Executive any right to a minimum annual bonus.

              6.     EMPLOYEE BENEFIT PROGRAMS.

              During the term of the Executive's employment under this
Agreement, the Executive shall be entitled to participate in all employee
retirement, pension, welfare and benefit programs of the Company as are in
effect from time to time and in which similarly situated senior executives of
the Company are eligible to participate.



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                                      -3-


              7.     BUSINESS EXPENSE REIMBURSEMENT AND FRINGE BENEFITS

              During the term of the Executive's employment under this
Agreement, the Executive shall be entitled to participate in the Company's
travel and entertainment expense reimbursement programs and its executive fringe
benefit plans and arrangements, all in accordance with the terms and conditions
of such programs, plans and arrangements as in effect from time to time as
applied to the Company's similarly situated executives.

              8.     TERMINATION OF EMPLOYMENT.

              (a)    TERMINATION DUE TO DEATH. In the event the Executive dies
during the term of employment hereunder, the Executive's spouse, if the spouse
survives the Executive, (or, if the Executive's spouse does not survive him, the
estate or other legal representative of the Executive) shall be entitled to
receive the Base Salary as provided in Section 4, above, at the rate in effect
at the time of Executive's death, to be paid in accordance with the Company's
regular payroll practices or in a lump sum, at the Company's option, through the
end of the sixth month after the month in which the Executive dies. In addition
to the above, the estate or other legal representative of the Executive shall be
entitled to:

                     (i)    any annual bonus awarded in accordance with the
       Company's bonus program but not yet paid under Section 5, above, and
       reimbursement of business expenses incurred prior to death in accordance
       with Section 7(a) above,

                     (ii)   a pro rata bonus for the year of death in an amount
       determined by the Compensation Committee, but in no event less than a pro
       rata portion of the Executive's average annual bonus for the immediately
       preceding three years (or the period of the Executive's employment with
       the Company, if less),

                     (iii)  the rights under any options to purchase equity
       securities of the Company or other rights with respect to equity
       securities of the Company, including any restricted stock or other
       securities, held by the Executive determined in accordance with the terms
       thereof,

                     (iv)   for a period of six months following the Executive's
       death, continued medical benefit plan coverage (including dental and
       vision benefits if provided under the applicable plans) for the
       Executive's dependents, if any, under the Company's medical benefit plans
       upon substantially the same terms and conditions (including cost of
       coverage to the dependents) as is then in existence for other executives
       during the coverage period; PROVIDED, THAT, if the Executive's dependents
       cannot continue to participate in the Company plans providing such
       benefits, the Company shall otherwise provide such benefits on
       substantially the same after-tax basis as if continued participation had
       been permitted, and



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                                      -4-


                     (v)    the vested accrued benefits, if any, under the
       employee benefit programs of the Company, as provided in Section 6,
       above, determined in accordance with the applicable terms and provisions
       of such programs.

              (b)    TERMINATION DUE TO DISABILITY. In the event the Executive's
employment hereunder is terminated due to his disability, as determined under
the Company's long-term disability plan, the Executive shall be entitled to:

                     (i)    the Base Salary as provided in Section 4, above,
       through the end of the sixth month after the month in which the
       Executive's employment terminates due to disability,

                     (ii)   any annual bonus awarded in accordance with the
       Company's bonus program but not yet paid under Section 5, and
       reimbursement of business expenses incurred prior to termination of
       employment in accordance with Section 7(a) above,

                     (iii)  a pro rata bonus for the year of termination in an
       amount determined by the Compensation Committee, but in no event less
       than a pro rata portion of the Executive's average annual bonus for the
       immediately preceding three years (or the period of the Executive's
       employment with the Company, if less),

                     (iv)   the rights under any options to purchase equity
       securities of the Company or other rights with respect to equity
       securities of the Company, including any restricted stock or other
       securities, held by the Executive, determined in accordance with the
       terms thereof,

                     (v)    for a period of six months following the termination
       of the Executive's employment, continued medical benefit plan coverage
       (including dental and vision benefits if provided under the applicable
       plans) for the Executive (and the Executive's dependents, if any) under
       the Company's medical benefit plans upon substantially the same terms and
       conditions (including cost of coverage to the Executive) as is then in
       existence for other executives during the coverage period; PROVIDED,
       THAT, if the Executive cannot continue to participate in the Company
       plans providing such benefits, the Company shall otherwise provide such
       benefits on substantially the same after-tax basis as if continued
       participation had been permitted; PROVIDED FURTHER, HOWEVER, that, in the
       event the Executive becomes reemployed with another employer and becomes
       eligible to receive medical benefits from such employer, the medical
       benefits described herein shall immediately cease, and

                     (vi)   the vested accrued benefits, if any, under the
       employee benefit programs of the Company, as provided in Section 6 above,
       determined in accordance with the applicable terms and provisions of such
       programs.




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                                      -5-


              (c)    TERMINATION FOR CAUSE.

                     (i)    The employment of the Executive under this Agreement
       may be terminated by the Company for Cause, such termination to be
       effective upon the Company giving the Executive written notice of
       termination in accordance with the provisions of this Agreement. For this
       purpose, "Cause" shall mean:

                            (A)    conviction of the Executive of a felony
                     involving moral turpitude, dishonesty or laws to which the
                     Company or its Affiliates are subject in connection with
                     the conduct of its or their business;

                            (B)    the Executive, in carrying out his duties for
                     the Company under this Agreement, has been guilty of (1)
                     willful misconduct or (2) substantial and continual refusal
                     by the Executive to perform the duties assigned to the
                     Executive pursuant to the terms hereof; PROVIDED, HOWEVER,
                     that any act or failure to act by the Executive shall not
                     constitute Cause for purposes of this Section 8(c)(i)(B) if
                     such act or failure to act was committed, or omitted, by
                     the Executive in good faith and in a manner he reasonably
                     believed to be in the overall best interests of the
                     Company, as the case may be. The determination of whether
                     the Executive acted in good faith and that he reasonably
                     believed his action to be in the Company's overall best
                     interest, as the case may be, will be in the reasonable and
                     good faith judgment of the Compensation Committee and/or
                     the Audit Committee; or

                            (C)    the Executive's continued willful refusal to
                     obey any lawful policy or requirement duly adopted by the
                     Company Board and the continuance of such refusal after
                     receipt of written notice.

                     (ii)   In the event of a termination for Cause under
       Section 8(c)(i), above, the Executive shall be entitled only to:

                            (A)    Base Salary as provided in Section 4, above,
                     at the rate in effect at the time of his termination of
                     employment for Cause, through the date on which termination
                     for Cause occurs,

                            (B)    the rights under any options to purchase
                     equity securities of the Company or other rights with
                     respect to equity securities of the Company, including any
                     restricted stock or other securities, held by the
                     Executive, determined in accordance with the terms thereof,
                     and

                            (C)    the vested accrued benefits, if any, under
                     employee benefit programs of the Company, as provided in
                     Section 6, above, and re-



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                                      -6-


                     imbursement of properly incurred unreimbursed business
                     expenses under the business expense reimbursement program
                     as described in Section 7, above, determined in accordance
                     with the applicable terms and provisions of such employee
                     benefit and expense reimbursement programs; PROVIDED that
                     the Executive shall not be entitled to any such benefits
                     unless the terms and provisions of such programs expressly
                     state that the Executive shall be entitled thereto in the
                     event his employment is terminated for Cause (as defined in
                     this Agreement or otherwise).

              (d)    TERMINATION WITHOUT CAUSE.

                     (i)    Anything in this Agreement to the contrary
       notwithstanding, the Executive's employment may be terminated by the
       Company without Cause as provided in this Section 8(d). A termination due
       to death or disability, as described in Section 8(a) or (b), above, or a
       termination for Cause, as described in Section 8(c), above, shall not be
       deemed a termination without Cause under this Section 8(d). For the
       avoidance of doubt, a notice of non-renewal of this Agreement pursuant to
       Section 2 issued by the Company, followed within six (6) months by a
       notice (x) by the Company of its intention to terminate the employment
       relationship with Executive at the end of the Term or (y) by the
       Executive of Executive's intention to terminate the employment
       relationship with the Company at the end of the Term, shall be considered
       a termination without Cause hereunder.

                     (ii)   In the event the Executive's employment is
       terminated by the Company without Cause (x) prior to a Change in Control
       (other than as provided in the last paragraph of Section 8(d)(iii), in
       which case the provisions of Section 8(d)(iii) shall apply in lieu of
       this Section 8(d)(ii)) or (y) following the Post-Change Period (as
       hereinafter defined), the Executive shall be entitled to:

                            (A)    Base Salary as provided in Section 4, above,
                     at the rate in effect at the time of his termination of
                     employment without Cause, through the date on which
                     termination without Cause occurs,

                            (B)    provided the Executive executes and does not
                     revoke a reasonable general release of employment liability
                     claims against the Company and its affiliates in form and
                     substance satisfactory to the Company, a cash lump sum
                     payment equal to (x) two times the Executive's annual Base
                     Salary, at the annual rate in effect in accordance with
                     Section 4, above, immediately prior to such termination and
                     (y) one times the higher of the targeted annual bonus for
                     the year of such termination, if any, or the average of the
                     Executive's annual bonus for the three years immediately
                     preceding the year of termination (or such



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                                      -7-


                     shorter period during which the Executive has been employed
                     by the Company),

                            (C)    any annual bonus awarded in accordance with
                     the Company's bonus program but not yet paid under Section
                     5, above, and reimbursement of business expenses incurred
                     prior to termination of employment in accordance with
                     Section 7(a) above,

                            (D)    the rights under any options to purchase
                     equity securities of the Company or other rights with
                     respect to equity securities of the Company, including any
                     restricted stock or other securities, held by the
                     Executive, determined in accordance with the terms thereof,

                            (E)    for a period of twenty-four months following
                     the termination of the Executive's employment, continued
                     medical benefit plan coverage (including dental and vision
                     benefits if provided under the applicable plans) for the
                     Executive (and the Executive's dependents, if any) under
                     the Company's medical benefit plans upon substantially the
                     same terms and conditions (including cost of coverage to
                     the Executive) as is then in existence for other executives
                     during the coverage period; PROVIDED, THAT, if the
                     Executive cannot continue to participate in the Company
                     plans providing such benefits, the Company shall otherwise
                     provide such benefits on substantially the same after-tax
                     basis as if continued participation had been permitted;
                     PROVIDED, HOWEVER, that, in the event the Executive becomes
                     reemployed with another employer and becomes eligible to
                     receive medical benefits from such employer, the medical
                     benefits described herein shall immediately cease, and

                            (F)    the vested accrued benefits, if any, under
                     the employee benefit programs of the Company, as provided
                     in Section 6 above, determined in accordance with the
                     applicable terms and provisions of such programs.

                     (iii)  In the event the Executive's employment is
       terminated by (x) the Company without Cause within the twenty-four month
       period following a Change in Control (as defined in Exhibit A hereto)
       (the "Post-Change Period") or (y) the Executive terminates his employment
       for "Good Reason" (as defined in Exhibit B hereto) during the Post-Change
       Period, the Executive shall be entitled to:

                            (A)    Base Salary as provided in Section 4, above,
                     at the rate in effect at the time of his termination of
                     employment, through the date on which termination occurs,



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                                      -8-


                            (B)    a cash lump sum payment equal to two times
                     the Executive's annual Base Salary, at the rate in effect
                     in accordance with Section 4, above, immediately prior to
                     such termination or Change in Control, whichever is
                     greater,

                            (C)    a cash lump sum payment equal to two times
                     the average annual bonus awarded to the Executive by the
                     Company in the three years prior to the year in which the
                     Change in Control occurs (or shorter period during which
                     the Executive had been employed by the Company); PROVIDED
                     such bonuses shall be at least equal to the targeted annual
                     bonus, if any, for the year of such termination,

                            (D)    an amount equal to (i) the higher of (x) the
                     bonus actually awarded to the Executive by the Company for
                     the year immediately preceding the year in which the Change
                     in Control occurs or (y) the targeted amount of bonus, if
                     any, that would have been awarded to the Executive in
                     respect of the year in which the termination of employment
                     occurs, multiplied by (ii) a fraction, the numerator of
                     which is the number of months or fraction thereof in which
                     the Executive was employed by the Company in the year of
                     termination of employment, and the denominator of which is
                     12,

                            (E)    options to purchase equity securities of the
                     Company or other rights with respect to equity securities
                     of the Company held by the Executive shall immediately vest
                     in full and shall continue to be exercisable for three
                     years from the date of termination of employment,
                     notwithstanding the Executive's termination of employment,
                     or the original full term of the option or other right, if
                     shorter,

                            (F)    for a period of twenty-four months following
                     the termination of the Executive's employment, continued
                     medical benefit plan coverage (including dental and vision
                     benefits if provided under the applicable plans) for the
                     Executive (and the Executive's dependents, if any) under
                     the Company's medical benefit plans upon substantially the
                     same terms and conditions (including cost of coverage to
                     the Executive) as is then in existence for other executives
                     during the coverage period; PROVIDED, THAT, if the
                     Executive cannot continue to participate in the Company
                     plans providing such benefits, the Company shall otherwise
                     provide such benefits on substantially the same after-tax
                     basis as if continued participation had been permitted;
                     PROVIDED, HOWEVER, that, in the event the Executive becomes
                     reemployed with another employer



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                                      -9-


                     and becomes eligible to receive medical benefits from such
                     employer, the medical benefits described herein shall
                     immediately cease, and

                            (G)    full and immediate vesting under the
                     Company's retirement plans as of the date of termination,
                     to the extent permitted by applicable law; PROVIDED,
                     HOWEVER, that if such full and immediate vesting cannot be
                     provided under a retirement plan under applicable law, then
                     economically equivalent benefits, determined on an after
                     tax basis to the Executive, shall be provided through
                     arrangements outside the applicable retirement plan.

              Anything in this Agreement to the contrary notwithstanding, the
Executive shall be entitled to the benefits described in (A)-(G) above, if the
Executive's employment with the Company is terminated (other than for Cause)
within one year prior to the date on which a Change in Control occurs, and it is
reasonably demonstrated that such termination (i) was at the request of a third
party who has taken steps reasonably calculated or intended to effect the Change
in Control or (ii) otherwise arose in connection with or anticipation of the
Change in Control; PROVIDED, HOWEVER, that in such event, amounts will be
payable hereunder only following the Change in Control.

                     (iv)   If, in situations where Section 8(d)(iii) does not
       apply, at any time during the term of the Executive's employment
       hereunder, duties are assigned to the Executive that are materially
       inconsistent with his position, or the Company does not cure any other
       material breach by it of any provision of Sections 3 through 7, 14 and 17
       of this Agreement within 30 calendar days following written notice of
       same by the Executive, the Executive shall have the right to terminate
       his employment within 30 calendar days of such assignment or of such
       failure to cure a breach, as the case may be, and such termination shall
       be deemed a termination by the Company without Cause under Section
       8(d)(ii), above, PROVIDED, in the case of assignment of inconsistent
       duties, the Executive shall have given the Company written notice of his
       decision and shall not, within 30 calendar days thereafter, have had the
       assignment of inconsistent duties rescinded.

              (e)    VOLUNTARY TERMINATION BY THE EXECUTIVE. The Executive may
voluntarily terminate his employment prior to the expiration of the term of this
Agreement upon at least three months' prior written notice to the Company,
provided such termination shall constitute a voluntary termination and, except
as provided in Section 8(d)(iii) or Section 8(d)(iv), above, in such event the
Executive shall be limited to the same rights and benefits as applicable to a
termination by the Company for Cause as provided in Section 8(c), above. A
voluntary termination in accordance with this Section 8(e) shall not be deemed a
breach of this Agreement. A termination of the Executive's employment due to
disability or death as described in Section 8(b) or 8(a), above, a termination
by the Executive



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                                      -10-


which the Executive is entitled to treat as a termination by the Company
pursuant to Section 8(d), above, or a termination by the Executive under Section
8(d)(iv), above, shall not be deemed a voluntary termination within the meaning
of this Section 8(e). For the avoidance of doubt, a notice of non-renewal of the
agreement pursuant to Section 2 above, issued by the Executive shall not be
considered a voluntary termination within the meaning of this Section 8(e).

              9.     EXCISE TAX PAYMENTS.

              (a)    Anything in this Agreement to the contrary notwithstanding,
in the event it shall be determined that (i) any payment or distribution made,
or benefit provided (including, without limitation, the acceleration of any
payment, distribution or benefit or accelerated vesting or exercisability of any
award) by the Company to or for the benefit of the Executive (whether paid or
payable or distributed or distributable pursuant to the terms of this Agreement
or otherwise, but determined without regard to any additional payments required
under this Section 9) (a "Payment") would be subject to the excise tax imposed
by Section 4999 of the United States Internal Revenue Code of 1986, as amended
(the "Code") (or any successor provision or similar excise tax), or any interest
or penalties are incurred by the Executive with respect to such excise tax (such
excise tax, together with any such interest and penalties, are hereinafter
collectively referred to as the "Excise Tax"), (ii) the aggregate amount of the
Executive's Parachute Payments (as defined in Section 280G(b)(2)(A) of the Code)
is less than 3.25 times the Executive's Base Amount (as defined in Section
280G(b)(3)(A) of the Code), and (iii) no such Payment would be subject to the
Excise Tax if the payments set forth in Section 8(d)(iii)(B) and (C) hereof were
each reduced by up to 20 percent, then the payments set forth in Section
8(d)(iii)(B) and (C) will each be reduced to the smallest extent possible (and
in no event by more than 20 percent in the aggregate) such that no Payment is
subject to the Excise Tax.

              (b)    Anything in this Agreement to the contrary notwithstanding,
in the event it shall be determined that (i) the aggregate amount of the
Executive's Parachute Payments equals or exceeds 3.25 times the Executive's Base
Amount, (ii) the aggregate amount of the Executive's Parachute Payments is less
than 3.25 times the Base Amount but one or more Payments would be subject to the
Excise Tax even if the payments set forth in Section 8(d)(iii)(B) and (C) hereof
were each reduced by 20 percent, or (iii) notwithstanding a reduction in
payments pursuant to Section 9(a) above, an Excise Tax is payable by the
Executive on one or more Payments, then, in any such case, Payments shall not be
reduced and the Executive shall be entitled to receive an additional payment (a
"Gross-Up Payment") in an amount such that after payment by the Executive of all
taxes (including any income or Excise Tax) imposed upon the Gross-Up Payment and
any interest or penalties imposed with respect to such taxes, the Executive
retains from the Gross-Up Payment an amount equal to the Excise Tax imposed upon
the Payments.




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              (c)    Subject to the provisions of Section 9(d), all
determinations required to be made under this Section 9, including determination
of whether a Gross-Up Payment is required and of the amount of any such Gross-Up
Payment, shall be made by a nationally recognized public accounting firm
selected by the Company (the "Accounting Firm") which shall provide detailed
supporting calculations both to the Company and the Executive within 15 business
days of the date of termination of the Executive's employment, if applicable, or
such earlier time as is reasonably requested. The initial Gross-Up Payment, if
any, as determined pursuant to this Section 9(c), shall be paid to the Executive
within five business days of the receipt of the Accounting Firm's determination.
If the Accounting Firm determines that no Excise Tax is payable by the
Executive, it shall furnish the Executive with a written opinion that he has
substantial authority not to report any Excise Tax on his Federal income tax
return. Any determination by the Accounting Firm meeting the requirements of
this Section 9(c) shall be binding upon the Company and the Executive, subject
only to payments pursuant to the following sentence based on a determination
that additional Gross-Up Payments should have been made, consistent with the
calculations required to be made hereunder (the amount of such additional
payments are referred to herein as the "Gross-Up Underpayment"). In the event
that the Company exhausts its remedies pursuant to Section 9(d) and the
Executive thereafter is required to make a payment of any Excise Tax, the
Accounting Firm shall determine the amount of the Gross-Up Underpayment that has
occurred and any such Gross-Up Underpayment shall be promptly paid by the
Company to or for the benefit of the Executive. The fees and disbursements of
the Accounting Firm shall be paid by the Company.

              (d)    The Executive shall notify the Company in writing of any
claim by the United States Internal Revenue Service that, if successful, would
require the payment by the Executive of any Excise Tax and, therefore, the
payment by the Company of a Gross-Up Payment. Such notification shall be given
as soon as practicable but not later than 30 business days after the Executive
receives written notice of such claim and shall apprise the Company of the
nature of such claim and the date on which such claim is requested to be paid.
The Executive shall not pay such claim prior to the expiration of the 30-day
period following the date on which he gives such notice to the Company (or such
shorter period ending on the date that any payment of taxes with respect to such
claim is due). If the Company notifies the Executive in writing prior to the
expiration of such period that it desires, in good faith, to contest such claim
(which notice shall set forth the bases for such contest) and that it will bear
the costs and provide the indemnification as required by this sentence, the
Executive shall, in good faith:

                     (i)    give the Company any information reasonably
       requested by the Company relating to such claim,

                     (ii)   take such action in connection with contesting such
       claim as the Company shall, in good faith, reasonably request in writing
       from time to time, includ-



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                                      -12-


       ing, without limitation, accepting legal representation with respect to
       such claim by an attorney selected by the Company and reasonably
       acceptable to the Executive,

                     (iii)  cooperate with the Company in good faith in order
       effectively to contest such claim, and

                     (iv)   permit the Company to participate, in good faith, in
       any proceedings relating to such claim;

PROVIDED, HOWEVER, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis to the Executive, for any Excise Tax or income tax, including
interest and penalties with respect thereto, imposed as a result of such
representation and payment of all costs and expenses.

              Without limitation on the foregoing provisions of this Section
9(d), the Company shall, exercising good faith, control all proceedings taken in
connection with such contest and, at its sole option (but in good faith), may
pursue or forego any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option (but in good faith), either direct the Executive to pay the tax
claimed and sue for a refund or contest the claim in any permissible manner, and
the Executive agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as the Company shall determine; PROVIDED, HOWEVER, that if the
Company directs the Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to the Executive, on an
interest-free basis and shall indemnify and hold the Executive harmless, on an
after-tax basis to the Executive, from any Excise Tax or income tax, including
interest or penalties with respect thereto, imposed with respect to such advance
or with respect to any imputed income with respect to such advance; AND FURTHER
PROVIDED that any extension of the statute of limitations relating to the
payment of taxes for the taxable year of the Executive with respect to which
such contested amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Company's control of the contest shall be limited to
issues with respect to which a Gross-Up Payment would be payable hereunder and
the Executive shall be entitled to settle or contest, as the case may be, any
other issue raised by the Internal Revenue Service or any other taxing
authority. If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 9(d), the Executive becomes entitled to receive any
refund with respect to such claim, the Executive shall (subject to the Company's
complying with the requirements of Section 9(d)) promptly pay to the Company, as
the case may be, the amount of such refund (together with any interest paid or
credited thereon after taxes applicable thereto). If, after the receipt by the
Executive of an amount advanced by the Company pursuant to Section 9(d), a
determination is made that the Executive shall not be entitled to any refund
with respect to such claim and the Company does not notify the Executive in
writing of its intent to



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                                      -13-


contest such denial of refund prior to the expiration of 30 days after such
determination, then any obligation of the Executive to repay such advance shall
be forgiven and the amount of such advance shall offset, to the extent thereof,
the amount of Gross-Up Payment required to be paid.

              Notwithstanding any provision herein to the contrary, the
Executive's failure to strictly comply with the notice provisions set forth in
this Section 9, so long as such failure does not prevent the Company from
contesting an excise tax claim, shall not adversely affect the Executive's
rights under this Section 9.

              10.    NO MITIGATION; NO OFFSET.

              In the event of any termination of employment under Section 8,
above, the Executive shall be under no obligation to mitigate damages or seek
other employment, and, except as expressly set forth herein, there shall be no
offset against amounts due the Executive under this Agreement on account of any
remuneration attributable to any subsequent employment that he may obtain.

              11.    NONCOMPETITION AND NONSOLICITATION.

              The Executive represents and warrants that, to the best of his
knowledge, he is not using the confidential or proprietary information of any
other person in violation of any agreement or rights of others known to him. The
Executive agrees that the products of the Company and its Affiliates shall
constitute the exclusive property of the Company and its Affiliates.

              For the avoidance of doubt, all trademarks, policy language or
forms, products or services (including products and services under development),
trade names, trade secrets, service marks, designs, computer programs and
software, utility models, copyrights, know-how and confidential information,
applications for registration of any of the foregoing and the right to apply for
them in any part of the world (whether any of the foregoing shall be registered
or unregistered) created or discovered or participated in by the Executive
during the course of his employment (whether or not pursuant to the terms of
this Agreement) or under the instructions of the Company or its Affiliates are
and shall be the absolute property of the Company and its Affiliates, as
appropriate. Without limiting the foregoing, the Executive hereby assigns to the
Company any and all of the Executive's right, title and interest, if any,
pertaining to the insurance and reinsurance (including, without limitation,
finite insurance and reinsurance), risk assumption, risk management, brokerage,
financial and other products or services developed or improved upon by the
Executive (including, without limitation, any related "know-how") while employed
by the Company or its Affiliates, including any patent, trademark, trade name,
copyright, ownership or other right that may pertain thereto.




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                                      -14-


              Since Executive has obtained and is likely to obtain in the course
of Executive's employment with the Company and its Affiliates knowledge of trade
names, trade secrets, know-how, products and services (including products and
services under development), techniques, methods, lists, computer programs and
software and other confidential information relating to the Company and its
Affiliates, and their employees, clients, business or business opportunities,
Executive hereby undertakes that:

                     (i)    Executive will not (either alone or jointly with or
       on behalf of others and whether directly or indirectly) encourage,
       entice, solicit or endeavor to encourage, entice or solicit away from
       employment with the Company or its Affiliates, or hire or cause to be
       hired, any officer or employee of the Company or its Affiliates (or any
       individual who was within the prior twelve months an officer or employee
       of the Company or its Affiliates), or encourage, entice, solicit or
       endeavor to encourage, entice or solicit any individual to violate the
       terms of any employment agreement or arrangement between such individual
       and the Company or any of its Affiliates;

                     (ii)   Executive will not (either alone or jointly with or
       on behalf of others and whether directly or indirectly) interfere with or
       disrupt or seek to interfere with or disrupt (A) the relationships
       between the Company and its Affiliates, on the one hand, and any customer
       or client of the Company and its Affiliates, on the other hand,
       (including any insured or reinsured party) who during the period of
       twenty-four months immediately preceding such termination shall have been
       such a customer or client, or (B) the supply to the Company and its
       Affiliates of any services by any supplier or agent or broker who during
       the period of twenty-four months immediately preceding such termination
       shall have supplied services to any such person, nor will Executive
       interfere or seek to interfere with the terms on which such supply or
       agency or brokering services during such period as aforesaid have been
       made or provided; and

                     (iii)  Executive will not (either alone or jointly with or
       on behalf of others and whether directly or indirectly) whether as an
       employee, consultant, partner, principal, agent, distributor,
       representative or stockholder (except solely as a less than one percent
       stockholder of a publicly traded company), engage in any activities in
       Bermuda, the United Kingdom or the United States if such activities are
       competitive with the businesses that (i) are then being conducted by the
       Company or its Affiliates and (ii) during the period of the Executive's
       employment were either being conducted by the Company or its Affiliates
       or actively being developed by the Company or its Affiliates; provided,
       for the avoidance of doubt, that the Executive shall be permitted at all
       times to provide legal services to any competitor of the Company or its
       affiliates, to the extent permitted under any applicable code of
       professional responsibility.

              The provisions of the immediately preceding sentence shall
continue as long as the Executive is employed by the Company or its Affiliates
and such provisions shall continue



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                                      -15-


in effect after such employment is terminated for any reason under section 8
until the first anniversary of such termination, provided that if such
employment is terminated by the Company under Section 8(d)(iii) or by the
Executive under Section 8(d)(iii), the provisions of clauses (ii) and (iii)
shall automatically terminate upon such termination of employment, unless the
Company elects, in writing, upon such termination to continue the provisions of
clauses (ii) and (iii) in effect through the six-month anniversary of such
termination of employment in which case the Company shall be obligated to
continue (through such six-month anniversary of termination) to pay the
Executive, in addition to any of the Executive's rights under Section 8(d)(iii),
his Base Salary and the pro rata portion of the Executive's average annual bonus
for the three years (or shorter period of employment by the Company) immediately
preceding the year of termination, and such pro rated average annual bonus shall
be payable no later than the time annual bonuses for such year are payable to
other executives.

              For purposes of this Agreement, an "Affiliate" of the Company
includes any person, directly or indirectly, through one or more intermediaries,
controlling, controlled by, or under common control with the Company, and such
term shall specifically include, without limitation, the Company's
majority-owned subsidiaries.

              The limitations on the Executive set forth in this Section shall
also apply to any agent or other representative acting on behalf of Executive.

              While the restrictions aforesaid are stated to be reasonable in
all the circumstances it is also recognized that restrictions of the nature in
question may fail for reasons unforeseen and accordingly it is hereby declared
and agreed that if any of such restrictions or the geographic or other scope
thereof shall be adjudged to be void as going beyond what is reasonable in the
circumstances for the protection of the interests of the Company and its
Affiliates but would be valid if part of the wording thereof were deleted and/or
the periods (if any) thereof reduced and/or geographic or other area dealt with
thereby reduced in scope then said restrictions shall apply with such
modifications as may be necessary to make them valid and effective.

              Nothing contained in this Section 11 shall limit in any manner any
additional obligations to which Executive may be bound pursuant to any other
agreement or any applicable law, rule or regulation and Section 11 shall apply,
subject to its terms, after employment has terminated for any reason.

              12.    CONFIDENTIAL INFORMATION.

              The Executive covenants that he shall not, without the prior
written consent of the Company, use for the Executive's own benefit or the
benefit of any other person or entity other than the Company and its Affiliates
or disclose to any person, other than an employee of the Company or other person
to whom disclosure is necessary to the performance by the Executive of his
duties in the employ of the Company, any confidential, proprietary, secret, or



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privileged information about the Company or its Affiliates or their business or
operations, including, but not limited to, information concerning trade secrets,
know-how, software, data processing systems, policy language and forms,
inventions, designs, processes, formulae, notations, improvements, financial
information, business plans, prospects, referral sources, lists of suppliers and
customers, legal advice and other information with respect to the affairs,
business, clients, customers, agents or other business relationships of the
Company or its Affiliates. Executive shall hold in a fiduciary capacity for the
benefit of the Company all secret, confidential proprietary or privileged
information or data relating to the Company or any of its Affiliates or
predecessor companies, and their respective businesses, which shall have been
obtained by Executive during his employment, unless and until such information
has become known to the public generally (other than as a result of unauthorized
disclosure by the Executive) or unless he is required to disclose such
information by a court or by a governmental body with apparent authority to
require such disclosure. The foregoing covenant by the Executive shall be
without limitation as to time and geographic application and this Section 12
shall apply in accordance with its terms after employment has terminated for any
reason. The Executive acknowledges and agrees that he shall have no authority to
waive any attorney-client or other privilege without the express prior written
consent of the Compensation Committee as evidenced by the signature of the
Company's General Counsel.

              13.    WITHHOLDING.

              Anything in this Agreement to the contrary notwithstanding, all
payments required to be made by the Company hereunder to the Executive shall be
subject to withholding of such amounts relating to taxes as the Company may
reasonably determine should be withheld pursuant to any applicable law or
regulation. In lieu of withholding such amounts, in whole or in part, the
Company may, in its sole discretion, accept other provision for payment of taxes
as required by law, provided it is satisfied that all requirements of law
affecting its responsibilities to withhold such taxes have been satisfied.

              14.    GUARANTY AND AFFILIATE SERVICES.

              (a)    LIABILITY. Each of XL Insurance Ltd, XL Re Ltd, and XL
America Inc. (together, the "Guarantors") hereby agrees to be jointly and
severally liable together with the Company, for the performance of all
obligations and duties, and the payment of all amounts, due to the Executive
under this Agreement.

              (b)    RESPONSIBILITY. All of the other terms and provisions of
this Agreement relating to the Executive's employment by the Company shall
likewise apply mutatis mutandis to the Executive's employment by any of its
Affiliates, it being understood that if the Executive's employment with the
Company is terminated, his employment with its Affiliates shall also be
terminated and the Executive shall be required to resign immediately from all
directorships and other positions held by the Executive in the Company and its
Affiliates or in any other entities in respect of which the Executive was acting
as a



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                                      -17-


representative or designee of the Company or its Affiliates in connection with
his employment.

              15.    ENTIRE AGREEMENT.

              This Agreement, together with the Exhibits, contains the entire
agreement between the Parties concerning the subject matter hereof and
supersedes all prior agreements, understandings, discussions, negotiations and
undertakings, whether written or oral, between the Company and the Executive
with respect thereto.

              16.    ASSIGNABILITY; BINDING NATURE.

              This Agreement shall be binding upon and inure to the benefit of
the Parties and their respective successors, heirs and assigns. No rights or
obligations of the Executive under this Agreement may be assigned or transferred
by the Executive other than his right to compensation and benefits hereunder,
which may be transferred by will or operation of law subject to the limitations
of this Agreement. No rights or obligations of the Company under this Agreement
may be assigned or transferred by the Company except that such rights or
obligations may be assigned or transferred pursuant to a merger or consolidation
or amalgamation or scheme of arrangement in which the Company is not the
continuing entity, or the sale or liquidation of all or substantially all of the
assets of the Company, provided that the assignee or transferee is the successor
to all or substantially all of the assets of the Company and such assignee or
transferee assumes by operation of law or in writing duly executed by the
assignee or transferee all of the liabilities, obligations and duties of the
Company, as contained in this Agreement, either contractually or as a matter of
law.

              17.    INDEMNIFICATION.

              The Executive shall be provided indemnification by the Company to
the maximum extent permitted by applicable law and its charter documents. In
addition, he shall be covered by a directors' and officers' liability policy
with coverage for all directors and officers of the Company in an amount equal
to at least US$75,000,000. Such directors' and officers' liability insurance
shall be maintained in effect for a period of six years following termination of
the Executive's employment for any reason other than pursuant to Section 8(c) or
Section 8(e) hereof.

              18.    SETTLEMENT OF DISPUTES.

              (a)    Any dispute between the Parties arising from or relating to
the terms of this Agreement or the Executive's employment with the Company or
its Affiliates shall, except as provided in Section 18(b) or Section 18(c), be
resolved by binding arbitration held in New York City in accordance with the
rules of the American Arbitration Association.




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              (b)    Executive acknowledges that the Company and its Affiliates
will suffer irreparable injury, not readily susceptible of valuation in monetary
damages, if Executive breaches his obligations under Section 11 or 12.
Accordingly, Executive agrees that the Company and its Affiliates will be
entitled, in addition to any other available remedies, to obtain injunctive
relief against any breach or prospective breach by Executive of his obligations
under Section 11 or 12 in any Federal or state court sitting in the City and
State of New York or court sitting in Bermuda or the United Kingdom, or, at the
Company's or any Affiliate's election, in any other jurisdiction in which
Executive maintains his residence or his principal place of business. Executive
hereby submits to the non-exclusive jurisdiction of all those courts for the
purposes of any actions or proceedings instituted by the Company or its
Affiliates to obtain such injunctive relief, and Executive agrees that process
in any or all of those actions or proceedings may be served by registered mail
or delivery, addressed to the last address of Executive known to the Company or
its Affiliates, or in any other manner authorized by law. Executive further
agrees that, in addition to any other remedies available to the Company or its
Affiliates by operation of law or otherwise, because of any breach by Executive
of his obligations under Section 11 or 12 he will forfeit any and all bonus and
rights to any payments to which he might otherwise then be entitled by virtue
hereof and such payments may be suspended so long as any good faith dispute with
respect thereto is continuing; PROVIDED, HOWEVER, that payments, benefits and
other rights and privileges of the Executive under this Agreement following
termination of the Executive's employment during a Post Change Period shall not
be forfeited, suspended, offset, diminished or otherwise altered in any way on
account of any breach or prospective breach of Section 11, Section 12 or any
other provision of this Agreement alleged by the Company.

              (c)    Notwithstanding any other provision of this Agreement, the
Executive may elect to resolve any dispute involving a breach or alleged breach
of this Agreement following termination of the Executive's employment during a
Post-Change Period in any Federal or State court sitting in the City and State
of New York or court sitting in Bermuda or the United Kingdom. The Company and
the Guarantors hereby submit to the non-exclusive jurisdiction of all those
courts for the purposes of any such actions or proceedings instituted by the
Executive, and the Company and the Guarantors agree that process in any or all
of such actions or proceedings may be served by registered mail or delivery,
addressed to the Company as set forth in Section 20, or in any other manner
authorized by law. The Company and the Guarantors shall pay all costs associated
with any court proceeding under this Section 18(c) without regard to the outcome
of such proceeding, including all legal fees and expenses of the Executive, who
shall be reimbursed for all such costs promptly upon written demand therefor by
the Executive.

              (d)    Each Party shall bear its own costs incurred in connection
with any proceeding under Sections 18(a) or 18(b) hereof, including all legal
fees and expenses; PROVIDED, HOWEVER, that the Company shall bear all such costs
of the Executive (to the extent such costs are reasonable) if the Executive
substantially prevails in the proceeding. The



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                                      -19-


Executive shall be reimbursed by the Company for all such reasonable costs
promptly upon written demand therefor by the Executive which is made within a
reasonable time following the proceeding and is supported by documentation of
such costs.

              19.    AMENDMENT OR WAIVER.

              No provision in this Agreement may be amended unless such
amendment is agreed to in writing, signed by the Executive and by a duly
authorized officer of the Company and the Guarantors. No waiver by any Party of
any breach by the other Party of any condition or provision of this Agreement to
be performed by such other Party shall be deemed a waiver of a similar or
dissimilar condition or provision at the same or any prior or subsequent time.
Any waiver must be in writing and signed by the Executive or a duly authorized
officer of the Company and the Guarantors, as the case may be.

              20.    NOTICES.

              Any notice required or permitted to be given under this Agreement
shall be in writing and shall be deemed to have been given when delivered
personally or sent by courier, or by certified or registered mail, postage
prepaid, return receipt requested, duly addressed to the Party concerned at the
address indicated below or to such changed address as such Party may
subsequently by similar process give notice of:

              If to the Company:

                     XL Capital Ltd
                     XL House
                     One Bermudiana Road
                     Hamilton HM JX
                     Bermuda

                     Att'n: General Counsel

              If to the Executive:

                     Paul Giordano
                     Holly Acres
                     34 Jennings Road
                     Smiths Parish  FL 03
                     Bermuda



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                                      -20-


              21.    SEVERABILITY.

              In the event that any provision or portion of this Agreement shall
be determined to be invalid or unenforceable for any reason, in whole or in
part, the remaining provisions of this Agreement shall be unaffected thereby and
shall remain in full force and effect to the fullest extent permitted by law.

              22.    SURVIVORSHIP.

              The respective rights and obligations of the Parties shall survive
any termination of this Agreement to the extent necessary to the intended
preservation of such rights and obligations.

              23.    REFERENCE.

              In the event of the Executive's death or a judicial determination
of his incompetence, reference in this Agreement to the Executive shall be
deemed, where appropriate, to refer to his estate or other legal representative.

              24.    GOVERNING LAW.

              This Agreement shall be governed by and construed and interpreted
in accordance with the laws of the State of New York without reference to the
principles of conflict of laws.

              25.    HEADINGS.

              The heading of the sections contained in this Agreement are for
convenience only and shall not be deemed to control or affect the meaning or
construction of any provision of this Agreement.

              26.    COUNTERPARTS.

              This Agreement may be executed in one or more counterparts.



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                                      -21-


              IN WITNESS WHEREOF, the undersigned have executed this Agreement
as of the date first written above.

                                      XL CAPITAL LTD


                                      By: /S/ KIRSTIN R. GOULD
                                          -----------------------------------




                                      PAUL S. GIORDANO


                                      By: /S/ PAUL S. GIORDANO
                                          -----------------------------------




                                      GUARANTORS:

                                      XL INSURANCE (BERMUDA) LTD


                                      By: /S/ KIRSTIN R. GOULD
                                          -----------------------------------




                                      XL RE LTD


                                      By: /S/ KIRSTIN R. GOULD
                                          -----------------------------------



                                      X.L. AMERICA, INC.


                                      By: /S/ BRIAN M. O'HARA
                                          -----------------------------------




                                                                       EXHIBIT A


                                CHANGE IN CONTROL


       A "Change in Control" shall be deemed to have occurred:

              (i)    if any person (which, for all purposes hereof, shall
include, without limitation, an individual, sole proprietorship, partnership,
unincorporated association, unincorporated syndicate, unincorporated
organization, trust, body corporate and a trustee, executor, administrator or
other legal representative)(a "Person") or any group, as defined in Sections
13(d) or 14(d) of the United States Securities Exchange Act of 1934 (other than
a group of which the Executive is a member or which has been organized by the
Executive), becomes the beneficial owner, directly or indirectly, of securities
of the Company representing, or acquires the right to control or direct, or to
acquire through the conversion of securities or the exercise of warrants or
other rights to acquire securities, 30% or more of either (I) the outstanding
Ordinary Shares of the Company, (II) the outstanding securities of the Company
having a right to vote in the election of directors, or (III) the combined
voting power of the outstanding securities of the Company having a right to vote
in the election of directors; or

              (ii)   if there shall be elected or appointed to the Board of
Directors of the Company (the "Board") any director or directors whose
appointment or election by the Board or nomination for election by the Company's
shareholders was not approved by a vote of at least a majority of the directors
then still in office who were either directors on the date of execution of this
Agreement or whose election or appointment or nomination for election was
previously so approved; or

              (iii)  upon consummation of a reorganization, scheme of
arrangement, merger, consolidation, combination, amalgamation, corporate
restructuring, liquidation, winding up, exchange of securities, or similar
transaction (each, an "Event"), in each case, in respect of which the beneficial
owners of the outstanding Company Ordinary Shares immediately prior to such
Event do not, following such Event, beneficially own, directly or indirectly,
more than 60% of each of the outstanding equity share capital, and the combined
voting power of the then outstanding voting securities entitled to vote in the
election of the directors, of the Company and any resulting entity, in
substantially the same proportions as their ownership, immediately prior to such
Event, of the Ordinary Shares and voting power of the Company; or

              (iv)   if there occurs an Event involving the Company as a result
of which 25% of more of the members of the Board of the Company are not persons
who were members of the Board immediately prior to the earlier of (x) the Event,
(y) exe-



                                      -2-


cution of an agreement, the consummation of which would result in the
Event, or (z) announcement by the Company of an intention to effect the Event;
or

              (v)    if the Board adopts a resolution to the effect that, for
purposes of this Agreement, a Change in Control has occurred.




                                                                       EXHIBIT B


                                   GOOD REASON

              For purposes of this Agreement, "Good Reason" shall mean any of
the following, unless done with the prior express written consent of the
Executive:

                     (i)    (A) The assignment to Executive of duties
              inconsistent with Executive's position (including duties,
              responsibilities, status, titles or offices as set forth in
              Section 3 hereof); or (B) any elimination, diminution or reduction
              of Executive's duties or responsibilities except in connection
              with the termination of Executive's employment for Cause,
              disability or as a result of Executive's death or by Executive
              other than for Good Reason; and for purposes for this clause (i),
              the determination of whether there has been a reduction of duties
              or responsibilities or an assignment of duties inconsistent with
              the Executive's position shall take into account the Executive's
              duties, responsibilities and position with the ultimate parent of
              the parent/subsidiary group as a whole which includes the Company;

                     (ii)   The (A) reduction in Executive's Base Salary from
              the level in effect immediately prior to the Change in Control, or
              (B) payment of an annual bonus in an amount less than the lesser
              of (x) the most recent annual bonus paid prior to the Change in
              Control or (y) the greater of (I) the most recent target bonus, if
              any, established prior to the Change in Control or (II) the annual
              average bonus paid for the preceding three complete years prior to
              the Change in Control (or such lesser number of complete years as
              the Executive shall have been employed by the Company);

                     (iii)  The failure by the Company or the Guarantors to
              obtain the specific written assumption of this Agreement by any
              successor or assign of the Company or the Guarantors or any person
              acquiring substantially all of the Company's or the Guarantors'
              assets;

                     (iv)   Any breach by the Company or the Guarantors of any
              provision of this Agreement or any agreements entered into
              pursuant thereto that remains uncured for 20 calendar days
              following written notice of same by the Executive;

                     (v)    Notwithstanding the provisions of Section 3(b) of
              this Agreement, requiring the Executive to be based at any office
              or location that is greater than 35 miles from the office or
              location at which the Executive was principally located
              immediately prior to the Change in Control;



                                      -2-


                     (vi)   During the Post Change Period, (A) the failure to
              continue in effect any compensation or incentive plan in which
              Executive participates immediately prior to the time of the Change
              in Control unless an equitable arrangement (embodied in an ongoing
              substitute or alternative plan providing Executive with at least
              the same aggregate economic opportunity on an after-tax basis
              available to the Executive immediately prior to the Change in
              Control) has been made with respect to such plan in connection
              with the Change in Control, or the failure to continue Executive's
              participation therein on substantially the same basis both in
              terms of the amount of benefits provided and the level of his
              participation relative to other participants, as existed at the
              time of the Change in Control; or (B) the failure to continue to
              provide Executive with benefits and coverage at least as favorable
              in the aggregate as those enjoyed by him under the Company's
              pension, life insurance, medical, health and accident, disability,
              deferred compensation or savings plans in which he was
              participating at the time of the Change in Control; or

                     (vii)  The failure by the Company to pay within 7 calendar
              days of the due date any amounts due under any benefit or
              compensation plan, including any deferred compensation plan.

EX-10.2

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                                                                    EXHIBIT 10.2

                              EMPLOYMENT AGREEMENT
                          (dated as of January 1, 2005)


              AGREEMENT, made and entered into as of the date first above
written, by and between, XL Capital Ltd, a Cayman Islands corporation (the
"Company"), and Henry C.V. Keeling (the "Executive").

              WHEREAS, the Executive has been in the employ of the Company and
certain of its subsidiaries;

              WHEREAS, the Company and Executive desire to continue such
employment and to memorialize the terms and conditions of such employment by a
written agreement;

              NOW, THEREFORE, in consideration of the premises and mutual
covenants contained herein and for other good and valuable consideration, the
Company, the Guarantors (as hereinafter defined) and the Executive (the
"Parties") agree as follows:

              1.     EMPLOYMENT.

              Subject to Section 3(d) below, the Company hereby employs the
Executive, and the Executive hereby accepts employment with the Company, for the
term of this Agreement as set forth in Section 2, below, in the position and
with duties and responsibilities set forth in Section 3, below, and upon such
other terms and conditions as are hereinafter stated.

              2.     TERM OF EMPLOYMENT.

              Subject to Section 3(d) below, the stated term of employment under
this Agreement shall commence on the date first above written (the "Date of the
Agreement") and shall continue through the close of business on the first
anniversary of the Date of the Agreement, subject to earlier termination as
provided in Section 8, below, and extension as provided in the next succeeding
sentence. On the first anniversary of the Date of the Agreement and on each
anniversary thereafter, the stated term of employment shall be automatically
extended for an additional one year unless the Company gives notice in writing
to the Executive or the Executive gives notice in writing to the Company at
least six months prior to such anniversary that the term is not to be so
extended.

              3.     POSITIONS, DUTIES AND RESPONSIBILITIES.

              (a)    GENERAL. The Executive shall be employed as the Chief
Executive of the Reinsurance operations of the Company. In such position, the
Executive shall have the duties, responsibilities and authority normally
associated with the office, position and titles of such an officer of an
insurance, reinsurance and financial services company, or holding company, whose
shares are publicly traded in the United States. In carrying out his duties and


                                      -2-

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responsibilities, the Executive shall report to the Chief Executive Officer of
XL Capital Ltd. During the term of this Agreement, the Executive shall devote
his full business time to the business and affairs of the Company, and shall use
his best efforts, skills and abilities to promote the Company's interests.

              (b)    PERFORMANCE OF SERVICES. The Executive's services under
this Agreement, which are global in nature, shall be performed at the location
or locations reasonably requested by the Company; PROVIDED, HOWEVER, that such
services will be performed outside the United States and in accordance with the
guidelines established by the Company from time to time for the location of the
performance of services on behalf of the Company and its subsidiaries. The
Executive acknowledges that the Company may require the Executive to travel to
the extent such travel is reasonably necessary to perform the services hereunder
and that such travel may be extensive. To the extent reasonably requested by the
Company, the Executive shall allocate greater business time to a location other
than his principal business location, and if reasonably requested by the
Company, the Executive shall relocate to such other locations. Any such
relocation will not be considered to be a breach of this Agreement.

              4.     BASE SALARY.

              The Executive shall be paid a Base Salary by the Company equal to
(pound)310,000.00 payable in accordance with the Company's regular pay
practices. Such Base Salary shall be subject to annual review in accordance with
the Company's practices for executives as in effect from time to time and may be
increased at the discretion of the Compensation Committee of the Company Board
(the "Compensation Committee").

              5.     BONUSES.

              In addition to the Base Salary provided for in Section 4, above,
the Executive shall be eligible for an annual cash bonus under the Company's
Annual Incentive Compensation Plan as in effect from time to time, with a bonus
opportunity which is substantially similar to that of similarly situated
executives. The Executive may be awarded such annual bonuses thereunder as may
be approved by the Compensation Committee based on corporate, individual and
business unit performance measures, as appropriate, established or approved from
time to time, by the Compensation Committee. Any annual bonus shall be paid in
cash in a lump sum promptly following approval thereof or, at Executive's
option, deferred in accordance with any bonus deferral plans of the Company in
effect from time to time. Nothing in this Section 5 shall confer upon the
Executive any right to a minimum annual bonus.

              6.     EMPLOYEE BENEFIT PROGRAMS.

              During the term of the Executive's employment under this
Agreement, the Executive shall be entitled to participate in all employee
benefit programs of the Company as are



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                                      -3-


in effect from time to time and in which similarly situated senior executives of
the Company are eligible to participate.

              7.     BUSINESS EXPENSE REIMBURSEMENT AND FRINGE BENEFITS

              During the term of the Executive's employment under this
Agreement, the Executive shall be entitled to participate in the Company's
travel and entertainment expense reimbursement programs and its executive fringe
benefit plans and arrangements, all in accordance with the terms and conditions
of such programs, plans and arrangements as in effect from time to time as
applied to the Company's similarly situated executives.

              8. TERMINATION OF EMPLOYMENT.

              (a)    TERMINATION DUE TO DEATH. In the event the Executive dies
during the term of employment hereunder, the Executive's spouse, if the spouse
survives the Executive, (or, if the Executive's spouse does not survive him, the
estate or other legal representative of the Executive) shall be entitled to
receive the Base Salary as provided in Section 4, above, at the rate in effect
at the time of Executive's death, to be paid in accordance with the Company's
regular payroll practices or in a lump sum, at the Company's option, through the
end of the sixth month after the month in which the Executive dies. In addition
to the above, the estate or other legal representative of the Executive shall be
entitled to:

                     (i)    any annual bonus awarded in accordance with the
       Company's bonus program but not yet paid under Section 5, above, and
       reimbursement of business expenses incurred prior to death in accordance
       with Section 7(a) above,

                     (ii)   a pro rata bonus for the year of death in an amount
       determined by the Compensation Committee, but in no event less than a pro
       rata portion of the Executive's average annual bonus for the immediately
       preceding three years (or the period of the Executive's employment with
       the Company, if less),

                     (iii)  the rights under any options to purchase equity
       securities of the Company or other rights with respect to equity
       securities of the Company, including any restricted stock or other
       securities, held by the Executive determined in accordance with the terms
       thereof,

                     (iv)   for a period of six months following the Executive's
       death, continued medical benefit plan coverage (including dental and
       vision benefits if provided under the applicable plans) for the
       Executive's dependents, if any, under the Company's medical benefit plans
       upon substantially the same terms and conditions (including cost of
       coverage to the dependents) as is then in existence for other executives
       during the coverage period; PROVIDED, THAT, if the Executive's dependents
       cannot continue to participate in the Company plans providing such
       benefits, the Company shall oth-




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                                      -4-


       erwise provide such benefits on substantially the same after-tax basis as
       if continued participation had been permitted, and

                     (v)    the vested accrued benefits, if any, under the
       employee benefit programs of the Company, as provided in Section 6,
       above, determined in accordance with the applicable terms and provisions
       of such programs.

              (b)    TERMINATION DUE TO DISABILITY. In the event the Executive's
employment hereunder is terminated due to his disability, as determined under
the Company's long-term disability plan, the Executive shall be entitled to:

                     (i)    the Base Salary as provided in Section 4, above,
       through the end of the sixth month after the month in which the
       Executive's employment terminates due to disability,

                     (ii)   any annual bonus awarded in accordance with the
       Company's bonus program but not yet paid under Section 5, and
       reimbursement of business expenses incurred prior to termination of
       employment in accordance with Section 7(a) above,

                     (iii)  a pro rata bonus for the year of termination in an
       amount determined by the Compensation Committee, but in no event less
       than a pro rata portion of the Executive's average annual bonus for the
       immediately preceding three years (or the period of the Executive's
       employment with the Company, if less),

                     (iv)   the rights under any options to purchase equity
       securities of the Company or other rights with respect to equity
       securities of the Company, including any restricted stock or other
       securities, held by the Executive, determined in accordance with the
       terms thereof,

                     (v)    for a period of six months following the termination
       of the Executive's employment, continued medical benefit plan coverage
       (including dental and vision benefits if provided under the applicable
       plans) for the Executive (and the Executive's dependents, if any) under
       the Company's medical benefit plans upon substantially the same terms and
       conditions (including cost of coverage to the Executive) as is then in
       existence for other executives during the coverage period; PROVIDED,
       THAT, if the Executive cannot continue to participate in the Company
       plans providing such benefits, the Company shall otherwise provide such
       benefits on substantially the same after-tax basis as if continued
       participation had been permitted; PROVIDED FURTHER, HOWEVER, that, in the
       event the Executive becomes reemployed with another employer and becomes
       eligible to receive medical benefits from such employer, the medical
       benefits described herein shall immediately cease, and



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                                      -5-


                     (vi)   the vested accrued benefits, if any, under the
       employee benefit programs of the Company, as provided in Section 6 above,
       determined in accordance with the applicable terms and provisions of such
       programs.

              (c)    TERMINATION FOR CAUSE.

                     (i)    The employment of the Executive under this Agreement
       may be terminated by the Company for Cause, such termination to be
       effective upon the Company giving the Executive written notice of
       termination in accordance with the provisions of this Agreement. For this
       purpose, "Cause" shall mean:

                            (A)    conviction of the Executive of a felony
                     involving moral turpitude, dishonesty or laws to which the
                     Company or its Affiliates are subject in connection with
                     the conduct of its or their business;

                            (B)    the Executive, in carrying out his duties for
                     the Company under this Agreement, has been guilty of (1)
                     willful misconduct or (2) substantial and continual refusal
                     by the Executive to perform the duties assigned to the
                     Executive pursuant to the terms hereof; provided, HOWEVER,
                     that any act or failure to act by the Executive shall not
                     constitute Cause for purposes of this Section 8(c)(i)(B) if
                     such act or failure to act was committed, or omitted, by
                     the Executive in good faith and in a manner he reasonably
                     believed to be in the overall best interests of the
                     Company, as the case may be. The determination of whether
                     the Executive acted in good faith and that he reasonably
                     believed his action to be in the Company's overall best
                     interest, as the case may be, will be in the reasonable
                     judgment of the General Counsel of the Company or, if the
                     General Counsel shall have an actual or potential conflict
                     of interest, the Compensation Committee; or

                            (C)    the Executive's continued willful refusal to
                     obey any lawful policy or requirement duly adopted by the
                     Company Board and the continuance of such refusal after
                     receipt of written notice.

                     (ii)   In the event of a termination for Cause under
       Section 8(c)(i), above, the Executive shall be entitled only to:

                            (A)    Base Salary as provided in Section 4, above,
                     at the rate in effect at the time of his termination of
                     employment for Cause, through the date on which termination
                     for Cause occurs,

                            (B)    the rights under any options to purchase
                     equity securities of the Company or other rights with
                     respect to equity securities of the



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                                      -6-


                     Company, including any restricted stock or other
                     securities, held by the Executive, determined in accordance
                     with the terms thereof, and

                            (C)    the vested accrued benefits, if any, under
                     employee benefit programs of the Company, as provided in
                     Section 6, above, and reimbursement of properly incurred
                     unreimbursed business expenses under the business expense
                     reimbursement program as described in Section 7, above,
                     determined in accordance with the applicable terms and
                     provisions of such employee benefit and expense
                     reimbursement programs; PROVIDED that the Executive shall
                     not be entitled to any such benefits unless the terms and
                     provisions of such programs expressly state that the
                     Executive shall be entitled thereto in the event his
                     employment is terminated for Cause (as defined in this
                     Agreement or otherwise).

              (d)    TERMINATION WITHOUT CAUSE.

                     (i)    Anything in this Agreement to the contrary
       notwithstanding, the Executive's employment may be terminated by the
       Company without Cause as provided in this Section 8(d). A termination due
       to death or disability, as described in Section 8(a) or (b), above, or a
       termination for Cause, as described in Section 8(c), above, shall not be
       deemed a termination without Cause under this Section 8(d).

                     (ii)   In the event the Executive's employment is
       terminated by the Company without Cause (x) prior to a Change in Control
       (other than as provided in the last paragraph of Section 8(d)(iii), in
       which case the provisions of Section 8(d)(iii) shall apply in lieu of
       this Section 8(d)(ii)) or (y) following the Post-Change Period (as
       hereinafter defined), the Executive shall be entitled to:

                            (A)    Base Salary as provided in Section 4, above,
                     at the rate in effect at the time of his termination of
                     employment without Cause, through the date on which
                     termination without Cause occurs,

                            (B)    provided the Executive executes and does not
                     revoke a general release of claims against the Company and
                     its affiliates in form and substance satisfactory to the
                     Company, a cash lump sum payment equal to (x) two times the
                     Executive's annual Base Salary, at the annual rate in
                     effect in accordance with Section 4, above, immediately
                     prior to such termination and (y) one times the higher of
                     the targeted annual bonus for the year of such termination,
                     if any, or the average of the Executive's annual bonus for
                     the three years immediately preceding the year of
                     termination (or such shorter period during which the
                     Executive has been employed by the Company),



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                                      -7-


                            (C)    any annual bonus awarded in accordance with
                     the Company's bonus program but not yet paid under Section
                     5, above, and reimbursement of business expenses incurred
                     prior to termination of employment in accordance with
                     Section 7(a) above,

                            (D)    the rights under any options to purchase
                     equity securities of the Company or other rights with
                     respect to equity securities of the Company, including any
                     restricted stock or other securities, held by the
                     Executive, determined in accordance with the terms thereof,

                            (E)    for a period of twenty-four months following
                     the termination of the Executive's employment, continued
                     medical benefit plan coverage (including dental and vision
                     benefits if provided under the applicable plans) for the
                     Executive (and the Executive's dependents, if any) under
                     the Company's medical benefit plans upon substantially the
                     same terms and conditions (including cost of coverage to
                     the Executive) as is then in existence for other executives
                     during the coverage period; PROVIDED, THAT, if the
                     Executive cannot continue to participate in the Company
                     plans providing such benefits, the Company shall otherwise
                     provide such benefits on substantially the same after-tax
                     basis as if continued participation had been permitted;
                     PROVIDED, HOWEVER, that, in the event the Executive becomes
                     reemployed with another employer and becomes eligible to
                     receive medical benefits from such employer, the medical
                     benefits described herein shall immediately cease, and

                            (F)    the vested accrued benefits, if any, under
                     the employee benefit programs of the Company, as provided
                     in Section 6 above, determined in accordance with the
                     applicable terms and provisions of such programs.

                     (iii)  In the event the Executive's employment is
       terminated by (x) the Company without Cause within the twenty-four month
       period following a Change in Control (as defined in Exhibit A hereto)
       (the "Post-Change Period") or (y) the Executive terminates his employment
       for "Good Reason" (as defined in Exhibit B hereto) during the Post-Change
       Period, the Executive shall be entitled to:

                            (A)    Base Salary as provided in Section 4, above,
                     at the rate in effect at the time of his termination of
                     employment, through the date on which termination occurs,

                            (B)    a cash lump sum payment equal to two times
                     the Executive's annual Base Salary, at the rate in effect
                     in accordance with Sec-



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                                      -8-


                     tion 4, above, immediately prior to such termination or
                     Change in Control, whichever is greater,

                            (C)    a cash lump sum payment equal to two times
                     the average annual bonus awarded to the Executive by the
                     Company in the three years prior to the year in which the
                     Change in Control occurs (or shorter period during which
                     the Executive had been employed by the Company); PROVIDED
                     such bonuses shall be at least equal to the targeted annual
                     bonus, if any, for the year of such termination,

                            (D)    an amount equal to (i) the higher of (x) the
                     bonus actually awarded to the Executive by the Company for
                     the year immediately preceding the year in which the Change
                     in Control occurs or (y) the targeted amount of bonus, if
                     any, that would have been awarded to the Executive in
                     respect of the year in which the termination of employment
                     occurs, multiplied by (ii) a fraction, the numerator of
                     which is the number of months or fraction thereof in which
                     the Executive was employed by the Company in the year of
                     termination of employment, and the denominator of which is
                     12,

                            (E)    options to purchase equity securities of the
                     Company or other rights with respect to equity securities
                     of the Company held by the Executive shall immediately vest
                     in full and shall continue to be exercisable for three
                     years from the date of termination of employment,
                     notwithstanding the Executive's termination of employment,
                     or the original full term of the option or other right, if
                     shorter,

                            (F)    for a period of twenty-four months following
                     the termination of the Executive's employment, continued
                     medical benefit plan coverage (including dental and vision
                     benefits if provided under the applicable plans) for the
                     Executive (and the Executive's dependents, if any) under
                     the Company's medical benefit plans upon substantially the
                     same terms and conditions (including cost of coverage to
                     the Executive) as is then in existence for other executives
                     during the coverage period; PROVIDED, THAT, if the
                     Executive cannot continue to participate in the Company
                     plans providing such benefits, the Company shall otherwise
                     provide such benefits on substantially the same after-tax
                     basis as if continued participation had been permitted;
                     PROVIDED, HOWEVER, that, in the event the Executive becomes
                     reemployed with another employer and becomes eligible to
                     receive medical benefits from such employer, the medical
                     benefits described herein shall immediately cease, and



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                                      -9-


                            (G)    full and immediate vesting under the
                     Company's retirement plans as of the date of termination,
                     to the extent permitted by applicable law; PROVIDED,
                     HOWEVER, that if such full and immediate vesting cannot be
                     provided under a retirement plan under applicable law, then
                     economically equivalent benefits, determined on an after
                     tax basis to the Executive, shall be provided through
                     arrangements outside the applicable retirement plan.

              Anything in this Agreement to the contrary notwithstanding, the
Executive shall be entitled to the benefits described in (A)-(G) above, if the
Executive's employment with the Company is terminated (other than for Cause)
within one year prior to the date on which a Change in Control occurs, and it is
reasonably demonstrated that such termination (i) was at the request of a third
party who has taken steps reasonably calculated or intended to effect the Change
in Control or (ii) otherwise arose in connection with or anticipation of the
Change in Control; PROVIDED, HOWEVER, that in such event, amounts will be
payable hereunder only following the Change in Control.

                     (iv)   If, in situations where Section 8(d)(iii) does not
       apply, at any time during the term of the Executive's employment
       hereunder, duties are assigned to the Executive that are materially
       inconsistent with his position, or the Company does not cure any material
       breach by it of any provision of Sections 4 through 7 of this Agreement
       within 30 calendar days following written notice of same by the
       Executive, the Executive shall have the right to terminate his employment
       within 30 calendar days of such assignment or of such failure to cure a
       breach, as the case may be, and such termination shall be deemed a
       termination by the Company without Cause under Section 8(d)(ii), above,
       PROVIDED, in the case of assignment of inconsistent duties, the Executive
       shall have given the Company written notice of his decision and shall
       not, within 30 calendar days thereafter, have had the assignment of
       inconsistent duties rescinded.

              (e)    VOLUNTARY TERMINATION BY THE EXECUTIVE. The Executive may
voluntarily terminate his employment prior to the expiration of the term of this
Agreement upon at least three months' prior written notice to the Company. Such
termination shall constitute a voluntary termination and, except as provided in
Section 8(d)(iii) or Section 8(d)(iv), above, in such event the Executive shall
be limited to the same rights and benefits as applicable to a termination by the
Company for Cause as provided in Section 8(c), above. A voluntary termination in
accordance with this Section 8(e) shall not be deemed a breach of this
Agreement. A termination of the Executive's employment due to disability or
death as described in Section 8(b) or 8(a), above, a termination by the
Executive which the Executive is entitled to treat as a termination by the
Company pursuant to Section 8(d), above, or a termination by the Executive under
Section 8(d)(iv), above, shall not be deemed a voluntary termination within the
meaning of this Section 8(e).



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              9.     EXCISE TAX PAYMENTS.

              (a)    Anything in this Agreement to the contrary notwithstanding,
in the event it shall be determined that (i) any payment or distribution made,
or benefit provided (including, without limitation, the acceleration of any
payment, distribution or benefit or accelerated vesting or exercisability of any
award) by the Company to or for the benefit of the Executive (whether paid or
payable or distributed or distributable pursuant to the terms of this Agreement
or otherwise, but determined without regard to any additional payments required
under this Section 9) (a "Payment") would be subject to the excise tax imposed
by Section 4999 of the United States Internal Revenue Code of 1986, as amended
(the "Code") (or any successor provision or similar excise tax), or any interest
or penalties are incurred by the Executive with respect to such excise tax (such
excise tax, together with any such interest and penalties, are hereinafter
collectively referred to as the "Excise Tax"), (ii) the aggregate amount of the
Executive's Parachute Payments (as defined in Section 280G(b)(2)(A) of the Code)
is less than 3.25 times the Executive's Base Amount (as defined in Section
280G(b)(3)(A) of the Code), and (iii) no such Payment would be subject to the
Excise Tax if the payments set forth in Section 8(d)(iii)(B) and (C) hereof were
each reduced by up to 20 percent, then the payments set forth in Section
8(d)(iii)(B) and (C) will each be reduced to the smallest extent possible (and
in no event by more than 20 percent in the aggregate) such that no Payment is
subject to the Excise Tax.

              (b)    Anything in this Agreement to the contrary notwithstanding,
in the event it shall be determined that (i) the aggregate amount of the
Executive's Parachute Payments equals or exceeds 3.25 times the Executive's Base
Amount, (ii) the aggregate amount of the Executive's Parachute Payments is less
than 3.25 times the Base Amount but one or more Payments would be subject to the
Excise Tax even if the payments set forth in Section 8(d)(iii)(B) and (C) hereof
were each reduced by 20 percent, or (iii) notwithstanding a reduction in
payments pursuant to Section 9(a) above, an Excise Tax is payable by the
Executive on one or more Payments, then, in any such case, Payments shall not be
reduced and the Executive shall be entitled to receive an additional payment (a
"Gross-Up Payment") in an amount such that after payment by the Executive of all
taxes (including any income or Excise Tax) imposed upon the Gross-Up Payment and
any interest or penalties imposed with respect to such taxes, the Executive
retains from the Gross-Up Payment an amount equal to the Excise Tax imposed upon
the Payments.

              (c)    Subject to the provisions of Section 9(d), all
determinations required to be made under this Section 9, including determination
of whether a Gross-Up Payment is required and of the amount of any such Gross-Up
Payment, shall be made by a nationally recognized public accounting firm
selected by the Company (the "Accounting Firm") which shall provide detailed
supporting calculations both to the Company and the Executive within 15 business
days of the date of termination of the Executive's employment, if applicable, or
such earlier time as is reasonably requested. The initial Gross-Up Payment, if
any, as



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                                      -11-


determined pursuant to this Section 9(c), shall be paid to the Executive within
five business days of the receipt of the Accounting Firm's determination. If the
Accounting Firm determines that no Excise Tax is payable by the Executive, it
shall furnish the Executive with a written opinion that he has substantial
authority not to report any Excise Tax on his Federal income tax return. Any
determination by the Accounting Firm meeting the requirements of this Section
9(c) shall be binding upon the Company and the Executive, subject only to
payments pursuant to the following sentence based on a determination that
additional Gross-Up Payments should have been made, consistent with the
calculations required to be made hereunder (the amount of such additional
payments are referred to herein as the "Gross-Up Underpayment"). In the event
that the Company exhausts its remedies pursuant to Section 9(d) and the
Executive thereafter is required to make a payment of any Excise Tax, the
Accounting Firm shall determine the amount of the Gross-Up Underpayment that has
occurred and any such Gross-Up Underpayment shall be promptly paid by the
Company to or for the benefit of the Executive. The fees and disbursements of
the Accounting Firm shall be paid by the Company.

              (d)    The Executive shall notify the Company in writing of any
claim by the United States Internal Revenue Service that, if successful, would
require the payment by the Executive of any Excise Tax and, therefore, the
payment by the Company of a Gross-Up Payment. Such notification shall be given
as soon as practicable but not later than 30 business days after the Executive
receives written notice of such claim and shall apprise the Company of the
nature of such claim and the date on which such claim is requested to be paid.
The Executive shall not pay such claim prior to the expiration of the 30-day
period following the date on which he gives such notice to the Company (or such
shorter period ending on the date that any payment of taxes with respect to such
claim is due). If the Company notifies the Executive in writing prior to the
expiration of such period that it desires, in good faith, to contest such claim
(which notice shall set forth the bases for such contest) and that it will bear
the costs and provide the indemnification as required by this sentence, the
Executive shall, in good faith:

                     (i)    give the Company any information reasonably
       requested by the Company relating to such claim,

                     (ii)   take such action in connection with contesting such
       claim as the Company shall, in good faith, reasonably request in writing
       from time to time, including, without limitation, accepting legal
       representation with respect to such claim by an attorney selected by the
       Company and reasonably acceptable to the Executive,

                     (iii)  cooperate with the Company in good faith in order
       effectively to contest such claim, and

                     (iv)   permit the Company to participate, in good faith, in
       any proceedings relating to such claim;



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                                      -12-


PROVIDED, HOWEVER, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis to the Executive, for any Excise Tax or income tax, including
interest and penalties with respect thereto, imposed as a result of such
representation and payment of all costs and expenses.

              Without limitation on the foregoing provisions of this Section
9(d), the Company shall, exercising good faith, control all proceedings taken in
connection with such contest and, at its sole option (but in good faith), may
pursue or forego any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option (but in good faith), either direct the Executive to pay the tax
claimed and sue for a refund or contest the claim in any permissible manner, and
the Executive agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as the Company shall determine; PROVIDED, HOWEVER, that if the
Company directs the Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to the Executive, on an
interest-free basis and shall indemnify and hold the Executive harmless, on an
after-tax basis to the Executive, from any Excise Tax or income tax, including
interest or penalties with respect thereto, imposed with respect to such advance
or with respect to any imputed income with respect to such advance; AND FURTHER
PROVIDED that any extension of the statute of limitations relating to the
payment of taxes for the taxable year of the Executive with respect to which
such contested amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Company's control of the contest shall be limited to
issues with respect to which a Gross-Up Payment would be payable hereunder and
the Executive shall be entitled to settle or contest, as the case may be, any
other issue raised by the Internal Revenue Service or any other taxing
authority. If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 9(d), the Executive becomes entitled to receive any
refund with respect to such claim, the Executive shall (subject to the Company's
complying with the requirements of Section 9(d)) promptly pay to the Company, as
the case may be, the amount of such refund (together with any interest paid or
credited thereon after taxes applicable thereto). If, after the receipt by the
Executive of an amount advanced by the Company pursuant to Section 9(d), a
determination is made that the Executive shall not be entitled to any refund
with respect to such claim and the Company does not notify the Executive in
writing of its intent to contest such denial of refund prior to the expiration
of 30 days after such determination, then any obligation of the Executive to
repay such advance shall be forgiven and the amount of such advance shall
offset, to the extent thereof, the amount of Gross-Up Payment required to be
paid.

              Notwithstanding any provision herein to the contrary, the
Executive's failure to strictly comply with the notice provisions set forth in
this Section 9, so long as such failure does not prevent the Company from
contesting an excise tax claim, shall not adversely affect the Executive's
rights under this Section 9.



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                                      -13-


              10.    NO MITIGATION; NO OFFSET.

              In the event of any termination of employment under Section 8,
above, the Executive shall be under no obligation to mitigate damages or seek
other employment, and, except as expressly set forth herein, there shall be no
offset against amounts due the Executive under this Agreement on account of any
remuneration attributable to any subsequent employment that he may obtain.

              11.    NONCOMPETITION AND NONSOLICITATION.

              The Executive represents and warrants that, to the best of his
knowledge, he is not using the confidential or proprietary information of any
other person in violation of any agreement or rights of others known to him. The
Executive agrees that the products of the Company and its Affiliates shall
constitute the exclusive property of the Company and its Affiliates.

              For the avoidance of doubt, all trademarks, policy language or
forms, products or services (including products and services under development),
trade names, trade secrets, service marks, designs, computer programs and
software, utility models, copyrights, know-how and confidential information,
applications for registration of any of the foregoing and the right to apply for
them in any part of the world (whether any of the foregoing shall be registered
or unregistered) created or discovered or participated in by the Executive
during the course of his employment (whether or not pursuant to the terms of
this Agreement) or under the instructions of the Company or its Affiliates are
and shall be the absolute property of the Company and its Affiliates, as
appropriate. Without limiting the foregoing, the Executive hereby assigns to the
Company any and all of the Executive's right, title and interest, if any,
pertaining to the insurance and reinsurance (including, without limitation,
finite insurance and reinsurance), risk assumption, risk management, brokerage,
financial and other products or services developed or improved upon by the
Executive (including, without limitation, any related "know-how") while employed
by the Company or its Affiliates, including any patent, trademark, trade name,
copyright, ownership or other right that may pertain thereto.

              Since Executive has obtained and is likely to obtain in the course
of Executive's employment with the Company and its Affiliates knowledge of trade
names, trade secrets, know-how, products and services (including products and
services under development), techniques, methods, lists, computer programs and
software and other confidential information relating to the Company and its
Affiliates, and their employees, clients, business or business opportunities,
Executive hereby undertakes that:

                     (i)    Executive will not (either alone or jointly with or
       on behalf of others and whether directly or indirectly) encourage,
       entice, solicit or endeavor to encourage, entice or solicit away from
       employment with the Company or its Affiliates, or hire or cause to be
       hired, any officer or employee of the Company or its Affiliates



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                                      -14-


       (or any individual who was within the prior twelve months an officer or
       employee of the Company or its Affiliates), or encourage, entice, solicit
       or endeavor to encourage, entice or solicit any individual to violate the
       terms of any employment agreement or arrangement between such individual
       and the Company or any of its Affiliates;

                     (ii)   Executive will not (either alone or jointly with or
       on behalf of others and whether directly or indirectly) interfere with or
       disrupt or seek to interfere with or disrupt (A) the relationships
       between the Company and its Affiliates, on the one hand, and any customer
       or client of the Company and its Affiliates, on the other hand,
       (including any insured or reinsured party) who during the period of
       twenty-four months immediately preceding such termination shall have been
       such a customer or client, or (B) the supply to the Company and its
       Affiliates of any services by any supplier or agent or broker who during
       the period of twenty-four months immediately preceding such termination
       shall have supplied services to any such person, nor will Executive
       interfere or seek to interfere with the terms on which such supply or
       agency or brokering services during such period as aforesaid have been
       made or provided; and

                     (iii)  Executive will not (either alone or jointly with or
       on behalf of others and whether directly or indirectly) whether as an
       employee, consultant, partner, principal, agent, distributor,
       representative or stockholder (except solely as a less than one percent
       stockholder of a publicly traded company), engage in any activities in
       Bermuda, the United Kingdom or the United States if such activities are
       competitive with the businesses that (i) are then being conducted by the
       Company or its Affiliates and (ii) during the period of the Executive's
       employment were either being conducted by the Company or its Affiliates
       or actively being developed by the Company or its Affiliates.

              The provisions of the immediately preceding sentence shall
continue as long as the Executive is employed by the Company or its Affiliates
and such provisions shall continue in effect after such employment is terminated
for any reason until the first anniversary of such termination, provided that if
such employment is terminated by the Company under Section 8(d)(iii) or by the
Executive under Section 8(d)(iii), the provisions of clauses (ii) and (iii)
shall automatically terminate upon such termination of employment, unless the
Company elects, in writing, upon such termination to continue the provisions of
clauses (ii) and (iii) in effect through the six-month anniversary of such
termination of employment in which case the Company shall be obligated to
continue (through such six-month anniversary of termination) to pay the
Executive, in addition to any of the Executive's rights under Section 8(d)(iii),
his Base Salary and the pro rata portion of the Executive's average annual bonus
for the three years (or shorter period of employment by the Company) immediately
preceding the year of termination, and such pro rated average annual bonus shall
be payable at the times annual bonuses for such year are payable to other
executives.



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                                      -15-


              For purposes of this Agreement, an "Affiliate" of the Company
includes any person, directly or indirectly, through one or more intermediaries,
controlling, controlled by, or under common control with the Company, and such
term shall specifically include, without limitation, the Company's
majority-owned subsidiaries.

              The limitations on the Executive set forth in this Section shall
also apply to any agent or other representative acting on behalf of Executive.

              While the restrictions aforesaid are considered by both parties to
be reasonable in all the circumstances it is recognized that restrictions of the
nature in question may fail for reasons unforeseen and accordingly it is hereby
declared and agreed that if any of such restrictions or the geographic or other
scope thereof shall be adjudged to be void as going beyond what is reasonable in
the circumstances for the protection of the interests of the Company and its
Affiliates but would be valid if part of the wording thereof were deleted and/or
the periods (if any) thereof reduced and/or geographic or other area dealt with
thereby reduced in scope then said restrictions shall apply with such
modifications as may be necessary to make them valid and effective.

              Nothing contained in this Section 11 shall limit in any manner any
additional obligations to which Executive may be bound pursuant to any other
agreement or any applicable law, rule or regulation and Section 11 shall apply,
subject to its terms, after employment has terminated for any reason.

              12.    CONFIDENTIAL INFORMATION.

              The Executive covenants that he shall not, without the prior
written consent of the Company, use for the Executive's own benefit or the
benefit of any other person or entity other than the Company and its Affiliates
or disclose to any person, other than an employee of the Company or other person
to whom disclosure is necessary to the performance by the Executive of his
duties in the employ of the Company, any confidential, proprietary, secret, or
privileged information about the Company or its Affiliates or their business or
operations, including, but not limited to, information concerning trade secrets,
know-how, software, data processing systems, policy language and forms,
inventions, designs, processes, formulae, notations, improvements, financial
information, business plans, prospects, referral sources, lists of suppliers and
customers, legal advice and other information with respect to the affairs,
business, clients, customers, agents or other business relationships of the
Company or its Affiliates. Executive shall hold in a fiduciary capacity for the
benefit of the Company all secret, confidential proprietary or privileged
information or data relating to the Company or any of its Affiliates or
predecessor companies, and their respective businesses, which shall have been
obtained by Executive during his employment, unless and until such information
has become known to the public generally (other than as a result of unauthorized
disclosure by the Executive) or unless he is required to disclose such
information by a court or by a governmental body with apparent authority to
require such disclosure. The foregoing covenant by the Ex-



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                                      -16-


ecutive shall be without limitation as to time and geographic application and
this Section 12 shall apply in accordance with its terms after employment has
terminated for any reason. The Executive acknowledges and agrees that he shall
have no authority to waive any attorney-client or other privilege without the
express prior written consent of the Compensation Committee as evidenced by the
signature of the Company's General Counsel.

              13.    WITHHOLDING.

              Anything in this Agreement to the contrary notwithstanding, all
payments required to be made by the Company hereunder to the Executive shall be
subject to withholding of such amounts relating to taxes as the Company may
reasonably determine should be withheld pursuant to any applicable law or
regulation. In lieu of withholding such amounts, in whole or in part, the
Company may, in its sole discretion, accept other provision for payment of taxes
as required by law, provided it is satisfied that all requirements of law
affecting its responsibilities to withhold such taxes have been satisfied.

              14.    GUARANTY AND AFFILIATE SERVICES.

              (a)    LIABILITY. Each of XL Insurance Ltd and XL Re Ltd
(together, the "Guarantors") hereby agrees to be jointly and severally liable
together with the Company, for the performance of all obligations and duties,
and the payment of all amounts, due to the Executive under this Agreement.

              (b)    RESPONSIBILITY. All of the other terms and provisions of
this Agreement relating to the Executive's employment by the Company shall
likewise apply mutatis mutandis to the Executive's employment by any of its
Affiliates, it being understood that if the Executive's employment with the
Company is terminated, his employment with its Affiliates shall also be
terminated and the Executive shall be required to resign immediately from all
directorships and other positions held by the Executive in the Company and its
Affiliates or in any other entities in respect of which the Executive was acting
as a representative or designee of the Company or its Affiliates in connection
with his employment.



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                                      -17-


              15.    ENTIRE AGREEMENT.

              This Agreement, together with the Exhibits, contains the entire
agreement between the Parties concerning the subject matter hereof and
supersedes all prior agreements, understandings, discussions, negotiations and
undertakings, whether written or oral, between the Company and the Executive
with respect thereto.

              16.    ASSIGNABILITY; BINDING NATURE.

              This Agreement shall be binding upon and inure to the benefit of
the Parties and their respective successors, heirs and assigns. No rights or
obligations of the Executive under this Agreement may be assigned or transferred
by the Executive other than his right to compensation and benefits hereunder,
which may be transferred by will or operation of law subject to the limitations
of this Agreement. No rights or obligations of the Company under this Agreement
may be assigned or transferred by the Company except that such rights or
obligations may be assigned or transferred pursuant to a merger or consolidation
or amalgamation or scheme of arrangement in which the Company is not the
continuing entity, or the sale or liquidation of all or substantially all of the
assets of the Company, provided that the assignee or transferee is the successor
to all or substantially all of the assets of the Company and such assignee or
transferee assumes by operation of law or in writing duly executed by the
assignee or transferee all of the liabilities, obligations and duties of the
Company, as contained in this Agreement, either contractually or as a matter of
law.

              17.    INDEMNIFICATION.

              The Executive shall be provided indemnification by the Company to
the maximum extent permitted by applicable law and its charter documents. In
addition, he shall be covered by a directors' and officers' liability policy
with coverage for all directors and officers of the Company in an amount equal
to at least US$75,000,000. Such directors' and officers' liability insurance
shall be maintained in effect for a period of six years following termination of
the Executive's employment for any reason other than pursuant to Section 8(c) or
Section 8(e) hereof.

              18.    SETTLEMENT OF DISPUTES.

              (a)    Any dispute between the Parties arising from or relating to
the terms of this Agreement or the Executive's employment with the Company or
its Affiliates shall, except as provided in Section 18(b) or Section 18(c), be
resolved by binding arbitration held in New York City in accordance with the
rules of the American Arbitration Association.

              (b)    Executive acknowledges that the Company and its Affiliates
will suffer irreparable injury, not readily susceptible of valuation in monetary
damages, if Executive breaches his obligations under Section 11 or 12.
Accordingly, Executive agrees that the



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                                      -18-


Company and its Affiliates will be entitled, in addition to any other available
remedies, to obtain injunctive relief against any breach or prospective breach
by Executive of his obligations under Section 11 or 12 in any Federal or state
court sitting in the City and State of New York or court sitting in Bermuda or
the United Kingdom, or, at the Company's or any Affiliate's election, in any
other jurisdiction in which Executive maintains his residence or his principal
place of business. Executive hereby submits to the non-exclusive jurisdiction of
all those courts for the purposes of any actions or proceedings instituted by
the Company or its Affiliates to obtain such injunctive relief, and Executive
agrees that process in any or all of those actions or proceedings may be served
by registered mail or delivery, addressed to the last address of Executive known
to the Company or its Affiliates, or in any other manner authorized by law.
Executive further agrees that, in addition to any other remedies available to
the Company or its Affiliates by operation of law or otherwise, because of any
breach by Executive of his obligations under Section 11 or 12 he will forfeit
any and all bonus and rights to any payments to which he might otherwise then be
entitled by virtue hereof and such payments may be suspended so long as any good
faith dispute with respect thereto is continuing; PROVIDED, HOWEVER, that
payments, benefits and other rights and privileges of the Executive under this
Agreement following termination of the Executive's employment during a Post
Change Period shall not be forfeited, suspended, offset, diminished or otherwise
altered in any way on account of any breach or prospective breach of Section 11,
Section 12 or any other provision of this Agreement alleged by the Company.

              (c)    Notwithstanding any other provision of this Agreement, the
Executive may elect to resolve any dispute involving a breach or alleged breach
of this Agreement following termination of the Executive's employment during a
Post-Change Period in any Federal or State court sitting in the City and State
of New York or court sitting in Bermuda or the United Kingdom. The Company and
the Guarantors hereby submit to the non-exclusive jurisdiction of all those
courts for the purposes of any such actions or proceedings instituted by the
Executive, and the Company and the Guarantors agree that process in any or all
of such actions or proceedings may be served by registered mail or delivery,
addressed to the Company as set forth in Section 20, or in any other manner
authorized by law. The Company and the Guarantors shall pay all costs associated
with any court proceeding under this Section 18(c) without regard to the outcome
of such proceeding, including all legal fees and expenses of the Executive, who
shall be reimbursed for all such costs promptly upon written demand therefor by
the Executive.

              (d)    Each Party shall bear its own costs incurred in connection
with any proceeding under Sections 18(a) or 18(b) hereof, including all legal
fees and expenses; PROVIDED, HOWEVER, that the Company shall bear all such costs
of the Executive (to the extent such costs are reasonable) if the Executive
substantially prevails in the proceeding. The Executive shall be reimbursed by
the Company for all such reasonable costs promptly upon written demand therefor
by the Executive which is made within a reasonable time following the proceeding
and is supported by documentation of such costs.



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                                      -19-


              19.    AMENDMENT OR WAIVER.

              No provision in this Agreement may be amended unless such
amendment is agreed to in writing, signed by the Executive and by a duly
authorized officer of the Company and the Guarantors. No waiver by any Party of
any breach by the other Party of any condition or provision of this Agreement to
be performed by such other Party shall be deemed a waiver of a similar or
dissimilar condition or provision at the same or any prior or subsequent time.
Any waiver must be in writing and signed by the Executive or a duly authorized
officer of the Company and the Guarantors, as the case may be.

              20.    NOTICES.

              Any notice required or permitted to be given under this Agreement
shall be in writing and shall be deemed to have been given when delivered
personally or sent by courier, or by certified or registered mail, postage
prepaid, return receipt requested, duly addressed to the Party concerned at the
address indicated below or to such changed address as such Party may
subsequently by similar process give notice of:

              If to the Company:

                     XL Capital Ltd
                     XL House
                     One Bermudiana Road
                     Hamilton HM JX
                     Bermuda

                     Att'n: General Counsel

              If to the Executive:

                     Henry Keeling
                     5C Oliver's Wharf
                     64 Wapping High Street
                     London, E1W 2PJ
                     England



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                                      -20-


              21.    SEVERABILITY.

              In the event that any provision or portion of this Agreement shall
be determined to be invalid or unenforceable for any reason, in whole or in
part, the remaining provisions of this Agreement shall be unaffected thereby and
shall remain in full force and effect to the fullest extent permitted by law.

              22.    SURVIVORSHIP.

              The respective rights and obligations of the Parties shall survive
any termination of this Agreement to the extent necessary to the intended
preservation of such rights and obligations.

              23.    REFERENCE.

              In the event of the Executive's death or a judicial determination
of his incompetence, reference in this Agreement to the Executive shall be
deemed, where appropriate, to refer to his estate or other legal representative.

              24.    GOVERNING LAW.

              This Agreement shall be governed by and construed and interpreted
in accordance with the laws of the State of New York without reference to the
principles of conflict of laws.

              25.    HEADINGS.

              The heading of the sections contained in this Agreement are for
convenience only and shall not be deemed to control or affect the meaning or
construction of any provision of this Agreement.

              26.    COUNTERPARTS.

              This Agreement may be executed in one or more counterparts.



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                                      -21-


              IN WITNESS WHEREOF, the undersigned have executed this Agreement
as of the date first written above.

                                      XL CAPITAL LTD


                                      By: /S/ KIRSTIN R. GOULD
                                         ------------------------------------




                                      HENRY C. V. KEELING


                                      By: /S/ HENRY C. V. KEELING
                                         ------------------------------------




                                      GUARANTORS:

                                      XL INSURANCE (BERMUDA) LTD


                                      By: /S/ KIRSTIN R. GOULD
                                         ------------------------------------




                                      XL RE LTD


                                      By: /S/ KIRSTIN R. GOULD
                                          -----------------------------------




                                                                       EXHIBIT A


                                CHANGE IN CONTROL


       A "Change in Control" shall be deemed to have occurred:

              (i)    if any person (which, for all purposes hereof, shall
include, without limitation, an individual, sole proprietorship, partnership,
unincorporated association, unincorporated syndicate, unincorporated
organization, trust, body corporate and a trustee, executor, administrator or
other legal representative)(a "Person") or any group, as defined in Sections
13(d) or 14(d) of the United States Securities Exchange Act of 1934 (other than
a group of which the Executive is a member or which has been organized by the
Executive), becomes the beneficial owner, directly or indirectly, of securities
of the Company representing, or acquires the right to control or direct, or to
acquire through the conversion of securities or the exercise of warrants or
other rights to acquire securities, 30% or more of either (I) the outstanding
Ordinary Shares of the Company, (II) the outstanding securities of the Company
having a right to vote in the election of directors, or (III) the combined
voting power of the outstanding securities of the Company having a right to vote
in the election of directors; or

              (ii)   if there shall be elected or appointed to the Board of
Directors of the Company (the "Board") any director or directors whose
appointment or election by the Board or nomination for election by the Company's
shareholders was not approved by a vote of at least a majority of the directors
then still in office who were either directors on the date of execution of this
Agreement or whose election or appointment or nomination for election was
previously so approved; or

              (iii)  upon consummation of a reorganization, scheme of
arrangement, merger, consolidation, combination, amalgamation, corporate
restructuring, liquidation, winding up, exchange of securities, or similar
transaction (each, an "Event"), in each case, in respect of which the beneficial
owners of the outstanding Company Ordinary Shares immediately prior to such
Event do not, following such Event, beneficially own, directly or indirectly,
more than 60% of each of the outstanding equity share capital, and the combined
voting power of the then outstanding voting securities entitled to vote in the
election of the directors, of the Company and any resulting entity, in
substantially the same proportions as their ownership, immediately prior to such
Event, of the Ordinary Shares and voting power of the Company; or

              (iv)   if there occurs an Event involving the Company as a result
of which 25% of more of the members of the Board of the Company are not persons
who were members of the Board immediately prior to the earlier of (x) the Event,
(y) exe-


                                       -2-


cution of an agreement, the consummation of which would result in the Event, or
(z) announcement by the Company of an intention to effect the Event; or

              (v)    if the Board adopts a resolution to the effect that, for
purposes of this Agreement, a Change in Control has occurred.






                                                                       EXHIBIT B


                                   GOOD REASON

              For purposes of this Agreement, "Good Reason" shall mean any of
the following, unless done with the prior express written consent of the
Executive:

                     (i)    (A) The assignment to Executive of duties
              inconsistent with Executive's position (including duties,
              responsibilities, status, titles or offices as set forth in
              Section 3 hereof); or (B) any elimination, diminution or reduction
              of Executive's duties or responsibilities except in connection
              with the termination of Executive's employment for Cause,
              disability or as a result of Executive's death or by Executive
              other than for Good Reason; and for purposes for this clause (i),
              the determination of whether there has been a reduction of duties
              or responsibilities or an assignment of duties inconsistent with
              the Executive's position shall take into account the Executive's
              duties, responsibilities and position with the ultimate parent of
              the parent/subsidiary group as a whole which includes the Company;

                     (ii)   The (A) reduction in Executive's Base Salary from
              the level in effect immediately prior to the Change in Control, or
              (B) payment of an annual bonus in an amount less than the lesser
              of (x) the most recent annual bonus paid prior to the Change in
              Control or (y) the greater of (I) the most recent target bonus, if
              any, established prior to the Change in Control or (II) the annual
              average bonus paid for the preceding three complete years prior to
              the Change in Control (or such lesser number of complete years as
              the Executive shall have been employed by the Company);

                     (iii)  The failure by the Company or the Guarantors to
              obtain the specific written assumption of this Agreement by any
              successor or assign of the Company or the Guarantors or any person
              acquiring substantially all of the Company's or the Guarantors'
              assets;

                     (iv)   Any breach by the Company or the Guarantors of any
              provision of this Agreement or any agreements entered into
              pursuant thereto that remains uncured for 20 calendar days
              following written notice of same by the Executive;

                     (v)    Notwithstanding the provisions of Section 3(b) of
              this Agreement, requiring the Executive to be based at any office
              or location that is greater than 35 miles from the office or
              location at which the Executive was principally located
              immediately prior to the Change in Control;


                                      -2-


                     (vi)   During the Post Change Period, (A) the failure to
              continue in effect any compensation or incentive plan in which
              Executive participates immediately prior to the time of the Change
              in Control unless an equitable arrangement (embodied in an ongoing
              substitute or alternative plan providing Executive with at least
              the same aggregate economic opportunity on an after-tax basis
              available to the Executive immediately prior to the Change in
              Control) has been made with respect to such plan in connection
              with the Change in Control, or the failure to continue Executive's
              participation therein on substantially the same basis both in
              terms of the amount of benefits provided and the level of his
              participation relative to other participants, as existed at the
              time of the Change in Control; or (B) the failure to continue to
              provide Executive with benefits and coverage at least as favorable
              in the aggregate as those enjoyed by him under the Company's
              pension, life insurance, medical, health and accident, disability,
              deferred compensation or savings plans in which he was
              participating at the time of the Change in Control; or

                     (vii)  The failure by the Company to pay within 7 calendar
              days of the due date any amounts due under any benefit or
              compensation plan, including any deferred compensation plan.

EX-10.3

                                                                    EXHIBIT 10.3



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                              EMPLOYMENT AGREEMENT
                           dated as of January 1, 2005


              AGREEMENT, made and entered into as of the date first above
written, by and between, XL Capital Ltd, a Cayman Islands corporation (the
"Company"), and Fiona E. Luck (the "Executive").

              WHEREAS, the Executive has been in the employ of the Company and
certain of its subsidiaries;

              WHEREAS, the Company and Executive desire to continue such
employment and to memorialize the terms and conditions of such employment by a
written agreement;

              NOW, THEREFORE, in consideration of the premises and mutual
covenants contained herein and for other good and valuable consideration, the
Company, the Guarantors (as hereinafter defined) and the Executive (the
"Parties") agree as follows:

              1.     EMPLOYMENT.

              Subject to Section 3(d) below, the Company hereby employs the
Executive, and the Executive hereby accepts employment with the Company, for the
term of this Agreement as set forth in Section 2, below, in the position and
with duties and responsibilities set forth in Section 3, below, and upon such
other terms and conditions as are hereinafter stated.

              2.     TERM OF EMPLOYMENT.

              Subject to Section 3(d) below, the stated term of employment under
this Agreement shall commence on the date first above written (the "Date of the
Agreement") and shall continue through the close of business on the first
anniversary of the Date of the Agreement, subject to earlier termination as
provided in Section 8, below, and extension as provided in the next succeeding
sentence. On the first anniversary of the Date of the Agreement and on each
anniversary thereafter, the stated term of employment shall be automatically
extended for an additional one year unless the Company gives notice in writing
to the Executive or the Executive gives notice in writing to the Company at
least six months prior to such anniversary that the term is not to be so
extended.

              3.     POSITIONS, DUTIES AND RESPONSIBILITIES.

              (a)    GENERAL. The Executive shall be employed as the Executive
Vice President, Group Operations for the Company. In such position, the
Executive shall have the duties, responsibilities and authority normally
associated with the office, position and titles of such an officer of an
insurance, reinsurance and financial services company, or holding company, whose
shares are publicly traded in the United States. In carrying out her duties




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                                      -2-


and responsibilities, the Executive shall report to the Chief Executive Officer
of XL Capital Ltd. During the term of this Agreement, the Executive shall devote
her full business time to the business and affairs of the Company, and shall use
her best efforts, skills and abilities to promote the Company's interests.

              (b)    PERFORMANCE OF SERVICES. The Executive's services under
this Agreement, which are global in nature, shall be performed at the location
or locations reasonably requested by the Company; PROVIDED, HOWEVER, that such
services will be performed outside the United States and in accordance with the
guidelines established by the Company from time to time for the location of the
performance of services on behalf of the Company and its subsidiaries. The
Executive acknowledges that the Company may require the Executive to travel to
the extent such travel is reasonably necessary to perform the services hereunder
and that such travel may be extensive. To the extent reasonably requested by the
Company, the Executive shall allocate greater business time to a location other
than her principal business location, and if reasonably requested by the
Company, the Executive shall relocate to such other locations. Any such
relocation will not be considered to be a breach of this Agreement.

              (c)    WORK PERMITS. The employment of the Executive by the
Company shall be contingent upon the issuance to the Executive of a suitable
(for the purposes of the Executive's contemplated employment by the Company)
work permit by the Bermuda government authorities and any other permits required
by any Bermuda government authority. Both the Company and the Executive shall
use their respective best efforts to obtain, maintain and renew said permit(s)
so as to allow the Executive to be employed under the terms hereof. The Company
shall be responsible for permit fees. If at any time said permit(s), having been
obtained, expire and are not renewed or cease to be valid and such renewal or
validation is necessary in order for the Executive to be employed by the Company
as contemplated by this Agreement and the non-renewal or invalidation is beyond
the control of both the Company and the Executive, employment under this
Agreement shall terminate immediately upon the expiration of said permit(s) or
upon said permit(s) ceasing to be valid unless the Executive can discharge her
duties and responsibilities effectively from another location not requiring said
permit(s) that is reasonably acceptable to the Executive and non-prejudicial to
the interests of the Company. In the event of such termination, the provisions
of Section 8(d) shall apply to such termination of the Executive's employment
(or, if within (i) the one-year period prior to the date of a Change in Control,
as hereinafter defined, provided the conditions set forth in the last paragraph
of Section 8(d)(iii) are satisfied, or (ii) the Post-Change Period, as
hereinafter defined, such termination shall be considered a termination by the
employee for "Good Reason") provided that non-renewal of said permit(s) or
invalidation thereof are not a direct result of any material action or omission
of the Executive that would reasonably cause such permit(s) not to be renewed or
validated.



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                                      -3-


              4.     BASE SALARY.

              The Executive shall be paid a Base Salary by the Company equal to
US$550,000.00, payable in accordance with the Company's regular pay practices.
Such Base Salary shall be subject to annual review in accordance with the
Company's practices for executives as in effect from time to time and may be
increased at the discretion of the Compensation Committee of the Company Board
(the "Compensation Committee").

              5.     BONUSES.

              In addition to the Base Salary provided for in Section 4, above,
the Executive shall be eligible for an annual cash bonus under the Company's
Annual Incentive Compensation Plan as in effect from time to time, with a bonus
opportunity which is substantially similar to that of similarly situated
executives. The Executive may be awarded such annual bonuses thereunder as may
be approved by the Compensation Committee based on corporate, individual and
business unit performance measures, as appropriate, established or approved from
time to time, by the Compensation Committee. Any annual bonus shall be paid in
cash in a lump sum promptly following approval thereof or, at Executive's
option, deferred in accordance with any bonus deferral plans of the Company in
effect from time to time. Nothing in this Section 5 shall confer upon the
Executive any right to a minimum annual bonus.

              6.     EMPLOYEE BENEFIT PROGRAMS.

              During the term of the Executive's employment under this
Agreement, the Executive shall be entitled to participate in all employee
benefit programs of the Company as are in effect from time to time and in which
similarly situated senior executives of the Company are eligible to participate.

              7.     BUSINESS EXPENSE REIMBURSEMENT, FRINGE BENEFITS AND
RELOCATION EXPENSES.

              (a)    EXPENSE REIMBURSEMENT AND FRINGE BENEFITS. During the term
of the Executive's employment under this Agreement, the Executive shall be
entitled to participate in the Company's travel and entertainment expense
reimbursement programs and its executive fringe benefit plans and arrangements,
all in accordance with the terms and conditions of such programs, plans and
arrangements as in effect from time to time as applied to the Company's
similarly situated executives.

              (b)    RELOCATION EXPENSES. The Company shall pay directly or
reimburse the Executive, in either case on an after-tax basis to the Executive,
for reasonable moving expenses in relocating the Executive and her immediate
family from Bermuda to a location in the United Kingdom designated by the
Executive (or the Executive's estate or



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                                      -4-


other legal representative in the event of her death) following termination of
the Executive's employment with the Company for any reason other than Cause (as
hereinafter defined).

              8.     TERMINATION OF EMPLOYMENT.

              (a)    TERMINATION DUE TO DEATH. In the event the Executive dies
during the term of employment hereunder, the Executive's spouse, if the spouse
survives the Executive, (or, if the Executive's spouse does not survive her, the
estate or other legal representative of the Executive) shall be entitled to
receive the Base Salary as provided in Section 4, above, at the rate in effect
at the time of Executive's death, to be paid in accordance with the Company's
regular payroll practices or in a lump sum, at the Company's option, through the
end of the sixth month after the month in which the Executive dies. In addition
to the above, the estate or other legal representative of the Executive shall be
entitled to:

                     (i)    any annual bonus awarded in accordance with the
       Company's bonus program but not yet paid under Section 5, above, and
       reimbursement of business expenses incurred prior to death in accordance
       with Section 7(a) above,

                     (ii)   a pro rata bonus for the year of death in an amount
       determined by the Compensation Committee, but in no event less than a pro
       rata portion of the Executive's average annual bonus for the immediately
       preceding three years (or the period of the Executive's employment with
       the Company, if less),

                     (iii)  the rights under any options to purchase equity
       securities of the Company or other rights with respect to equity
       securities of the Company, including any restricted stock or other
       securities, held by the Executive determined in accordance with the terms
       thereof,

                     (iv)   for a period of six months following the Executive's
       death, continued medical benefit plan coverage (including dental and
       vision benefits if provided under the applicable plans) for the
       Executive's dependents, if any, under the Company's medical benefit plans
       upon substantially the same terms and conditions (including cost of
       coverage to the dependents) as is then in existence for other executives
       during the coverage period; PROVIDED, THAT, if the Executive's dependents
       cannot continue to participate in the Company plans providing such
       benefits, the Company shall otherwise provide such benefits on
       substantially the same after-tax basis as if continued participation had
       been permitted, and

                     (v)    the vested accrued benefits, if any, under the
       employee benefit programs of the Company, as provided in Section 6,
       above, determined in accordance with the applicable terms and provisions
       of such programs.



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                                      -5-


              (b)    TERMINATION DUE TO DISABILITY. In the event the Executive's
employment hereunder is terminated due to her disability, as determined under
the Company's long-term disability plan, the Executive shall be entitled to:

                     (i)    the Base Salary as provided in Section 4, above,
       through the end of the sixth month after the month in which the
       Executive's employment terminates due to disability,

                     (ii)   any annual bonus awarded in accordance with the
       Company's bonus program but not yet paid under Section 5, and
       reimbursement of business expenses incurred prior to termination of
       employment in accordance with Section 7(a) above,

                     (iii)  a pro rata bonus for the year of termination in an
       amount determined by the Compensation Committee, but in no event less
       than a pro rata portion of the Executive's average annual bonus for the
       immediately preceding three years (or the period of the Executive's
       employment with the Company, if less),

                     (iv)   the rights under any options to purchase equity
       securities of the Company or other rights with respect to equity
       securities of the Company, including any restricted stock or other
       securities, held by the Executive, determined in accordance with the
       terms thereof,

                     (v)    for a period of six months following the termination
       of the Executive's employment, continued medical benefit plan coverage
       (including dental and vision benefits if provided under the applicable
       plans) for the Executive (and the Executive's dependents, if any) under
       the Company's medical benefit plans upon substantially the same terms and
       conditions (including cost of coverage to the Executive) as is then in
       existence for other executives during the coverage period; PROVIDED,
       THAT, if the Executive cannot continue to participate in the Company
       plans providing such benefits, the Company shall otherwise provide such
       benefits on substantially the same after-tax basis as if continued
       participation had been permitted; PROVIDED FURTHER, HOWEVER, that, in the
       event the Executive becomes reemployed with another employer and becomes
       eligible to receive medical benefits from such employer, the medical
       benefits described herein shall immediately cease, and

                     (vi)   the vested accrued benefits, if any, under the
       employee benefit programs of the Company, as provided in Section 6 above,
       determined in accordance with the applicable terms and provisions of such
       programs.

              (c)    TERMINATION FOR CAUSE.



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                                      -6-


                     (i)    The employment of the Executive under this Agreement
       may be terminated by the Company for Cause, such termination to be
       effective upon the Company giving the Executive written notice of
       termination in accordance with the provisions of this Agreement. For this
       purpose, "Cause" shall mean:

                            (A)    conviction of the Executive of a felony
                     involving moral turpitude, dishonesty or laws to which the
                     Company or its Affiliates are subject in connection with
                     the conduct of its or their business;

                            (B)    the Executive, in carrying out her duties for
                     the Company under this Agreement, has been guilty of (1)
                     willful misconduct or (2) substantial and continual refusal
                     by the Executive to perform the duties assigned to the
                     Executive pursuant to the terms hereof; provided, HOWEVER,
                     that any act or failure to act by the Executive shall not
                     constitute Cause for purposes of this Section 8(c)(i)(B) if
                     such act or failure to act was committed, or omitted, by
                     the Executive in good faith and in a manner she reasonably
                     believed to be in the overall best interests of the
                     Company, as the case may be. The determination of whether
                     the Executive acted in good faith and that she reasonably
                     believed her action to be in the Company's overall best
                     interest, as the case may be, will be in the reasonable
                     judgment of the General Counsel of the Company or, if the
                     General Counsel shall have an actual or potential conflict
                     of interest, the Compensation Committee; or

                            (C)    the Executive's continued willful refusal to
                     obey any lawful policy or requirement duly adopted by the
                     Company Board and the continuance of such refusal after
                     receipt of written notice.

                     (ii)   In the event of a termination for Cause under
       Section 8(c)(i), above, the Executive shall be entitled only to:

                            (A)    Base Salary as provided in Section 4, above,
                     at the rate in effect at the time of her termination of
                     employment for Cause, through the date on which termination
                     for Cause occurs,

                            (B)    the rights under any options to purchase
                     equity securities of the Company or other rights with
                     respect to equity securities of the Company, including any
                     restricted stock or other securities, held by the
                     Executive, determined in accordance with the terms thereof,
                     and

                            (C)    the vested accrued benefits, if any, under
                     employee benefit programs of the Company, as provided in
                     Section 6, above, and reimbursement of properly incurred
                     unreimbursed business expenses un-



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                                      -7-


                     der the business expense reimbursement program as described
                     in Section 7, above, determined in accordance with the
                     applicable terms and provisions of such employee benefit
                     and expense reimbursement programs; PROVIDED that the
                     Executive shall not be entitled to any such benefits unless
                     the terms and provisions of such programs expressly state
                     that the Executive shall be entitled thereto in the event
                     her employment is terminated for Cause (as defined in this
                     Agreement or otherwise).

              (d)    TERMINATION WITHOUT CAUSE.

                     (i)    Anything in this Agreement to the contrary
       notwithstanding, the Executive's employment may be terminated by the
       Company without Cause as provided in this Section 8(d). A termination due
       to death or disability, as described in Section 8(a) or (b), above, or a
       termination for Cause, as described in Section 8(c), above, shall not be
       deemed a termination without Cause under this Section 8(d).

                     (ii)   In the event the Executive's employment is
       terminated by the Company without Cause (x) prior to a Change in Control
       (other than as provided in the last paragraph of Section 8(d)(iii), in
       which case the provisions of Section 8(d)(iii) shall apply in lieu of
       this Section 8(d)(ii)) or (y) following the Post-Change Period (as
       hereinafter defined), the Executive shall be entitled to:

                            (A)    Base Salary as provided in Section 4, above,
                     at the rate in effect at the time of her termination of
                     employment without Cause, through the date on which
                     termination without Cause occurs,

                            (B)    provided the Executive executes and does not
                     revoke a general release of claims against the Company and
                     its affiliates in form and substance satisfactory to the
                     Company, a cash lump sum payment equal to (x) two times the
                     Executive's annual Base Salary, at the annual rate in
                     effect in accordance with Section 4, above, immediately
                     prior to such termination and (y) one times the higher of
                     the targeted annual bonus for the year of such termination,
                     if any, or the average of the Executive's annual bonus for
                     the three years immediately preceding the year of
                     termination (or such shorter period during which the
                     Executive has been employed by the Company),

                            (C)    any annual bonus awarded in accordance with
                     the Company's bonus program but not yet paid under Section
                     5, above, and reimbursement of business expenses incurred
                     prior to termination of employment in accordance with
                     Section 7(a) above,



[XL CAPITAL LOGO]


                                      -8-


                            (D)    the rights under any options to purchase
                     equity securities of the Company or other rights with
                     respect to equity securities of the Company, including any
                     restricted stock or other securities, held by the
                     Executive, determined in accordance with the terms thereof,

                            (E)    for a period of twenty-four months following
                     the termination of the Executive's employment, continued
                     medical benefit plan coverage (including dental and vision
                     benefits if provided under the applicable plans) for the
                     Executive (and the Executive's dependents, if any) under
                     the Company's medical benefit plans upon substantially the
                     same terms and conditions (including cost of coverage to
                     the Executive) as is then in existence for other executives
                     during the coverage period; PROVIDED, THAT, if the
                     Executive cannot continue to participate in the Company
                     plans providing such benefits, the Company shall otherwise
                     provide such benefits on substantially the same after-tax
                     basis as if continued participation had been permitted;
                     PROVIDED, HOWEVER, that, in the event the Executive becomes
                     reemployed with another employer and becomes eligible to
                     receive medical benefits from such employer, the medical
                     benefits described herein shall immediately cease, and

                            (F)    the vested accrued benefits, if any, under
                     the employee benefit programs of the Company, as provided
                     in Section 6 above, determined in accordance with the
                     applicable terms and provisions of such programs.

                     (iii)  In the event the Executive's employment is
       terminated by (x) the Company without Cause within the twenty-four month
       period following a Change in Control (as defined in Exhibit A hereto)
       (the "Post-Change Period") or (y) the Executive terminates her employment
       for "Good Reason" (as defined in Exhibit B hereto) during the Post-Change
       Period, the Executive shall be entitled to:

                            (A)    Base Salary as provided in Section 4, above,
                     at the rate in effect at the time of her termination of
                     employment, through the date on which termination occurs,

                            (B)    a cash lump sum payment equal to two times
                     the Executive's annual Base Salary, at the rate in effect
                     in accordance with Section 4, above, immediately prior to
                     such termination or Change in Control, whichever is
                     greater,

                            (C)    a cash lump sum payment equal to two times
                     the average annual bonus awarded to the Executive by the
                     Company in the three years prior to the year in which the
                     Change in Control occurs (or



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                                      -9-



                     shorter period during which the Executive had been employed
                     by the Company); PROVIDED such bonuses shall be at least
                     equal to the targeted annual bonus, if any, for the year of
                     such termination,

                            (D)    an amount equal to (i) the higher of (x) the
                     bonus actually awarded to the Executive by the Company for
                     the year immediately preceding the year in which the Change
                     in Control occurs or (y) the targeted amount of bonus, if
                     any, that would have been awarded to the Executive in
                     respect of the year in which the termination of employment
                     occurs, multiplied by (ii) a fraction, the numerator of
                     which is the number of months or fraction thereof in which
                     the Executive was employed by the Company in the year of
                     termination of employment, and the denominator of which is
                     12,

                            (E)    options to purchase equity securities of the
                     Company or other rights with respect to equity securities
                     of the Company held by the Executive shall immediately vest
                     in full and shall continue to be exercisable for three
                     years from the date of termination of employment,
                     notwithstanding the Executive's termination of employment,
                     or the original full term of the option or other right, if
                     shorter,

                            (F)    for a period of twenty-four months following
                     the termination of the Executive's employment, continued
                     medical benefit plan coverage (including dental and vision
                     benefits if provided under the applicable plans) for the
                     Executive (and the Executive's dependents, if any) under
                     the Company's medical benefit plans upon substantially the
                     same terms and conditions (including cost of coverage to
                     the Executive) as is then in existence for other executives
                     during the coverage period; PROVIDED, THAT, if the
                     Executive cannot continue to participate in the Company
                     plans providing such benefits, the Company shall otherwise
                     provide such benefits on substantially the same after-tax
                     basis as if continued participation had been permitted;
                     PROVIDED, HOWEVER, that, in the event the Executive becomes
                     reemployed with another employer and becomes eligible to
                     receive medical benefits from such employer, the medical
                     benefits described herein shall immediately cease, and

                            (G)    full and immediate vesting under the
                     Company's retirement plans as of the date of termination,
                     to the extent permitted by applicable law; PROVIDED,
                     HOWEVER, that if such full and immediate vesting cannot be
                     provided under a retirement plan under applicable law, then
                     economically equivalent benefits, determined on an after
                     tax basis to



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                                      -10-


                     the Executive, shall be provided through arrangements
                     outside the applicable retirement plan.

              Anything in this Agreement to the contrary notwithstanding, the
Executive shall be entitled to the benefits described in (A)-(G) above, if the
Executive's employment with the Company is terminated (other than for Cause)
within one year prior to the date on which a Change in Control occurs, and it is
reasonably demonstrated that such termination (i) was at the request of a third
party who has taken steps reasonably calculated or intended to effect the Change
in Control or (ii) otherwise arose in connection with or anticipation of the
Change in Control; PROVIDED, HOWEVER, that in such event, amounts will be
payable hereunder only following the Change in Control.

                     (iv)   If, in situations where Section 8(d)(iii) does not
       apply, at any time during the term of the Executive's employment
       hereunder, duties are assigned to the Executive that are materially
       inconsistent with her position, or the Company does not cure any material
       breach by it of any provision of Sections 4 through 7 of this Agreement
       within 30 calendar days following written notice of same by the
       Executive, the Executive shall have the right to terminate her employment
       within 30 calendar days of such assignment or of such failure to cure a
       breach, as the case may be, and such termination shall be deemed a
       termination by the Company without Cause under Section 8(d)(ii), above,
       PROVIDED, in the case of assignment of inconsistent duties, the Executive
       shall have given the Company written notice of her decision and shall
       not, within 30 calendar days thereafter, have had the assignment of
       inconsistent duties rescinded.

              (e)    VOLUNTARY TERMINATION BY THE EXECUTIVE. The Executive may
voluntarily terminate her employment prior to the expiration of the term of this
Agreement upon at least three months' prior written notice to the Company. Such
termination shall constitute a voluntary termination and, except as provided in
Section 8(d)(iii) or Section 8(d)(iv), above, in such event the Executive shall
be limited to the same rights and benefits as applicable to a termination by the
Company for Cause as provided in Section 8(c), above. A voluntary termination in
accordance with this Section 8(e) shall not be deemed a breach of this
Agreement. A termination of the Executive's employment due to disability or
death as described in Section 8(b) or 8(a), above, a termination by the
Executive which the Executive is entitled to treat as a termination by the
Company pursuant to Section 8(d), above, or a termination by the Executive under
Section 8(d)(iv), above, shall not be deemed a voluntary termination within the
meaning of this Section 8(e).

              9.     EXCISE TAX PAYMENTS.

              (a)    Anything in this Agreement to the contrary notwithstanding,
in the event it shall be determined that (i) any payment or distribution made,
or benefit provided (including, without limitation, the acceleration of any
payment, distribution or benefit or



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                                      -11-


accelerated vesting or exercisability of any award) by the Company to or for the
benefit of the Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise, but
determined without regard to any additional payments required under this Section
9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of
the United States Internal Revenue Code of 1986, as amended (the "Code") (or any
successor provision or similar excise tax), or any interest or penalties are
incurred by the Executive with respect to such excise tax (such excise tax,
together with any such interest and penalties, are hereinafter collectively
referred to as the "Excise Tax"), (ii) the aggregate amount of the Executive's
Parachute Payments (as defined in Section 280G(b)(2)(A) of the Code) is less
than 3.25 times the Executive's Base Amount (as defined in Section 280G(b)(3)(A)
of the Code), and (iii) no such Payment would be subject to the Excise Tax if
the payments set forth in Section 8(d)(iii)(B) and (C) hereof were each reduced
by up to 20 percent, then the payments set forth in Section 8(d)(iii)(B) and (C)
will each be reduced to the smallest extent possible (and in no event by more
than 20 percent in the aggregate) such that no Payment is subject to the Excise
Tax.

              (b)    Anything in this Agreement to the contrary notwithstanding,
in the event it shall be determined that (i) the aggregate amount of the
Executive's Parachute Payments equals or exceeds 3.25 times the Executive's Base
Amount, (ii) the aggregate amount of the Executive's Parachute Payments is less
than 3.25 times the Base Amount but one or more Payments would be subject to the
Excise Tax even if the payments set forth in Section 8(d)(iii)(B) and (C) hereof
were each reduced by 20 percent, or (iii) notwithstanding a reduction in
payments pursuant to Section 9(a) above, an Excise Tax is payable by the
Executive on one or more Payments, then, in any such case, Payments shall not be
reduced and the Executive shall be entitled to receive an additional payment (a
"Gross-Up Payment") in an amount such that after payment by the Executive of all
taxes (including any income or Excise Tax) imposed upon the Gross-Up Payment and
any interest or penalties imposed with respect to such taxes, the Executive
retains from the Gross-Up Payment an amount equal to the Excise Tax imposed upon
the Payments.

              (c)    Subject to the provisions of Section 9(d), all
determinations required to be made under this Section 9, including determination
of whether a Gross-Up Payment is required and of the amount of any such Gross-Up
Payment, shall be made by a nationally recognized public accounting firm
selected by the Company (the "Accounting Firm") which shall provide detailed
supporting calculations both to the Company and the Executive within 15 business
days of the date of termination of the Executive's employment, if applicable, or
such earlier time as is reasonably requested. The initial Gross-Up Payment, if
any, as determined pursuant to this Section 9(c), shall be paid to the Executive
within five business days of the receipt of the Accounting Firm's determination.
If the Accounting Firm determines that no Excise Tax is payable by the
Executive, it shall furnish the Executive with a written opinion that she has
substantial authority not to report any Excise Tax on her Federal income tax
return. Any determination by the Accounting Firm meeting the requirements of



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                                      -12-


this Section 9(c) shall be binding upon the Company and the Executive, subject
only to payments pursuant to the following sentence based on a determination
that additional Gross-Up Payments should have been made, consistent with the
calculations required to be made hereunder (the amount of such additional
payments are referred to herein as the "Gross-Up Underpayment"). In the event
that the Company exhausts its remedies pursuant to Section 9(d) and the
Executive thereafter is required to make a payment of any Excise Tax, the
Accounting Firm shall determine the amount of the Gross-Up Underpayment that has
occurred and any such Gross-Up Underpayment shall be promptly paid by the
Company to or for the benefit of the Executive. The fees and disbursements of
the Accounting Firm shall be paid by the Company.

              (d)    The Executive shall notify the Company in writing of any
claim by the United States Internal Revenue Service that, if successful, would
require the payment by the Executive of any Excise Tax and, therefore, the
payment by the Company of a Gross-Up Payment. Such notification shall be given
as soon as practicable but not later than 30 business days after the Executive
receives written notice of such claim and shall apprise the Company of the
nature of such claim and the date on which such claim is requested to be paid.
The Executive shall not pay such claim prior to the expiration of the 30-day
period following the date on which she gives such notice to the Company (or such
shorter period ending on the date that any payment of taxes with respect to such
claim is due). If the Company notifies the Executive in writing prior to the
expiration of such period that it desires, in good faith, to contest such claim
(which notice shall set forth the bases for such contest) and that it will bear
the costs and provide the indemnification as required by this sentence, the
Executive shall, in good faith:

                     (i)    give the Company any information reasonably
       requested by the Company relating to such claim,

                     (ii)   take such action in connection with contesting such
       claim as the Company shall, in good faith, reasonably request in writing
       from time to time, including, without limitation, accepting legal
       representation with respect to such claim by an attorney selected by the
       Company and reasonably acceptable to the Executive,

                     (iii)  cooperate with the Company in good faith in order
       effectively to contest such claim, and

                     (iv)   permit the Company to participate, in good faith, in
       any proceedings relating to such claim;

PROVIDED, HOWEVER, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis to the Executive, for any



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                                      -13-


Excise Tax or income tax, including interest and penalties with respect thereto,
imposed as a result of such representation and payment of all costs and
expenses.

              Without limitation on the foregoing provisions of this Section
9(d), the Company shall, exercising good faith, control all proceedings taken in
connection with such contest and, at its sole option (but in good faith), may
pursue or forego any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option (but in good faith), either direct the Executive to pay the tax
claimed and sue for a refund or contest the claim in any permissible manner, and
the Executive agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as the Company shall determine; PROVIDED, HOWEVER, that if the
Company directs the Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to the Executive, on an
interest-free basis and shall indemnify and hold the Executive harmless, on an
after-tax basis to the Executive, from any Excise Tax or income tax, including
interest or penalties with respect thereto, imposed with respect to such advance
or with respect to any imputed income with respect to such advance; AND FURTHER
PROVIDED that any extension of the statute of limitations relating to the
payment of taxes for the taxable year of the Executive with respect to which
such contested amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Company's control of the contest shall be limited to
issues with respect to which a Gross-Up Payment would be payable hereunder and
the Executive shall be entitled to settle or contest, as the case may be, any
other issue raised by the Internal Revenue Service or any other taxing
authority. If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 9(d), the Executive becomes entitled to receive any
refund with respect to such claim, the Executive shall (subject to the Company's
complying with the requirements of Section 9(d)) promptly pay to the Company, as
the case may be, the amount of such refund (together with any interest paid or
credited thereon after taxes applicable thereto). If, after the receipt by the
Executive of an amount advanced by the Company pursuant to Section 9(d), a
determination is made that the Executive shall not be entitled to any refund
with respect to such claim and the Company does not notify the Executive in
writing of its intent to contest such denial of refund prior to the expiration
of 30 days after such determination, then any obligation of the Executive to
repay such advance shall be forgiven and the amount of such advance shall
offset, to the extent thereof, the amount of Gross-Up Payment required to be
paid.

              Notwithstanding any provision herein to the contrary, the
Executive's failure to strictly comply with the notice provisions set forth in
this Section 9, so long as such failure does not prevent the Company from
contesting an excise tax claim, shall not adversely affect the Executive's
rights under this Section 9.



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                                      -14-


              10.    NO MITIGATION; NO OFFSET.

              In the event of any termination of employment under Section 8,
above, the Executive shall be under no obligation to mitigate damages or seek
other employment, and, except as expressly set forth herein, there shall be no
offset against amounts due the Executive under this Agreement on account of any
remuneration attributable to any subsequent employment that she may obtain.

              11.    NONCOMPETITION AND NONSOLICITATION.

              The Executive represents and warrants that, to the best of her
knowledge, she is not using the confidential or proprietary information of any
other person in violation of any agreement or rights of others known to her. The
Executive agrees that the products of the Company and its Affiliates shall
constitute the exclusive property of the Company and its Affiliates.

              For the avoidance of doubt, all trademarks, policy language or
forms, products or services (including products and services under development),
trade names, trade secrets, service marks, designs, computer programs and
software, utility models, copyrights, know-how and confidential information,
applications for registration of any of the foregoing and the right to apply for
them in any part of the world (whether any of the foregoing shall be registered
or unregistered) created or discovered or participated in by the Executive
during the course of her employment (whether or not pursuant to the terms of
this Agreement) or under the instructions of the Company or its Affiliates are
and shall be the absolute property of the Company and its Affiliates, as
appropriate. Without limiting the foregoing, the Executive hereby assigns to the
Company any and all of the Executive's right, title and interest, if any,
pertaining to the insurance and reinsurance (including, without limitation,
finite insurance and reinsurance), risk assumption, risk management, brokerage,
financial and other products or services developed or improved upon by the
Executive (including, without limitation, any related "know-how") while employed
by the Company or its Affiliates, including any patent, trademark, trade name,
copyright, ownership or other right that may pertain thereto.

              Since Executive has obtained and is likely to obtain in the course
of Executive's employment with the Company and its Affiliates knowledge of trade
names, trade secrets, know-how, products and services (including products and
services under development), techniques, methods, lists, computer programs and
software and other confidential information relating to the Company and its
Affiliates, and their employees, clients, business or business opportunities,
Executive hereby undertakes that:

                     (i)    Executive will not (either alone or jointly with or
       on behalf of others and whether directly or indirectly) encourage,
       entice, solicit or endeavor to encourage, entice or solicit away from
       employment with the Company or its Affiliates, or hire or cause to be
       hired, any officer or employee of the Company or its Affiliates



[XL CAPITAL LOGO]


                                      -15-


       (or any individual who was within the prior twelve months an officer or
       employee of the Company or its Affiliates), or encourage, entice, solicit
       or endeavor to encourage, entice or solicit any individual to violate the
       terms of any employment agreement or arrangement between such individual
       and the Company or any of its Affiliates;

                     (ii)   Executive will not (either alone or jointly with or
       on behalf of others and whether directly or indirectly) interfere with or
       disrupt or seek to interfere with or disrupt (A) the relationships
       between the Company and its Affiliates, on the one hand, and any customer
       or client of the Company and its Affiliates, on the other hand,
       (including any insured or reinsured party) who during the period of
       twenty-four months immediately preceding such termination shall have been
       such a customer or client, or (B) the supply to the Company and its
       Affiliates of any services by any supplier or agent or broker who during
       the period of twenty-four months immediately preceding such termination
       shall have supplied services to any such person, nor will Executive
       interfere or seek to interfere with the terms on which such supply or
       agency or brokering services during such period as aforesaid have been
       made or provided; and

                     (iii)  Executive will not (either alone or jointly with or
       on behalf of others and whether directly or indirectly) whether as an
       employee, consultant, partner, principal, agent, distributor,
       representative or stockholder (except solely as a less than one percent
       stockholder of a publicly traded company), engage in any activities in
       Bermuda, the United Kingdom or the United States if such activities are
       competitive with the businesses that (i) are then being conducted by the
       Company or its Affiliates and (ii) during the period of the Executive's
       employment were either being conducted by the Company or its Affiliates
       or actively being developed by the Company or its Affiliates.

              The provisions of the immediately preceding sentence shall
continue as long as the Executive is employed by the Company or its Affiliates
and such provisions shall continue in effect after such employment is terminated
for any reason until the first anniversary of such termination, provided that if
such employment is terminated by the Company under Section 8(d)(iii) or by the
Executive under Section 8(d)(iii), the provisions of clauses (ii) and (iii)
shall automatically terminate upon such termination of employment, unless the
Company elects, in writing, upon such termination to continue the provisions of
clauses (ii) and (iii) in effect through the six-month anniversary of such
termination of employment in which case the Company shall be obligated to
continue (through such six-month anniversary of termination) to pay the
Executive, in addition to any of the Executive's rights under Section 8(d)(iii),
her Base Salary and the pro rata portion of the Executive's average annual bonus
for the three years (or shorter period of employment by the Company) immediately
preceding the year of termination, and such pro rated average annual bonus shall
be payable at the times annual bonuses for such year are payable to other
executives.



[XL CAPITAL LOGO]


                                      -16-


              For purposes of this Agreement, an "Affiliate" of the Company
includes any person, directly or indirectly, through one or more intermediaries,
controlling, controlled by, or under common control with the Company, and such
term shall specifically include, without limitation, the Company's
majority-owned subsidiaries.

              The limitations on the Executive set forth in this Section shall
also apply to any agent or other representative acting on behalf of Executive.

              While the restrictions aforesaid are considered by both parties to
be reasonable in all the circumstances it is recognized that restrictions of the
nature in question may fail for reasons unforeseen and accordingly it is hereby
declared and agreed that if any of such restrictions or the geographic or other
scope thereof shall be adjudged to be void as going beyond what is reasonable in
the circumstances for the protection of the interests of the Company and its
Affiliates but would be valid if part of the wording thereof were deleted and/or
the periods (if any) thereof reduced and/or geographic or other area dealt with
thereby reduced in scope then said restrictions shall apply with such
modifications as may be necessary to make them valid and effective.

              Nothing contained in this Section 11 shall limit in any manner any
additional obligations to which Executive may be bound pursuant to any other
agreement or any applicable law, rule or regulation and Section 11 shall apply,
subject to its terms, after employment has terminated for any reason.

              12.    CONFIDENTIAL INFORMATION.

              The Executive covenants that she shall not, without the prior
written consent of the Company, use for the Executive's own benefit or the
benefit of any other person or entity other than the Company and its Affiliates
or disclose to any person, other than an employee of the Company or other person
to whom disclosure is necessary to the performance by the Executive of her
duties in the employ of the Company, any confidential, proprietary, secret, or
privileged information about the Company or its Affiliates or their business or
operations, including, but not limited to, information concerning trade secrets,
know-how, software, data processing systems, policy language and forms,
inventions, designs, processes, formulae, notations, improvements, financial
information, business plans, prospects, referral sources, lists of suppliers and
customers, legal advice and other information with respect to the affairs,
business, clients, customers, agents or other business relationships of the
Company or its Affiliates. Executive shall hold in a fiduciary capacity for the
benefit of the Company all secret, confidential proprietary or privileged
information or data relating to the Company or any of its Affiliates or
predecessor companies, and their respective businesses, which shall have been
obtained by Executive during her employment, unless and until such information
has become known to the public generally (other than as a result of unauthorized
disclosure by the Executive) or unless she is required to disclose such
information by a court or by a governmental body with apparent authority to
require such disclosure. The foregoing covenant by the Ex-



[XL CAPITAL LOGO]


                                      -17-


ecutive shall be without limitation as to time and geographic application and
this Section 12 shall apply in accordance with its terms after employment has
terminated for any reason. The Executive acknowledges and agrees that she shall
have no authority to waive any attorney-client or other privilege without the
express prior written consent of the Compensation Committee as evidenced by the
signature of the Company's General Counsel.

              13.    WITHHOLDING.

              Anything in this Agreement to the contrary notwithstanding, all
payments required to be made by the Company hereunder to the Executive shall be
subject to withholding of such amounts relating to taxes as the Company may
reasonably determine should be withheld pursuant to any applicable law or
regulation. In lieu of withholding such amounts, in whole or in part, the
Company may, in its sole discretion, accept other provision for payment of taxes
as required by law, provided it is satisfied that all requirements of law
affecting its responsibilities to withhold such taxes have been satisfied.

              14.    GUARANTY AND AFFILIATE SERVICES.

              (a)    LIABILITY. Each of XL Insurance Ltd and XL Re Ltd
(together, the "Guarantors") hereby agrees to be jointly and severally liable
together with the Company, for the performance of all obligations and duties,
and the payment of all amounts, due to the Executive under this Agreement.

              (b)    RESPONSIBILITY. All of the other terms and provisions of
this Agreement relating to the Executive's employment by the Company shall
likewise apply mutatis mutandis to the Executive's employment by any of its
Affiliates, it being understood that if the Executive's employment with the
Company is terminated, her employment with its Affiliates shall also be
terminated and the Executive shall be required to resign immediately from all
directorships and other positions held by the Executive in the Company and its
Affiliates or in any other entities in respect of which the Executive was acting
as a representative or designee of the Company or its Affiliates in connection
with her employment.



[XL CAPITAL LOGO]


                                      -18-


              15.    ENTIRE AGREEMENT.

              This Agreement, together with the Exhibits, contains the entire
agreement between the Parties concerning the subject matter hereof and
supersedes all prior agreements, understandings, discussions, negotiations and
undertakings, whether written or oral, between the Company and the Executive
with respect thereto.

              16.    ASSIGNABILITY; BINDING NATURE.

              This Agreement shall be binding upon and inure to the benefit of
the Parties and their respective successors, heirs and assigns. No rights or
obligations of the Executive under this Agreement may be assigned or transferred
by the Executive other than her right to compensation and benefits hereunder,
which may be transferred by will or operation of law subject to the limitations
of this Agreement. No rights or obligations of the Company under this Agreement
may be assigned or transferred by the Company except that such rights or
obligations may be assigned or transferred pursuant to a merger or consolidation
or amalgamation or scheme of arrangement in which the Company is not the
continuing entity, or the sale or liquidation of all or substantially all of the
assets of the Company, provided that the assignee or transferee is the successor
to all or substantially all of the assets of the Company and such assignee or
transferee assumes by operation of law or in writing duly executed by the
assignee or transferee all of the liabilities, obligations and duties of the
Company, as contained in this Agreement, either contractually or as a matter of
law.

              17.    INDEMNIFICATION.

              The Executive shall be provided indemnification by the Company to
the maximum extent permitted by applicable law and its charter documents. In
addition, she shall be covered by a directors' and officers' liability policy
with coverage for all directors and officers of the Company in an amount equal
to at least US$75,000,000. Such directors' and officers' liability insurance
shall be maintained in effect for a period of six years following termination of
the Executive's employment for any reason other than pursuant to Section 8(c) or
Section 8(e) hereof.

              18.    SETTLEMENT OF DISPUTES.

              (a)    Any dispute between the Parties arising from or relating to
the terms of this Agreement or the Executive's employment with the Company or
its Affiliates shall, except as provided in Section 18(b) or Section 18(c), be
resolved by binding arbitration held in New York City in accordance with the
rules of the American Arbitration Association.

              (b)    Executive acknowledges that the Company and its Affiliates
will suffer irreparable injury, not readily susceptible of valuation in monetary
damages, if Executive breaches her obligations under Section 11 or 12.
Accordingly, Executive agrees that the



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                                      -19-


Company and its Affiliates will be entitled, in addition to any other available
remedies, to obtain injunctive relief against any breach or prospective breach
by Executive of her obligations under Section 11 or 12 in any Federal or state
court sitting in the City and State of New York or court sitting in Bermuda or
the United Kingdom, or, at the Company's or any Affiliate's election, in any
other jurisdiction in which Executive maintains her residence or her principal
place of business. Executive hereby submits to the non-exclusive jurisdiction of
all those courts for the purposes of any actions or proceedings instituted by
the Company or its Affiliates to obtain such injunctive relief, and Executive
agrees that process in any or all of those actions or proceedings may be served
by registered mail or delivery, addressed to the last address of Executive known
to the Company or its Affiliates, or in any other manner authorized by law.
Executive further agrees that, in addition to any other remedies available to
the Company or its Affiliates by operation of law or otherwise, because of any
breach by Executive of her obligations under Section 11 or 12 she will forfeit
any and all bonus and rights to any payments to which she might otherwise then
be entitled by virtue hereof and such payments may be suspended so long as any
good faith dispute with respect thereto is continuing; PROVIDED, HOWEVER, that
payments, benefits and other rights and privileges of the Executive under this
Agreement following termination of the Executive's employment during a Post
Change Period shall not be forfeited, suspended, offset, diminished or otherwise
altered in any way on account of any breach or prospective breach of Section 11,
Section 12 or any other provision of this Agreement alleged by the Company.

              (c)    Notwithstanding any other provision of this Agreement, the
Executive may elect to resolve any dispute involving a breach or alleged breach
of this Agreement following termination of the Executive's employment during a
Post-Change Period in any Federal or State court sitting in the City and State
of New York or court sitting in Bermuda or the United Kingdom. The Company and
the Guarantors hereby submit to the non-exclusive jurisdiction of all those
courts for the purposes of any such actions or proceedings instituted by the
Executive, and the Company and the Guarantors agree that process in any or all
of such actions or proceedings may be served by registered mail or delivery,
addressed to the Company as set forth in Section 20, or in any other manner
authorized by law. The Company and the Guarantors shall pay all costs associated
with any court proceeding under this Section 18(c) without regard to the outcome
of such proceeding, including all legal fees and expenses of the Executive, who
shall be reimbursed for all such costs promptly upon written demand therefor by
the Executive.

              (d)    Each Party shall bear its own costs incurred in connection
with any proceeding under Sections 18(a) or 18(b) hereof, including all legal
fees and expenses; PROVIDED, HOWEVER, that the Company shall bear all such costs
of the Executive (to the extent such costs are reasonable) if the Executive
substantially prevails in the proceeding. The Executive shall be reimbursed by
the Company for all such reasonable costs promptly upon written demand therefor
by the Executive which is made within a reasonable time following the proceeding
and is supported by documentation of such costs.



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                                      -20-


              19.    AMENDMENT OR WAIVER.

              No provision in this Agreement may be amended unless such
amendment is agreed to in writing, signed by the Executive and by a duly
authorized officer of the Company and the Guarantors. No waiver by any Party of
any breach by the other Party of any condition or provision of this Agreement to
be performed by such other Party shall be deemed a waiver of a similar or
dissimilar condition or provision at the same or any prior or subsequent time.
Any waiver must be in writing and signed by the Executive or a duly authorized
officer of the Company and the Guarantors, as the case may be.

              20.    NOTICES.

              Any notice required or permitted to be given under this Agreement
shall be in writing and shall be deemed to have been given when delivered
personally or sent by courier, or by certified or registered mail, postage
prepaid, return receipt requested, duly addressed to the Party concerned at the
address indicated below or to such changed address as such Party may
subsequently by similar process give notice of:

              If to the Company:

                     XL Capital Ltd
                     XL House
                     One Bermudiana Road
                     Hamilton HM JX
                     Bermuda

                     Att'n: General Counsel

              If to the Executive:

                     Fiona Luck
                     Sea Breeze
                     4 McGalls Bay Drive
                     Smiths Parish FL 05
                     Bermuda



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                                      -21-


              21.    SEVERABILITY.

              In the event that any provision or portion of this Agreement shall
be determined to be invalid or unenforceable for any reason, in whole or in
part, the remaining provisions of this Agreement shall be unaffected thereby and
shall remain in full force and effect to the fullest extent permitted by law.

              22.    SURVIVORSHIP.

              The respective rights and obligations of the Parties shall survive
any termination of this Agreement to the extent necessary to the intended
preservation of such rights and obligations.

              23.    REFERENCE.

              In the event of the Executive's death or a judicial determination
of her incompetence, reference in this Agreement to the Executive shall be
deemed, where appropriate, to refer to her estate or other legal representative.

              24.    GOVERNING LAW.

              This Agreement shall be governed by and construed and interpreted
in accordance with the laws of the State of New York without reference to the
principles of conflict of laws.

              25.    HEADINGS.

              The heading of the sections contained in this Agreement are for
convenience only and shall not be deemed to control or affect the meaning or
construction of any provision of this Agreement.

              26.    COUNTERPARTS.

              This Agreement may be executed in one or more counterparts.



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                                      -22-


              IN WITNESS WHEREOF, the undersigned have executed this Agreement
as of the date first written above.

                                       XL CAPITAL LTD


                                       By: /S/ KIRSTIN R. GOULD
                                          ------------------------------------




                                       FIONA E. LUCK


                                       By: /S/ FIONA E. LUCK
                                          ------------------------------------





                                       GUARANTORS:

                                       XL INSURANCE (BERMUDA) LTD


                                       By: /S/ KIRSTIN R. GOULD
                                          ------------------------------------




                                       XL RE LTD


                                       By: /S/ KIRSTIN R. GOULD
                                          ------------------------------------




                                       -2-


                                                                       EXHIBIT A


                                CHANGE IN CONTROL


       A "Change in Control" shall be deemed to have occurred:

              (i)    if any person (which, for all purposes hereof, shall
include, without limitation, an individual, sole proprietorship, partnership,
unincorporated association, unincorporated syndicate, unincorporated
organization, trust, body corporate and a trustee, executor, administrator or
other legal representative)(a "Person") or any group, as defined in Sections
13(d) or 14(d) of the United States Securities Exchange Act of 1934 (other than
a group of which the Executive is a member or which has been organized by the
Executive), becomes the beneficial owner, directly or indirectly, of securities
of the Company representing, or acquires the right to control or direct, or to
acquire through the conversion of securities or the exercise of warrants or
other rights to acquire securities, 30% or more of either (I) the outstanding
Ordinary Shares of the Company, (II) the outstanding securities of the Company
having a right to vote in the election of directors, or (III) the combined
voting power of the outstanding securities of the Company having a right to vote
in the election of directors; or

              (ii)   if there shall be elected or appointed to the Board of
Directors of the Company (the "Board") any director or directors whose
appointment or election by the Board or nomination for election by the Company's
shareholders was not approved by a vote of at least a majority of the directors
then still in office who were either directors on the date of execution of this
Agreement or whose election or appointment or nomination for election was
previously so approved; or

              (iii)  upon consummation of a reorganization, scheme of
arrangement, merger, consolidation, combination, amalgamation, corporate
restructuring, liquidation, winding up, exchange of securities, or similar
transaction (each, an "Event"), in each case, in respect of which the beneficial
owners of the outstanding Company Ordinary Shares immediately prior to such
Event do not, following such Event, beneficially own, directly or indirectly,
more than 60% of each of the outstanding equity share capital, and the combined
voting power of the then outstanding voting securities entitled to vote in the
election of the directors, of the Company and any resulting entity, in
substantially the same proportions as their ownership, immediately prior to such
Event, of the Ordinary Shares and voting power of the Company; or

              (iv)   if there occurs an Event involving the Company as a result
of which 25% of more of the members of the Board of the Company are not persons
who were members of the Board immediately prior to the earlier of (x) the Event,
(y) exe-


                                      -2-


cution of an agreement, the consummation of which would result in the Event, or
(z) announcement by the Company of an intention to effect the Event; or

              (v)    if the Board adopts a resolution to the effect that, for
purposes of this Agreement, a Change in Control has occurred.




                                                                       EXHIBIT B


                                   GOOD REASON

              For purposes of this Agreement, "Good Reason" shall mean any of
the following, unless done with the prior express written consent of the
Executive:

                     (i)    (A) The assignment to Executive of duties
              inconsistent with Executive's position (including duties,
              responsibilities, status, titles or offices as set forth in
              Section 3 hereof); or (B) any elimination, diminution or reduction
              of Executive's duties or responsibilities except in connection
              with the termination of Executive's employment for Cause,
              disability or as a result of Executive's death or by Executive
              other than for Good Reason; and for purposes for this clause (i),
              the determination of whether there has been a reduction of duties
              or responsibilities or an assignment of duties inconsistent with
              the Executive's position shall take into account the Executive's
              duties, responsibilities and position with the ultimate parent of
              the parent/subsidiary group as a whole which includes the Company;

                     (ii)   The (A) reduction in Executive's Base Salary from
              the level in effect immediately prior to the Change in Control, or
              (B) payment of an annual bonus in an amount less than the lesser
              of (x) the most recent annual bonus paid prior to the Change in
              Control or (y) the greater of (I) the most recent target bonus, if
              any, established prior to the Change in Control or (II) the annual
              average bonus paid for the preceding three complete years prior to
              the Change in Control (or such lesser number of complete years as
              the Executive shall have been employed by the Company);

                     (iii)  The failure by the Company or the Guarantors to
              obtain the specific written assumption of this Agreement by any
              successor or assign of the Company or the Guarantors or any person
              acquiring substantially all of the Company's or the Guarantors'
              assets;

                     (iv)   Any breach by the Company or the Guarantors of any
              provision of this Agreement or any agreements entered into
              pursuant thereto that remains uncured for 20 calendar days
              following written notice of same by the Executive;

                     (v)    Notwithstanding the provisions of Section 3(b) of
              this Agreement, requiring the Executive to be based at any office
              or location that is greater than 35 miles from the office or
              location at which the Executive was principally located
              immediately prior to the Change in Control;



                                      -2-


                     (vi)   During the Post Change Period, (A) the failure to
              continue in effect any compensation or incentive plan in which
              Executive participates immediately prior to the time of the Change
              in Control unless an equitable arrangement (embodied in an ongoing
              substitute or alternative plan providing Executive with at least
              the same aggregate economic opportunity on an after-tax basis
              available to the Executive immediately prior to the Change in
              Control) has been made with respect to such plan in connection
              with the Change in Control, or the failure to continue Executive's
              participation therein on substantially the same basis both in
              terms of the amount of benefits provided and the level of her
              participation relative to other participants, as existed at the
              time of the Change in Control; or (B) the failure to continue to
              provide Executive with benefits and coverage at least as favorable
              in the aggregate as those enjoyed by her under the Company's
              pension, life insurance, medical, health and accident, disability,
              deferred compensation or savings plans in which she was
              participating at the time of the Change in Control; or

                     (vii)  The failure by the Company to pay within 7 calendar
              days of the due date any amounts due under any benefit or
              compensation plan, including any deferred compensation plan.

EX-10.4

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                                                                    EXHIBIT 10.4


                              EMPLOYMENT AGREEMENT
                           dated as of January 1, 2005


              AGREEMENT, made and entered into as of the date first above
written, by and between, XL Capital Ltd, a Cayman Islands corporation (the
"Company"), and Clive Tobin (the "Executive").

              WHEREAS, the Executive has been in the employ of the Company and
certain of its subsidiaries;

              WHEREAS, the Company and Executive desire to continue such
employment and to memorialize the terms and conditions of such employment by a
written agreement;

              NOW, THEREFORE, in consideration of the premises and mutual
covenants contained herein and for other good and valuable consideration, the
Company, the Guarantors (as hereinafter defined) and the Executive (the
"Parties") agree as follows:

              1.     EMPLOYMENT.

              Subject to Section 3(d) below, the Company hereby employs the
Executive, and the Executive hereby accepts employment with the Company, for the
term of this Agreement as set forth in Section 2, below, in the position and
with duties and responsibilities set forth in Section 3, below, and upon such
other terms and conditions as are hereinafter stated.

              2.     TERM OF EMPLOYMENT.

              Subject to Section 3(d) below, the stated term of employment under
this Agreement shall commence on the date first above written (the "Date of the
Agreement") and shall continue through the close of business on the first
anniversary of the Date of the Agreement, subject to earlier termination as
provided in Section 8, below, and extension as provided in the next succeeding
sentence. On the first anniversary of the Date of the Agreement and on each
anniversary thereafter, the stated term of employment shall be automatically
extended for an additional one year unless the Company gives notice in writing
to the Executive or the Executive gives notice in writing to the Company at
least six months prior to such anniversary that the term is not to be so
extended.

              3.     POSITIONS, DUTIES AND RESPONSIBILITIES.

              (a)    GENERAL. The Executive shall be employed as the Chief
Executive of the Insurance operations of the Company. In such position, the
Executive shall have the duties, responsibilities and authority normally
associated with the office, position and titles of such an officer of an
insurance, reinsurance and financial services company, or holding company, whose
shares are publicly traded in the United States. In carrying out his duties and



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                                      -2-


responsibilities, the Executive shall report to the Chief Executive Officer of
XL Capital Ltd. During the term of this Agreement, the Executive shall devote
his full business time to the business and affairs of the Company, and shall use
his best efforts, skills and abilities to promote the Company's interests.

              (b)    PERFORMANCE OF SERVICES. The Executive's services under
this Agreement, which are global in nature, shall be performed at the location
or locations reasonably requested by the Company; PROVIDED, HOWEVER, that such
services will be performed outside the United States and in accordance with the
guidelines established by the Company from time to time for the location of the
performance of services on behalf of the Company and its subsidiaries. The
Executive acknowledges that the Company may require the Executive to travel to
the extent such travel is reasonably necessary to perform the services hereunder
and that such travel may be extensive. To the extent reasonably requested by the
Company, the Executive shall allocate greater business time to a location other
than his principal business location, and if reasonably requested by the
Company, the Executive shall relocate to such other locations. Any such
relocation will not be considered to be a breach of this Agreement.

              4.     BASE SALARY.

              The Executive shall be paid a Base Salary by the Company equal to
(pound)310,000.00, payable in accordance with the Company's regular pay
practices. Such Base Salary shall be subject to annual review in accordance with
the Company's practices for executives as in effect from time to time and may be
increased at the discretion of the Compensation Committee of the Company Board
(the "Compensation Committee").

              5.     BONUSES.

              In addition to the Base Salary provided for in Section 4, above,
the Executive shall be eligible for an annual cash bonus under the Company's
Annual Incentive Compensation Plan as in effect from time to time, with a bonus
opportunity which is substantially similar to that of similarly situated
executives. The Executive may be awarded such annual bonuses thereunder as may
be approved by the Compensation Committee based on corporate, individual and
business unit performance measures, as appropriate, established or approved from
time to time, by the Compensation Committee. Any annual bonus shall be paid in
cash in a lump sum promptly following approval thereof or, at Executive's
option, deferred in accordance with any bonus deferral plans of the Company in
effect from time to time. Nothing in this Section 5 shall confer upon the
Executive any right to a minimum annual bonus.

              6.     EMPLOYEE BENEFIT PROGRAMS.

              During the term of the Executive's employment under this
Agreement, the Executive shall be entitled to participate in all employee
benefit programs of the Company as are



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                                      -3-


in effect from time to time and in which similarly situated senior executives of
the Company are eligible to participate.

              7.     BUSINESS EXPENSE REIMBURSEMENT AND FRINGE BENEFITS

              During the term of the Executive's employment under this
Agreement, the Executive shall be entitled to participate in the Company's
travel and entertainment expense reimbursement programs and its executive fringe
benefit plans and arrangements, all in accordance with the terms and conditions
of such programs, plans and arrangements as in effect from time to time as
applied to the Company's similarly situated executives.

              8.     TERMINATION OF EMPLOYMENT.

              (a)    TERMINATION DUE TO DEATH. In the event the Executive dies
during the term of employment hereunder, the Executive's spouse, if the spouse
survives the Executive, (or, if the Executive's spouse does not survive him, the
estate or other legal representative of the Executive) shall be entitled to
receive the Base Salary as provided in Section 4, above, at the rate in effect
at the time of Executive's death, to be paid in accordance with the Company's
regular payroll practices or in a lump sum, at the Company's option, through the
end of the sixth month after the month in which the Executive dies. In addition
to the above, the estate or other legal representative of the Executive shall be
entitled to:

                     (i)    any annual bonus awarded in accordance with the
       Company's bonus program but not yet paid under Section 5, above, and
       reimbursement of business expenses incurred prior to death in accordance
       with Section 7(a) above,

                     (ii)   a pro rata bonus for the year of death in an amount
       determined by the Compensation Committee, but in no event less than a pro
       rata portion of the Executive's average annual bonus for the immediately
       preceding three years (or the period of the Executive's employment with
       the Company, if less),

                     (iii)  the rights under any options to purchase equity
       securities of the Company or other rights with respect to equity
       securities of the Company, including any restricted stock or other
       securities, held by the Executive determined in accordance with the terms
       thereof,

                     (iv)   for a period of six months following the Executive's
       death, continued medical benefit plan coverage (including dental and
       vision benefits if provided under the applicable plans) for the
       Executive's dependents, if any, under the Company's medical benefit plans
       upon substantially the same terms and conditions (including cost of
       coverage to the dependents) as is then in existence for other executives
       during the coverage period; PROVIDED, THAT, if the Executive's dependents
       cannot continue to participate in the Company plans providing such
       benefits, the Company shall oth-



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                                      -4-


       erwise provide such benefits on substantially the same after-tax basis as
       if continued participation had been permitted, and

                     (v)    the vested accrued benefits, if any, under the
       employee benefit programs of the Company, as provided in Section 6,
       above, determined in accordance with the applicable terms and provisions
       of such programs.

              (b)    TERMINATION DUE TO DISABILITY. In the event the Executive's
employment hereunder is terminated due to his disability, as determined under
the Company's long-term disability plan, the Executive shall be entitled to:

                     (i)    the Base Salary as provided in Section 4, above,
       through the end of the sixth month after the month in which the
       Executive's employment terminates due to disability,

                     (ii)   any annual bonus awarded in accordance with the
       Company's bonus program but not yet paid under Section 5, and
       reimbursement of business expenses incurred prior to termination of
       employment in accordance with Section 7(a) above,

                     (iii)  a pro rata bonus for the year of termination in an
       amount determined by the Compensation Committee, but in no event less
       than a pro rata portion of the Executive's average annual bonus for the
       immediately preceding three years (or the period of the Executive's
       employment with the Company, if less),

                     (iv)   the rights under any options to purchase equity
       securities of the Company or other rights with respect to equity
       securities of the Company, including any restricted stock or other
       securities, held by the Executive, determined in accordance with the
       terms thereof,

                     (v)    for a period of six months following the termination
       of the Executive's employment, continued medical benefit plan coverage
       (including dental and vision benefits if provided under the applicable
       plans) for the Executive (and the Executive's dependents, if any) under
       the Company's medical benefit plans upon substantially the same terms and
       conditions (including cost of coverage to the Executive) as is then in
       existence for other executives during the coverage period; PROVIDED,
       THAT, if the Executive cannot continue to participate in the Company
       plans providing such benefits, the Company shall otherwise provide such
       benefits on substantially the same after-tax basis as if continued
       participation had been permitted; PROVIDED FURTHER, HOWEVER, that, in the
       event the Executive becomes reemployed with another employer and becomes
       eligible to receive medical benefits from such employer, the medical
       benefits described herein shall immediately cease, and



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                                      -5-


                     (vi)   the vested accrued benefits, if any, under the
       employee benefit programs of the Company, as provided in Section 6 above,
       determined in accordance with the applicable terms and provisions of such
       programs.

              (c)    TERMINATION FOR CAUSE.

                     (i)    The employment of the Executive under this Agreement
       may be terminated by the Company for Cause, such termination to be
       effective upon the Company giving the Executive written notice of
       termination in accordance with the provisions of this Agreement. For this
       purpose, "Cause" shall mean:

                            (A)    conviction of the Executive of a felony
                     involving moral turpitude, dishonesty or laws to which the
                     Company or its Affiliates are subject in connection with
                     the conduct of its or their business;

                            (B)    the Executive, in carrying out his duties for
                     the Company under this Agreement, has been guilty of (1)
                     willful misconduct or (2) substantial and continual refusal
                     by the Executive to perform the duties assigned to the
                     Executive pursuant to the terms hereof; provided, HOWEVER,
                     that any act or failure to act by the Executive shall not
                     constitute Cause for purposes of this Section 8(c)(i)(B) if
                     such act or failure to act was committed, or omitted, by
                     the Executive in good faith and in a manner he reasonably
                     believed to be in the overall best interests of the
                     Company, as the case may be. The determination of whether
                     the Executive acted in good faith and that he reasonably
                     believed his action to be in the Company's overall best
                     interest, as the case may be, will be in the reasonable
                     judgment of the General Counsel of the Company or, if the
                     General Counsel shall have an actual or potential conflict
                     of interest, the Compensation Committee; or

                            (C)    the Executive's continued willful refusal to
                     obey any lawful policy or requirement duly adopted by the
                     Company Board and the continuance of such refusal after
                     receipt of written notice.

                     (ii)   In the event of a termination for Cause under
       Section 8(c)(i), above, the Executive shall be entitled only to:

                            (A)    Base Salary as provided in Section 4, above,
                     at the rate in effect at the time of his termination of
                     employment for Cause, through the date on which termination
                     for Cause occurs,

                            (B)    the rights under any options to purchase
                     equity securities of the Company or other rights with
                     respect to equity securities of the



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                                      -6-


                     Company, including any restricted stock or other
                     securities, held by the Executive, determined in accordance
                     with the terms thereof, and

                            (C)    the vested accrued benefits, if any, under
                     employee benefit programs of the Company, as provided in
                     Section 6, above, and reimbursement of properly incurred
                     unreimbursed business expenses under the business expense
                     reimbursement program as described in Section 7, above,
                     determined in accordance with the applicable terms and
                     provisions of such employee benefit and expense
                     reimbursement programs; PROVIDED that the Executive shall
                     not be entitled to any such benefits unless the terms and
                     provisions of such programs expressly state that the
                     Executive shall be entitled thereto in the event his
                     employment is terminated for Cause (as defined in this
                     Agreement or otherwise).

              (d)    TERMINATION WITHOUT CAUSE.

                     (i)    Anything in this Agreement to the contrary
       notwithstanding, the Executive's employment may be terminated by the
       Company without Cause as provided in this Section 8(d). A termination due
       to death or disability, as described in Section 8(a) or (b), above, or a
       termination for Cause, as described in Section 8(c), above, shall not be
       deemed a termination without Cause under this Section 8(d).

                     (ii)   In the event the Executive's employment is
       terminated by the Company without Cause (x) prior to a Change in Control
       (other than as provided in the last paragraph of Section 8(d)(iii), in
       which case the provisions of Section 8(d)(iii) shall apply in lieu of
       this Section 8(d)(ii)) or (y) following the Post-Change Period (as
       hereinafter defined), the Executive shall be entitled to:

                            (A)    Base Salary as provided in Section 4, above,
                     at the rate in effect at the time of his termination of
                     employment without Cause, through the date on which
                     termination without Cause occurs,

                            (B)    provided the Executive executes and does not
                     revoke a general release of claims against the Company and
                     its affiliates in form and substance satisfactory to the
                     Company, a cash lump sum payment equal to (x) two times the
                     Executive's annual Base Salary, at the annual rate in
                     effect in accordance with Section 4, above, immediately
                     prior to such termination and (y) one times the higher of
                     the targeted annual bonus for the year of such termination,
                     if any, or the average of the Executive's annual bonus for
                     the three years immediately preceding the year of
                     termination (or such shorter period during which the
                     Executive has been employed by the Company),



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                                      -7-


                            (C)    any annual bonus awarded in accordance with
                     the Company's bonus program but not yet paid under Section
                     5, above, and reimbursement of business expenses incurred
                     prior to termination of employment in accordance with
                     Section 7(a) above,

                            (D)    the rights under any options to purchase
                     equity securities of the Company or other rights with
                     respect to equity securities of the Company, including any
                     restricted stock or other securities, held by the
                     Executive, determined in accordance with the terms thereof,

                            (E)    for a period of twenty-four months following
                     the termination of the Executive's employment, continued
                     medical benefit plan coverage (including dental and vision
                     benefits if provided under the applicable plans) for the
                     Executive (and the Executive's dependents, if any) under
                     the Company's medical benefit plans upon substantially the
                     same terms and conditions (including cost of coverage to
                     the Executive) as is then in existence for other executives
                     during the coverage period; PROVIDED, THAT, if the
                     Executive cannot continue to participate in the Company
                     plans providing such benefits, the Company shall otherwise
                     provide such benefits on substantially the same after-tax
                     basis as if continued participation had been permitted;
                     PROVIDED, HOWEVER, that, in the event the Executive becomes
                     reemployed with another employer and becomes eligible to
                     receive medical benefits from such employer, the medical
                     benefits described herein shall immediately cease, and

                            (F)    the vested accrued benefits, if any, under
                     the employee benefit programs of the Company, as provided
                     in Section 6 above, determined in accordance with the
                     applicable terms and provisions of such programs.

                     (iii)  In the event the Executive's employment is
       terminated by (x) the Company without Cause within the twenty-four month
       period following a Change in Control (as defined in Exhibit A hereto)
       (the "Post-Change Period") or (y) the Executive terminates his employment
       for "Good Reason" (as defined in Exhibit B hereto) during the Post-Change
       Period, the Executive shall be entitled to:

                            (A)    Base Salary as provided in Section 4, above,
                     at the rate in effect at the time of his termination of
                     employment, through the date on which termination occurs,

                            (B)    a cash lump sum payment equal to two times
                     the Executive's annual Base Salary, at the rate in effect
                     in accordance with Sec-



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                                      -8-


                     tion 4, above, immediately prior to such termination or
                     Change in Control, whichever is greater,

                            (C)    a cash lump sum payment equal to two times
                     the average annual bonus awarded to the Executive by the
                     Company in the three years prior to the year in which the
                     Change in Control occurs (or shorter period during which
                     the Executive had been employed by the Company); PROVIDED
                     such bonuses shall be at least equal to the targeted annual
                     bonus, if any, for the year of such termination,

                            (D)    an amount equal to (i) the higher of (x) the
                     bonus actually awarded to the Executive by the Company for
                     the year immediately preceding the year in which the Change
                     in Control occurs or (y) the targeted amount of bonus, if
                     any, that would have been awarded to the Executive in
                     respect of the year in which the termination of employment
                     occurs, multiplied by (ii) a fraction, the numerator of
                     which is the number of months or fraction thereof in which
                     the Executive was employed by the Company in the year of
                     termination of employment, and the denominator of which is
                     12,

                            (E)    options to purchase equity securities of the
                     Company or other rights with respect to equity securities
                     of the Company held by the Executive shall immediately vest
                     in full and shall continue to be exercisable for three
                     years from the date of termination of employment,
                     notwithstanding the Executive's termination of employment,
                     or the original full term of the option or other right, if
                     shorter,

                            (F)    for a period of twenty-four months following
                     the termination of the Executive's employment, continued
                     medical benefit plan coverage (including dental and vision
                     benefits if provided under the applicable plans) for the
                     Executive (and the Executive's dependents, if any) under
                     the Company's medical benefit plans upon substantially the
                     same terms and conditions (including cost of coverage to
                     the Executive) as is then in existence for other executives
                     during the coverage period; PROVIDED, THAT, if the
                     Executive cannot continue to participate in the Company
                     plans providing such benefits, the Company shall otherwise
                     provide such benefits on substantially the same after-tax
                     basis as if continued participation had been permitted;
                     PROVIDED, HOWEVER, that, in the event the Executive becomes
                     reemployed with another employer and becomes eligible to
                     receive medical benefits from such employer, the medical
                     benefits described herein shall immediately cease, and




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                                      -9-


                            (G)    full and immediate vesting under the
                     Company's retirement plans as of the date of termination,
                     to the extent permitted by applicable law; PROVIDED,
                     HOWEVER, that if such full and immediate vesting cannot be
                     provided under a retirement plan under applicable law, then
                     economically equivalent benefits, determined on an after
                     tax basis to the Executive, shall be provided through
                     arrangements outside the applicable retirement plan.

              Anything in this Agreement to the contrary notwithstanding, the
Executive shall be entitled to the benefits described in (A)-(G) above, if the
Executive's employment with the Company is terminated (other than for Cause)
within one year prior to the date on which a Change in Control occurs, and it is
reasonably demonstrated that such termination (i) was at the request of a third
party who has taken steps reasonably calculated or intended to effect the Change
in Control or (ii) otherwise arose in connection with or anticipation of the
Change in Control; PROVIDED, HOWEVER, that in such event, amounts will be
payable hereunder only following the Change in Control.

                     (iv)   If, in situations where Section 8(d)(iii) does not
       apply, at any time during the term of the Executive's employment
       hereunder, duties are assigned to the Executive that are materially
       inconsistent with his position, or the Company does not cure any material
       breach by it of any provision of Sections 4 through 7 of this Agreement
       within 30 calendar days following written notice of same by the
       Executive, the Executive shall have the right to terminate his employment
       within 30 calendar days of such assignment or of such failure to cure a
       breach, as the case may be, and such termination shall be deemed a
       termination by the Company without Cause under Section 8(d)(ii), above,
       PROVIDED, in the case of assignment of inconsistent duties, the Executive
       shall have given the Company written notice of his decision and shall
       not, within 30 calendar days thereafter, have had the assignment of
       inconsistent duties rescinded.

              (e)    VOLUNTARY TERMINATION BY THE EXECUTIVE. The Executive may
voluntarily terminate his employment prior to the expiration of the term of this
Agreement upon at least three months' prior written notice to the Company. Such
termination shall constitute a voluntary termination and, except as provided in
Section 8(d)(iii) or Section 8(d)(iv), above, in such event the Executive shall
be limited to the same rights and benefits as applicable to a termination by the
Company for Cause as provided in Section 8(c), above. A voluntary termination in
accordance with this Section 8(e) shall not be deemed a breach of this
Agreement. A termination of the Executive's employment due to disability or
death as described in Section 8(b) or 8(a), above, a termination by the
Executive which the Executive is entitled to treat as a termination by the
Company pursuant to Section 8(d), above, or a termination by the Executive under
Section 8(d)(iv), above, shall not be deemed a voluntary termination within the
meaning of this Section 8(e).



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                                      -10-


              9.     EXCISE TAX PAYMENTS.

              (a)    Anything in this Agreement to the contrary notwithstanding,
in the event it shall be determined that (i) any payment or distribution made,
or benefit provided (including, without limitation, the acceleration of any
payment, distribution or benefit or accelerated vesting or exercisability of any
award) by the Company to or for the benefit of the Executive (whether paid or
payable or distributed or distributable pursuant to the terms of this Agreement
or otherwise, but determined without regard to any additional payments required
under this Section 9) (a "Payment") would be subject to the excise tax imposed
by Section 4999 of the United States Internal Revenue Code of 1986, as amended
(the "Code") (or any successor provision or similar excise tax), or any interest
or penalties are incurred by the Executive with respect to such excise tax (such
excise tax, together with any such interest and penalties, are hereinafter
collectively referred to as the "Excise Tax"), (ii) the aggregate amount of the
Executive's Parachute Payments (as defined in Section 280G(b)(2)(A) of the Code)
is less than 3.25 times the Executive's Base Amount (as defined in Section
280G(b)(3)(A) of the Code), and (iii) no such Payment would be subject to the
Excise Tax if the payments set forth in Section 8(d)(iii)(B) and (C) hereof were
each reduced by up to 20 percent, then the payments set forth in Section
8(d)(iii)(B) and (C) will each be reduced to the smallest extent possible (and
in no event by more than 20 percent in the aggregate) such that no Payment is
subject to the Excise Tax.

              (b)    Anything in this Agreement to the contrary notwithstanding,
in the event it shall be determined that (i) the aggregate amount of the
Executive's Parachute Payments equals or exceeds 3.25 times the Executive's Base
Amount, (ii) the aggregate amount of the Executive's Parachute Payments is less
than 3.25 times the Base Amount but one or more Payments would be subject to the
Excise Tax even if the payments set forth in Section 8(d)(iii)(B) and (C) hereof
were each reduced by 20 percent, or (iii) notwithstanding a reduction in
payments pursuant to Section 9(a) above, an Excise Tax is payable by the
Executive on one or more Payments, then, in any such case, Payments shall not be
reduced and the Executive shall be entitled to receive an additional payment (a
"Gross-Up Payment") in an amount such that after payment by the Executive of all
taxes (including any income or Excise Tax) imposed upon the Gross-Up Payment and
any interest or penalties imposed with respect to such taxes, the Executive
retains from the Gross-Up Payment an amount equal to the Excise Tax imposed upon
the Payments.

              (c)    Subject to the provisions of Section 9(d), all
determinations required to be made under this Section 9, including determination
of whether a Gross-Up Payment is required and of the amount of any such Gross-Up
Payment, shall be made by a nationally recognized public accounting firm
selected by the Company (the "Accounting Firm") which shall provide detailed
supporting calculations both to the Company and the Executive within 15 business
days of the date of termination of the Executive's employment, if applicable, or
such earlier time as is reasonably requested. The initial Gross-Up Payment, if
any, as



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determined pursuant to this Section 9(c), shall be paid to the Executive within
five business days of the receipt of the Accounting Firm's determination. If the
Accounting Firm determines that no Excise Tax is payable by the Executive, it
shall furnish the Executive with a written opinion that he has substantial
authority not to report any Excise Tax on his Federal income tax return. Any
determination by the Accounting Firm meeting the requirements of this Section
9(c) shall be binding upon the Company and the Executive, subject only to
payments pursuant to the following sentence based on a determination that
additional Gross-Up Payments should have been made, consistent with the
calculations required to be made hereunder (the amount of such additional
payments are referred to herein as the "Gross-Up Underpayment"). In the event
that the Company exhausts its remedies pursuant to Section 9(d) and the
Executive thereafter is required to make a payment of any Excise Tax, the
Accounting Firm shall determine the amount of the Gross-Up Underpayment that has
occurred and any such Gross-Up Underpayment shall be promptly paid by the
Company to or for the benefit of the Executive. The fees and disbursements of
the Accounting Firm shall be paid by the Company.

              (d)    The Executive shall notify the Company in writing of any
claim by the United States Internal Revenue Service that, if successful, would
require the payment by the Executive of any Excise Tax and, therefore, the
payment by the Company of a Gross-Up Payment. Such notification shall be given
as soon as practicable but not later than 30 business days after the Executive
receives written notice of such claim and shall apprise the Company of the
nature of such claim and the date on which such claim is requested to be paid.
The Executive shall not pay such claim prior to the expiration of the 30-day
period following the date on which he gives such notice to the Company (or such
shorter period ending on the date that any payment of taxes with respect to such
claim is due). If the Company notifies the Executive in writing prior to the
expiration of such period that it desires, in good faith, to contest such claim
(which notice shall set forth the bases for such contest) and that it will bear
the costs and provide the indemnification as required by this sentence, the
Executive shall, in good faith:

                     (i)    give the Company any information reasonably
       requested by the Company relating to such claim,

                     (ii)   take such action in connection with contesting such
       claim as the Company shall, in good faith, reasonably request in writing
       from time to time, including, without limitation, accepting legal
       representation with respect to such claim by an attorney selected by the
       Company and reasonably acceptable to the Executive,

                     (iii)  cooperate with the Company in good faith in order
       effectively to contest such claim, and

                     (iv)   permit the Company to participate, in good faith, in
       any proceedings relating to such claim;



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                                      -12-


PROVIDED, HOWEVER, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis to the Executive, for any Excise Tax or income tax, including
interest and penalties with respect thereto, imposed as a result of such
representation and payment of all costs and expenses.

              Without limitation on the foregoing provisions of this Section
9(d), the Company shall, exercising good faith, control all proceedings taken in
connection with such contest and, at its sole option (but in good faith), may
pursue or forego any and all administrative appeals, proceedings, hearings and
conferences with the taxing authority in respect of such claim and may, at its
sole option (but in good faith), either direct the Executive to pay the tax
claimed and sue for a refund or contest the claim in any permissible manner, and
the Executive agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as the Company shall determine; PROVIDED, HOWEVER, that if the
Company directs the Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to the Executive, on an
interest-free basis and shall indemnify and hold the Executive harmless, on an
after-tax basis to the Executive, from any Excise Tax or income tax, including
interest or penalties with respect thereto, imposed with respect to such advance
or with respect to any imputed income with respect to such advance; AND FURTHER
PROVIDED that any extension of the statute of limitations relating to the
payment of taxes for the taxable year of the Executive with respect to which
such contested amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Company's control of the contest shall be limited to
issues with respect to which a Gross-Up Payment would be payable hereunder and
the Executive shall be entitled to settle or contest, as the case may be, any
other issue raised by the Internal Revenue Service or any other taxing
authority. If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section 9(d), the Executive becomes entitled to receive any
refund with respect to such claim, the Executive shall (subject to the Company's
complying with the requirements of Section 9(d)) promptly pay to the Company, as
the case may be, the amount of such refund (together with any interest paid or
credited thereon after taxes applicable thereto). If, after the receipt by the
Executive of an amount advanced by the Company pursuant to Section 9(d), a
determination is made that the Executive shall not be entitled to any refund
with respect to such claim and the Company does not notify the Executive in
writing of its intent to contest such denial of refund prior to the expiration
of 30 days after such determination, then any obligation of the Executive to
repay such advance shall be forgiven and the amount of such advance shall
offset, to the extent thereof, the amount of Gross-Up Payment required to be
paid.

              Notwithstanding any provision herein to the contrary, the
Executive's failure to strictly comply with the notice provisions set forth in
this Section 9, so long as such failure does not prevent the Company from
contesting an excise tax claim, shall not adversely affect the Executive's
rights under this Section 9.



[XL CAPITAL LOGO]

                                      -13-


              10.    NO MITIGATION; NO OFFSET.

              In the event of any termination of employment under Section 8,
above, the Executive shall be under no obligation to mitigate damages or seek
other employment, and, except as expressly set forth herein, there shall be no
offset against amounts due the Executive under this Agreement on account of any
remuneration attributable to any subsequent employment that he may obtain.

              11.    NONCOMPETITION AND NONSOLICITATION.

              The Executive represents and warrants that, to the best of his
knowledge, he is not using the confidential or proprietary information of any
other person in violation of any agreement or rights of others known to him. The
Executive agrees that the products of the Company and its Affiliates shall
constitute the exclusive property of the Company and its Affiliates.

              For the avoidance of doubt, all trademarks, policy language or
forms, products or services (including products and services under development),
trade names, trade secrets, service marks, designs, computer programs and
software, utility models, copyrights, know-how and confidential information,
applications for registration of any of the foregoing and the right to apply for
them in any part of the world (whether any of the foregoing shall be registered
or unregistered) created or discovered or participated in by the Executive
during the course of his employment (whether or not pursuant to the terms of
this Agreement) or under the instructions of the Company or its Affiliates are
and shall be the absolute property of the Company and its Affiliates, as
appropriate. Without limiting the foregoing, the Executive hereby assigns to the
Company any and all of the Executive's right, title and interest, if any,
pertaining to the insurance and reinsurance (including, without limitation,
finite insurance and reinsurance), risk assumption, risk management, brokerage,
financial and other products or services developed or improved upon by the
Executive (including, without limitation, any related "know-how") while employed
by the Company or its Affiliates, including any patent, trademark, trade name,
copyright, ownership or other right that may pertain thereto.

              Since Executive has obtained and is likely to obtain in the course
of Executive's employment with the Company and its Affiliates knowledge of trade
names, trade secrets, know-how, products and services (including products and
services under development), techniques, methods, lists, computer programs and
software and other confidential information relating to the Company and its
Affiliates, and their employees, clients, business or business opportunities,
Executive hereby undertakes that:

                     (i)    Executive will not (either alone or jointly with or
       on behalf of others and whether directly or indirectly) encourage,
       entice, solicit or endeavor to encourage, entice or solicit away from
       employment with the Company or its Affiliates, or hire or cause to be
       hired, any officer or employee of the Company or its Affiliates



[XL CAPITAL LOGO]

                                      -14-


       (or any individual who was within the prior twelve months an officer or
       employee of the Company or its Affiliates), or encourage, entice, solicit
       or endeavor to encourage, entice or solicit any individual to violate the
       terms of any employment agreement or arrangement between such individual
       and the Company or any of its Affiliates;

                     (ii)   Executive will not (either alone or jointly with or
       on behalf of others and whether directly or indirectly) interfere with or
       disrupt or seek to interfere with or disrupt (A) the relationships
       between the Company and its Affiliates, on the one hand, and any customer
       or client of the Company and its Affiliates, on the other hand,
       (including any insured or reinsured party) who during the period of
       twenty-four months immediately preceding such termination shall have been
       such a customer or client, or (B) the supply to the Company and its
       Affiliates of any services by any supplier or agent or broker who during
       the period of twenty-four months immediately preceding such termination
       shall have supplied services to any such person, nor will Executive
       interfere or seek to interfere with the terms on which such supply or
       agency or brokering services during such period as aforesaid have been
       made or provided; and

                     (iii)  Executive will not (either alone or jointly with or
       on behalf of others and whether directly or indirectly) whether as an
       employee, consultant, partner, principal, agent, distributor,
       representative or stockholder (except solely as a less than one percent
       stockholder of a publicly traded company), engage in any activities in
       Bermuda, the United Kingdom or the United States if such activities are
       competitive with the businesses that (i) are then being conducted by the
       Company or its Affiliates and (ii) during the period of the Executive's
       employment were either being conducted by the Company or its Affiliates
       or actively being developed by the Company or its Affiliates.

              The provisions of the immediately preceding sentence shall
continue as long as the Executive is employed by the Company or its Affiliates
and such provisions shall continue in effect after such employment is terminated
for any reason until the first anniversary of such termination, provided that if
such employment is terminated by the Company under Section 8(d)(iii) or by the
Executive under Section 8(d)(iii), the provisions of clauses (ii) and (iii)
shall automatically terminate upon such termination of employment, unless the
Company elects, in writing, upon such termination to continue the provisions of
clauses (ii) and (iii) in effect through the six-month anniversary of such
termination of employment in which case the Company shall be obligated to
continue (through such six-month anniversary of termination) to pay the
Executive, in addition to any of the Executive's rights under Section 8(d)(iii),
his Base Salary and the pro rata portion of the Executive's average annual bonus
for the three years (or shorter period of employment by the Company) immediately
preceding the year of termination, and such pro rated average annual bonus shall
be payable at the times annual bonuses for such year are payable to other
executives.



[XL CAPITAL LOGO]

                                      -15-


              For purposes of this Agreement, an "Affiliate" of the Company
includes any person, directly or indirectly, through one or more intermediaries,
controlling, controlled by, or under common control with the Company, and such
term shall specifically include, without limitation, the Company's
majority-owned subsidiaries.

              The limitations on the Executive set forth in this Section shall
also apply to any agent or other representative acting on behalf of Executive.

              While the restrictions aforesaid are considered by both parties to
be reasonable in all the circumstances it is recognized that restrictions of the
nature in question may fail for reasons unforeseen and accordingly it is hereby
declared and agreed that if any of such restrictions or the geographic or other
scope thereof shall be adjudged to be void as going beyond what is reasonable in
the circumstances for the protection of the interests of the Company and its
Affiliates but would be valid if part of the wording thereof were deleted and/or
the periods (if any) thereof reduced and/or geographic or other area dealt with
thereby reduced in scope then said restrictions shall apply with such
modifications as may be necessary to make them valid and effective.

              Nothing contained in this Section 11 shall limit in any manner any
additional obligations to which Executive may be bound pursuant to any other
agreement or any applicable law, rule or regulation and Section 11 shall apply,
subject to its terms, after employment has terminated for any reason.

              12.    CONFIDENTIAL INFORMATION.

              The Executive covenants that he shall not, without the prior
written consent of the Company, use for the Executive's own benefit or the
benefit of any other person or entity other than the Company and its Affiliates
or disclose to any person, other than an employee of the Company or other person
to whom disclosure is necessary to the performance by the Executive of his
duties in the employ of the Company, any confidential, proprietary, secret, or
privileged information about the Company or its Affiliates or their business or
operations, including, but not limited to, information concerning trade secrets,
know-how, software, data processing systems, policy language and forms,
inventions, designs, processes, formulae, notations, improvements, financial
information, business plans, prospects, referral sources, lists of suppliers and
customers, legal advice and other information with respect to the affairs,
business, clients, customers, agents or other business relationships of the
Company or its Affiliates. Executive shall hold in a fiduciary capacity for the
benefit of the Company all secret, confidential proprietary or privileged
information or data relating to the Company or any of its Affiliates or
predecessor companies, and their respective businesses, which shall have been
obtained by Executive during his employment, unless and until such information
has become known to the public generally (other than as a result of unauthorized
disclosure by the Executive) or unless he is required to disclose such
information by a court or by a governmental body with apparent authority to
require such disclosure. The foregoing covenant by the Ex-



[XL CAPITAL LOGO]

                                      -16-


ecutive shall be without limitation as to time and geographic application and
this Section 12 shall apply in accordance with its terms after employment has
terminated for any reason. The Executive acknowledges and agrees that he shall
have no authority to waive any attorney-client or other privilege without the
express prior written consent of the Compensation Committee as evidenced by the
signature of the Company's General Counsel.

              13.    WITHHOLDING.

              Anything in this Agreement to the contrary notwithstanding, all
payments required to be made by the Company hereunder to the Executive shall be
subject to withholding of such amounts relating to taxes as the Company may
reasonably determine should be withheld pursuant to any applicable law or
regulation. In lieu of withholding such amounts, in whole or in part, the
Company may, in its sole discretion, accept other provision for payment of taxes
as required by law, provided it is satisfied that all requirements of law
affecting its responsibilities to withhold such taxes have been satisfied.

              14.    GUARANTY AND AFFILIATE SERVICES.

              (a)    LIABILITY. Each of XL Insurance Ltd and XL Re Ltd
(together, the "Guarantors") hereby agrees to be jointly and severally liable
together with the Company, for the performance of all obligations and duties,
and the payment of all amounts, due to the Executive under this Agreement.

              (b)    RESPONSIBILITY. All of the other terms and provisions of
this Agreement relating to the Executive's employment by the Company shall
likewise apply mutatis mutandis to the Executive's employment by any of its
Affiliates, it being understood that if the Executive's employment with the
Company is terminated, his employment with its Affiliates shall also be
terminated and the Executive shall be required to resign immediately from all
directorships and other positions held by the Executive in the Company and its
Affiliates or in any other entities in respect of which the Executive was acting
as a representative or designee of the Company or its Affiliates in connection
with his employment.



[XL CAPITAL LOGO]

                                      -17-


              15.    ENTIRE AGREEMENT.

              This Agreement, together with the Exhibits, contains the entire
agreement between the Parties concerning the subject matter hereof and
supersedes all prior agreements, understandings, discussions, negotiations and
undertakings, whether written or oral, between the Company and the Executive
with respect thereto.

              16.    ASSIGNABILITY; BINDING NATURE.

              This Agreement shall be binding upon and inure to the benefit of
the Parties and their respective successors, heirs and assigns. No rights or
obligations of the Executive under this Agreement may be assigned or transferred
by the Executive other than his right to compensation and benefits hereunder,
which may be transferred by will or operation of law subject to the limitations
of this Agreement. No rights or obligations of the Company under this Agreement
may be assigned or transferred by the Company except that such rights or
obligations may be assigned or transferred pursuant to a merger or consolidation
or amalgamation or scheme of arrangement in which the Company is not the
continuing entity, or the sale or liquidation of all or substantially all of the
assets of the Company, provided that the assignee or transferee is the successor
to all or substantially all of the assets of the Company and such assignee or
transferee assumes by operation of law or in writing duly executed by the
assignee or transferee all of the liabilities, obligations and duties of the
Company, as contained in this Agreement, either contractually or as a matter of
law.

              17.    INDEMNIFICATION.

              The Executive shall be provided indemnification by the Company to
the maximum extent permitted by applicable law and its charter documents. In
addition, he shall be covered by a directors' and officers' liability policy
with coverage for all directors and officers of the Company in an amount equal
to at least US$75,000,000. Such directors' and officers' liability insurance
shall be maintained in effect for a period of six years following termination of
the Executive's employment for any reason other than pursuant to Section 8(c) or
Section 8(e) hereof.

              18.    SETTLEMENT OF DISPUTES.

              (a)    Any dispute between the Parties arising from or relating to
the terms of this Agreement or the Executive's employment with the Company or
its Affiliates shall, except as provided in Section 18(b) or Section 18(c), be
resolved by binding arbitration held in New York City in accordance with the
rules of the American Arbitration Association.

              (b)    Executive acknowledges that the Company and its Affiliates
will suffer irreparable injury, not readily susceptible of valuation in monetary
damages, if Executive breaches his obligations under Section 11 or 12.
Accordingly, Executive agrees that the



[XL CAPITAL LOGO]

                                      -18-


Company and its Affiliates will be entitled, in addition to any other available
remedies, to obtain injunctive relief against any breach or prospective breach
by Executive of his obligations under Section 11 or 12 in any Federal or state
court sitting in the City and State of New York or court sitting in Bermuda or
the United Kingdom, or, at the Company's or any Affiliate's election, in any
other jurisdiction in which Executive maintains his residence or his principal
place of business. Executive hereby submits to the non-exclusive jurisdiction of
all those courts for the purposes of any actions or proceedings instituted by
the Company or its Affiliates to obtain such injunctive relief, and Executive
agrees that process in any or all of those actions or proceedings may be served
by registered mail or delivery, addressed to the last address of Executive known
to the Company or its Affiliates, or in any other manner authorized by law.
Executive further agrees that, in addition to any other remedies available to
the Company or its Affiliates by operation of law or otherwise, because of any
breach by Executive of his obligations under Section 11 or 12 he will forfeit
any and all bonus and rights to any payments to which he might otherwise then be
entitled by virtue hereof and such payments may be suspended so long as any good
faith dispute with respect thereto is continuing; PROVIDED, HOWEVER, that
payments, benefits and other rights and privileges of the Executive under this
Agreement following termination of the Executive's employment during a Post
Change Period shall not be forfeited, suspended, offset, diminished or otherwise
altered in any way on account of any breach or prospective breach of Section 11,
Section 12 or any other provision of this Agreement alleged by the Company.

              (c)    Notwithstanding any other provision of this Agreement, the
Executive may elect to resolve any dispute involving a breach or alleged breach
of this Agreement following termination of the Executive's employment during a
Post-Change Period in any Federal or State court sitting in the City and State
of New York or court sitting in Bermuda or the United Kingdom. The Company and
the Guarantors hereby submit to the non-exclusive jurisdiction of all those
courts for the purposes of any such actions or proceedings instituted by the
Executive, and the Company and the Guarantors agree that process in any or all
of such actions or proceedings may be served by registered mail or delivery,
addressed to the Company as set forth in Section 20, or in any other manner
authorized by law. The Company and the Guarantors shall pay all costs associated
with any court proceeding under this Section 18(c) without regard to the outcome
of such proceeding, including all legal fees and expenses of the Executive, who
shall be reimbursed for all such costs promptly upon written demand therefor by
the Executive.

              (d)    Each Party shall bear its own costs incurred in connection
with any proceeding under Sections 18(a) or 18(b) hereof, including all legal
fees and expenses; PROVIDED, HOWEVER, that the Company shall bear all such costs
of the Executive (to the extent such costs are reasonable) if the Executive
substantially prevails in the proceeding. The Executive shall be reimbursed by
the Company for all such reasonable costs promptly upon written demand therefor
by the Executive which is made within a reasonable time following the proceeding
and is supported by documentation of such costs.



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                                      -19-


              19.    AMENDMENT OR WAIVER.

              No provision in this Agreement may be amended unless such
amendment is agreed to in writing, signed by the Executive and by a duly
authorized officer of the Company and the Guarantors. No waiver by any Party of
any breach by the other Party of any condition or provision of this Agreement to
be performed by such other Party shall be deemed a waiver of a similar or
dissimilar condition or provision at the same or any prior or subsequent time.
Any waiver must be in writing and signed by the Executive or a duly authorized
officer of the Company and the Guarantors, as the case may be.

              20.    NOTICES.

              Any notice required or permitted to be given under this Agreement
              shall be in writing and shall be deemed to have been given when
              delivered personally or sent by courier, or by certified or
              registered mail, postage prepaid, return receipt requested, duly
              addressed to the Party concerned at the address indicated below or
              to such changed address as such Party may subsequently by similar
              process give notice of:

              If to the Company:

                     XL Capital Ltd
                     XL House
                     One Bermudiana Road
                     Hamilton HM JX
                     Bermuda

                     Att'n: General Counsel

              If to the Executive:

                     Clive Tobin
                     Hurston House
                     Stoke Road
                     Coombe
                     Kingston Upon Thames
                     Surrey KT2 7NX
                     England



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                                      -20-


              21.    SEVERABILITY.

              In the event that any provision or portion of this Agreement shall
be determined to be invalid or unenforceable for any reason, in whole or in
part, the remaining provisions of this Agreement shall be unaffected thereby and
shall remain in full force and effect to the fullest extent permitted by law.

              22.    SURVIVORSHIP.

              The respective rights and obligations of the Parties shall survive
any termination of this Agreement to the extent necessary to the intended
preservation of such rights and obligations.

              23.    REFERENCE.

              In the event of the Executive's death or a judicial determination
of his incompetence, reference in this Agreement to the Executive shall be
deemed, where appropriate, to refer to his estate or other legal representative.

              24.    GOVERNING LAW.

              This Agreement shall be governed by and construed and interpreted
in accordance with the laws of the State of New York without reference to the
principles of conflict of laws.

              25.    HEADINGS.

              The heading of the sections contained in this Agreement are for
convenience only and shall not be deemed to control or affect the meaning or
construction of any provision of this Agreement.

              26.    COUNTERPARTS.

              This Agreement may be executed in one or more counterparts.



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                                      -21-


              IN WITNESS WHEREOF, the undersigned have executed this Agreement
as of the date first written above.

                                      XL CAPITAL LTD


                                      By: /S/ KIRSTIN R. GOULD
                                         ------------------------------------




                                      CLIVE TOBIN


                                      By: /S/ CLIVE TOBIN
                                         ------------------------------------





                                      GUARANTORS:

                                      XL INSURANCE (BERMUDA) LTD


                                      By: /S/ KIRSTIN R. GOULD
                                         ------------------------------------




                                      XL RE LTD


                                      By: /S/ KIRSTIN R. GOULD
                                         ------------------------------------








                                                                       EXHIBIT A


                                CHANGE IN CONTROL


       A "Change in Control" shall be deemed to have occurred:

              (i)    if any person (which, for all purposes hereof, shall
include, without limitation, an individual, sole proprietorship, partnership,
unincorporated association, unincorporated syndicate, unincorporated
organization, trust, body corporate and a trustee, executor, administrator or
other legal representative)(a "Person") or any group, as defined in Sections
13(d) or 14(d) of the United States Securities Exchange Act of 1934 (other than
a group of which the Executive is a member or which has been organized by the
Executive), becomes the beneficial owner, directly or indirectly, of securities
of the Company representing, or acquires the right to control or direct, or to
acquire through the conversion of securities or the exercise of warrants or
other rights to acquire securities, 30% or more of either (I) the outstanding
Ordinary Shares of the Company, (II) the outstanding securities of the Company
having a right to vote in the election of directors, or (III) the combined
voting power of the outstanding securities of the Company having a right to vote
in the election of directors; or

              (ii)   if there shall be elected or appointed to the Board of
Directors of the Company (the "Board") any director or directors whose
appointment or election by the Board or nomination for election by the Company's
shareholders was not approved by a vote of at least a majority of the directors
then still in office who were either directors on the date of execution of this
Agreement or whose election or appointment or nomination for election was
previously so approved; or

              (iii)  upon consummation of a reorganization, scheme of
arrangement, merger, consolidation, combination, amalgamation, corporate
restructuring, liquidation, winding up, exchange of securities, or similar
transaction (each, an "Event"), in each case, in respect of which the beneficial
owners of the outstanding Company Ordinary Shares immediately prior to such
Event do not, following such Event, beneficially own, directly or indirectly,
more than 60% of each of the outstanding equity share capital, and the combined
voting power of the then outstanding voting securities entitled to vote in the
election of the directors, of the Company and any resulting entity, in
substantially the same proportions as their ownership, immediately prior to such
Event, of the Ordinary Shares and voting power of the Company; or

              (iv)   if there occurs an Event involving the Company as a result
of which 25% of more of the members of the Board of the Company are not persons
who were members of the Board immediately prior to the earlier of (x) the Event,


                                      -2-


(y) execution of an agreement, the consummation of which would result in the
Event, or (z) announcement by the Company of an intention to effect the Event;
or

              (v)    if the Board adopts a resolution to the effect that, for
purposes of this Agreement, a Change in Control has occurred.






                                                                       EXHIBIT B


                                   GOOD REASON

              For purposes of this Agreement, "Good Reason" shall mean any of
the following, unless done with the prior express written consent of the
Executive:

                     (i)    (A) The assignment to Executive of duties
              inconsistent with Executive's position (including duties,
              responsibilities, status, titles or offices as set forth in
              Section 3 hereof); or (B) any elimination, diminution or reduction
              of Executive's duties or responsibilities except in connection
              with the termination of Executive's employment for Cause,
              disability or as a result of Executive's death or by Executive
              other than for Good Reason; and for purposes for this clause (i),
              the determination of whether there has been a reduction of duties
              or responsibilities or an assignment of duties inconsistent with
              the Executive's position shall take into account the Executive's
              duties, responsibilities and position with the ultimate parent of
              the parent/subsidiary group as a whole which includes the Company;

                     (ii)   The (A) reduction in Executive's Base Salary from
              the level in effect immediately prior to the Change in Control, or
              (B) payment of an annual bonus in an amount less than the lesser
              of (x) the most recent annual bonus paid prior to the Change in
              Control or (y) the greater of (I) the most recent target bonus, if
              any, established prior to the Change in Control or (II) the annual
              average bonus paid for the preceding three complete years prior to
              the Change in Control (or such lesser number of complete years as
              the Executive shall have been employed by the Company);

                     (iii)  The failure by the Company or the Guarantors to
              obtain the specific written assumption of this Agreement by any
              successor or assign of the Company or the Guarantors or any person
              acquiring substantially all of the Company's or the Guarantors'
              assets;

                     (iv)   Any breach by the Company or the Guarantors of any
              provision of this Agreement or any agreements entered into
              pursuant thereto that remains uncured for 20 calendar days
              following written notice of same by the Executive;

                     (v)    Notwithstanding the provisions of Section 3(b) of
              this Agreement, requiring the Executive to be based at any office
              or location that is greater than 35 miles from the office or
              location at which the Executive was principally located
              immediately prior to the Change in Control;


                                      -2-


                     (vi)   During the Post Change Period, (A) the failure to
              continue in effect any compensation or incentive plan in which
              Executive participates immediately prior to the time of the Change
              in Control unless an equitable arrangement (embodied in an ongoing
              substitute or alternative plan providing Executive with at least
              the same aggregate economic opportunity on an after-tax basis
              available to the Executive immediately prior to the Change in
              Control) has been made with respect to such plan in connection
              with the Change in Control, or the failure to continue Executive's
              participation therein on substantially the same basis both in
              terms of the amount of benefits provided and the level of his
              participation relative to other participants, as existed at the
              time of the Change in Control; or (B) the failure to continue to
              provide Executive with benefits and coverage at least as favorable
              in the aggregate as those enjoyed by him under the Company's
              pension, life insurance, medical, health and accident, disability,
              deferred compensation or savings plans in which he was
              participating at the time of the Change in Control; or

                     (vii)  The failure by the Company to pay within 7 calendar
              days of the due date any amounts due under any benefit or
              compensation plan, including any deferred compensation plan.

EX-31

                                                                      EXHIBIT 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 officer 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)) and internal control over
     financial reporting (as defined in Exchange Act Rules 13a-15(f) and
     15d-15(f)) 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)   Designed such internal control over financial reporting, or caused
              such internal control over financial reporting to be designed
              under our supervision, to provide reasonable assurance regarding
              the reliability of financial reporting and the preparation of
              financial statements for external purposes in accordance with
              generally accepted accounting principles;

         c)   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

         d)   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 officer 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: MAY 6, 2005

                                   /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 officer 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)) and internal control over
     financial reporting (as defined in Exchange Act Rules 13a-15(f) and
     15d-15(f)) 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)   Designed such internal control over financial reporting, or caused
              such internal control over financial reporting to be designed
              under our supervision, to provide reasonable assurance regarding
              the reliability of financial reporting and the preparation of
              financial statements for external purposes in accordance with
              generally accepted accounting principles;

         c)   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

         d)   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 officer 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: MAY 6, 2005

                                   /S/ JERRY DE ST. PAER
                                   ----------------------------------
                                   JERRY DE ST. PAER
                                   EXECUTIVE VICE PRESIDENT AND
                                   CHIEF FINANCIAL OFFICER

EX-32

                                                                      EXHIBIT 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 March 31, 2005 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: MAY 6, 2005


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




       DATED: MAY 6, 2005


       /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 MONTH PERIODS ENDED MARCH 31, 2005 AND 2004

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
	March 31,			December 31,
	2005			2004
Assets
Investments:
Fixed maturities available for sale, at fair value
(amortized cost: 2005 - $273,576; 2004 - $270,523)	$	272,027		$	272,950
Short-term investments, at fair value
(amortized cost: 2005 - $5,177; 2004 - $3,657)		5,171			3,657
Total investments		277,198			276,607
Cash and cash equivalents		19,439			58,038
Accrued investment income		1,846			2,564
Prepaid reinsurance premium		367,251			362,725
Premiums receivable		2,517			6,938
Reinsurance balances recoverable on unpaid losses		93,763			91,111
Intangible assets - acquired licenses		11,529			11,529
Deferred Federal income tax assets		18,651			17,260
Intercompany receivable from affiliates		3,328			-
Other assets		22,946			20,676
Total assets	$	818,468		$	847,448
Liabilities and Shareholder's Equity
Liabilities:
Unpaid losses and loss adjustment expenses	$	98,409		$	95,324
Deferred premium revenue		411,315			406,296
Deferred ceding commissions, net		34,570			37,270
Reinsurance premiums payable		11,570			25,849
Accounts payable, accrued expenses and other liabilities		25,780			25,182
Current Federal income tax payable		3,892			2,917
Intercompany payable to affiliates		-			20,644
Total liabilities		585,536			613,482
Shareholder's Equity:
Common stock (par value $7,500 per share; 8,000 shares
authorized; 2,000 shares issued and outstanding)		15,000			15,000
Additional paid-in capital		239,173			239,173
Accumulated other comprehensive income (Net of deferred
Federal income tax effect of: 2005 - ($542); 2004 - $850)		(1,013	)		1,578
Accumulated deficit		(20,228	)		(21,785	)
Total shareholder's equity		232,932			233,966
Total liabilities and shareholder's equity	$	818,468		$	847,448

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
		March 31,
	2005			2004
Revenues
Gross premiums written	$	37,414		$	41,939
Ceded premiums written		(33,708	)		(31,692	)
Net premiums written		3,706			10,247
Change in deferred premium revenue		(493	)		(6,491	)
Net premiums earned (Net of ceded earned premium for the		3,213			3,756
three months of $29,181 in 2005 and $20,257 in 2004)
Net investment income		3,034			2,495
Net realized gains (losses) on investments		(56	)		473
Net realized and unrealized gains on credit derivatives		208			318
Fee income and other		55			-
Total revenues		6,454			7,042
Expenses
Net losses and loss adjustment expenses (net of ceded losses		362			657
and loss adjustment expenses for the three months of
$3,922 in 2005 and $2,934 in 2004)
Net operating expenses		3,560			6,239
Total expenses		3,922			6,896
Income before Federal income tax expense		2,532			146
Current Federal income tax expense		975			50
Total Federal income tax expense		975			50
Net income		1,557			96
Comprehensive Income (Loss)
Other comprehensive income (loss)		(2,591	)		2,631
Comprehensive income (loss)	$	(1,034	)	$	2,727

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)
	Three months ended				Year Ended
	March 31,				December 31,
	2005				2004
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			239,173
Balance- end of period		239,173			239,173
Accumulated Other Comprehensive Income
Balance - beginning of year		1,578			1,327
Net change in unrealized appreciation of investments, net of
deferred Federal tax expense (benefit) of ($1,393) in 2005 and $134 in 2004		(2,591	)		251
Balance- end of period		(1,013	)		1,578
Accumulated deficit
Balance - beginning of year		(21,785	)		(18,272	)
Net income (loss)		1,557			(3,513	)
Balance- end of period		(20,228	)		(21,785	)
Total shareholder's equity	$	232,932		$	233,966

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)
		Three months ended
				March 31,
		2005				2004
Cash flows from operating activities:
Net Income (loss)	$	1,557			$	96
Adjustments to reconcile net income (loss) to net cash used in
operating activities
Net realized (gains) losses on sale of investments		56				(473	)
Net realized and unrealized (gains) losses on credit derivatives
excluding cash received and paid		(208	)			(318	)
Amortization of premium on bonds		317				380
Increase in unpaid losses and loss adjustment expenses, net		433				657
Increase in deferred premium revenue, net		493				6,491
(Decrease) in deferred ceding commissions, net		(2,700	)			(1,240	)
(Decrease) in reinsurance premiums payable		(14,279	)			(17,875	)
Decrease (increase) in premiums receivable		4,421				(1,426	)
Decrease in accrued investment income		718				649
Increase in current Federal income tax payable		975				50
Increase (decrease) in accounts payable and accrued expenses		807				(5,619	)
(Decrease) in intercompany payable to affiliates		(23,972	)			(6,673	)
Other		(2,283	)			1,812
Total adjustments		(35,222	)			(23,585	)
Net cash used in operating activities		(33,665	)			(23,489	)
Cash flows from investing activities:
Proceeds from sale of fixed maturities and short-term investments		14,635				64,659
Purchase of fixed maturities and short-term investments		510				(69,740	)
Increase (decrease) in payable for securities purchased		(20,079	)
Net cash (used in) provided by investing activities		(4,934	)			(5,081	)
Decrease in cash and cash equivalents		(38,599	)			(28,570	)
Cash and cash equivalents- beginning of year		58,038				76,854
Cash and cash equivalents- end of period	$	19,439			$	48,284
Taxes paid	$	-			$	-

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. (the “Company”) is a wholly owned subsidiary of XL Reinsurance America, Inc. (“XL RE AM”). XL RE AM and the Company are indirect wholly owned subsidiaries of XL Capital Ltd (“XL Capital”), a Cayman Islands exempted limited company whose shares are listed on the New York Stock Exchange.

The Company is an insurance company domiciled in the State of New York and licensed to conduct financial guaranty insurance business throughout the United States, as well as in Puerto Rico, the District of Columbia, and the U.S. Virgin Islands. The Company has triple-A financial strength ratings from Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings. The Company is primarily engaged in the business of providing credit enhancement on fixed and variable rate income securities through the issuance of financial guaranty insurance policies, and credit protection on specific referenced credits or on pools of specific referenced credits through the issuance of credit default swaps.

Financial guaranty insurance provides an unconditional and irrevocable guaranty that protects the holder of a financial obligation against non-payment of principal and interest when due. Financial guaranty insurance may be issued to the holders of the insured obligations at the time of issuance of those obligations, or may be issued in the secondary market to holders of public bonds and structured securities. Credit default swaps are derivative contracts which offer credit protection relating to a particular security or issuer. Under the terms of a credit default swap, the seller of credit protection makes a specified payment to the buyer of credit protection upon the occurrence of one or more specified credit events with respect to a reference obligation or entity. Credit derivatives typically provide protection to a buyer rather than credit enhancement of an issue as in traditional financial guaranty insurance.

On April 24, 2002, the Company formed XL Capital Assurance (U.K.) Limited, (“XLCA-UK”), an insurance company organized under the laws of England. XLCA-UK is a 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. 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 March 31, 2005 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, 2004 consolidated financial statements and notes thereto. The accompanying condensed consolidated balance sheet as of December 31, 2004 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 March 31, 2005 and 2004 are not necessarily indicative of the operating results for the full year.

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, as well as the reported amounts of revenue and expenses. Actual results

XL Capital Assurance Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(UNAUDITED)

may differ from those estimates. Certain comparative figures have been reclassified to conform with the current year’s presentation.

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, as well as actual and expected loss payments by the Company.

Effective January 1, 2005, the Company changed the presentation of the results from credit default swaps in its statement of operations to reclassify changes in the fair value of such instruments attributable to earnings from premiums received by the Company from the issuance of such contracts and losses from actual and expected payments to counterparties under such contracts from the line item caption entitled “net realized and unrealized gains (losses) on credit derivatives” to the “premium” and “losses and loss adjustment expense” captions in the statement, respectively. In addition, certain reclassifications were made to the Company’s balance sheet to correspond with the aforementioned changes in its statement of operations. This change in presentation is applicable only to credit default swaps issued by the Company that it has the intent and ability to hold to maturity and is consistent with practices in the financial guaranty insurance industry for reporting the results of such instruments. Results of the prior period presented have been reclassified to conform the current period presented.

The credit default swap portfolio consists of structured pools of corporate obligations that were awarded investment grade ratings at the respective deals’ inception. At March 31, 2005, approximately 87% of the portfolio was rated AAA with the remaining 13% allocated to other investment grade ratings. The weighted average term of the contracts in force was approximately 4.15 years, and the credit default swaps represented approximately 9% of the Company’s credit enhancement par exposure at March 31, 2005.

XL Capital Assurance Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(UNAUDITED)

Amounts related to credit default swaps appear in the following financial statement line items as of and for the periods noted:

(U.S. Dollars in thousands)		(Unaudited)
		Three Months Ended
		March 31,
		2005			2004
Income Statement
Gross written premiums	$	4,883		$	4,992
Net premiums earned		451			393
Net losses and loss expenses		54			93
Net realized and unrealized gains on credit derivatives		208			318
	As of		As of
	March 31,		December 31,
	2005		2004
Assets
Reinsurance balances recoverable on unpaid losses	$	8,520	$		8,215
Other Assets		22,505			20,514
Total assets	$	31,025	$		28,729
Liabilities
Unpaid losses and loss adjustment expenses	$	9,245	$		8,886
Accounts payable, accrued expenses and other liabilities		21,035			19,252
Total liabilities	$	30,280	$		28,138

4. Recent Developments

In March 2005, the FASB issued FASB Staff Position (“FSP”) FIN 46(R)-5, Implicit Variable Interests Under FASB Interpretation No. 46(R) which requires an enterprise to consider whether it holds an implicit variable interest in a Variable Interest Entity (“VIE”) and what affect this may have on the calculation of expected losses and residual returns of the VIE and the determination of which party, if any, is considered the primary beneficiary of the VIE. This statement will be effective for the first quarterly reporting period beginning after March 3, 2005 and is not expected to have a material impact on the Company’s financial condition or results of operations.

The Company is aware of the Securities and Exchange Commission’s (the “SEC”) recent review of the loss reserving practices of the financial guaranty insurance industry. The Company recognizes that there is diversity in practice among financial guarantee insurers and reinsurers with respect to their accounting policies for loss reserves. Current accounting literature, specifically Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. 60 "Accounting and Reporting by Insurance Enterprises" ("SFAS 60”) and FASB Statement of Financial Accounting Standards No. 97 "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments" ("SFAS 97"), does not specifically address the unique characteristics of financial guarantee insurance contracts. Consequently, the accounting principles applied by the industry, as well as the Company, have evolved over time and incorporate the concepts of both short-duration and long-duration contract accounting under the provisions of SFAS 60 and SFAS 97, as well as other accounting literature, such as FASB No. 5 “Accounting for Contingencies” and Emerging Issues Task Force (“EITF”) Issue No. 85-20 “Recognition of Fees for Guaranteeing a Loan”. It is our understanding that the SEC has requested that the FASB review this matter and provide guidance for the accounting of financial guarantee insurance contracts. The Company will continue its loss reserving methodology as described in the 2004 year-end financial statements until further guidance is provided by the SEC or the FASB.

XL Capital Assurance Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(UNAUDITED)

5. Variable Interest Entities

The Company participates in transactions which utilize variable interest entities (“VIEs”) in the ordinary course of the Company’s 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 charge fees for specified services or projects, and corporate 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 VIEs. In synthetic transactions, the Company guarantees payment obligations of counterparties, including VIEs, through credit default swaps referencing asset portfolios. The Company only provides financial guaranty insurance of these VIEs for fixed premiums at market rates but does not hold any equity positions or subordinated debt in these off-balance sheet arrangements. These financial guaranty insurance contracts represent variable interests held by the Company in VIEs.

In underwriting financial guaranty insurance, the Company believes the risk of any loss to be remote based upon the Company’s requirement that guaranteed obligations be investment-grade prior to the provision of credit enhancement. Typically, in the case of asset-backed securities and other structured obligations, such investment grade ratings are based upon subordination, cash reserves and other structural protections. Consequently, the Company has determined that it is not the primary beneficiary of any VIEs in which it holds a variable interest. Accordingly, these VIEs are not consolidated.

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. As of March 31, 2005 and December 31, 2004, the Company had deferred Federal income tax assets of $18,651,000 and $17,260,000, 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

General Services Agreements

The Company entered into a General Services Agreement effective January 28, 2002 (the “XLFAS General Services Agreement”) with an affiliated company, XL Financial Administrative Services Inc. (“XLFAS”). For the three months ended March 31, 2005 and 2004, operating expenses were allocated to the Company under this agreement in the amount of $9,400,635 and $12,497,379, respectively.

In addition to the XLFAS General Services Agreement, the Company has entered into two service agreements with certain of its U.S. affiliates, including its ultimate U.S. holding company, X.L. America, Inc (“XLA”). These services agreements include the Amended and Restated General Services Agreement, dated January 1, 2003 (the “Global Services Agreement”) among X.L. Global Services, Inc.(“XLGS”), XLA on behalf of: the Company, XLFAS and various other affiliates and the Second Amended and Restated General Services Agreement, dated January 1, 2003 (the “XL America General Services Agreement”), among XLA, XLFAS, the Company and various other affiliates. Expenses allocated to the Company under the Global Services Agreement and the XL America General Services Agreement for the three months ended March 31, 2005 and 2004 were $3,627,667 and $2,794,380, respectively.

XL Capital Assurance Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
(UNAUDITED)

Employee Benefit Plans

XLA maintains a qualified defined contribution pension plan for the benefit of all eligible employees and a non-qualified deferred compensation plan for the benefit of certain employees of XLFAS and some other subsidiaries (collectively, the “Plans”). XLFAS’s discretionary contributions to both Plans are based on a fixed percentage of employee contributions and compensation as defined by the Plans. The Company’s share of allocated pension expense was $569,010 and $616,758 for the three months ended March 31, 2005 and 2004, respectively.

Facultative Quota Share Reinsurance Treaties

On October 6, 1999, the Company entered into an arm’s-length Facultative Quota Share Reinsurance Treaty (“Treaty”) with XL Financial Assurance Ltd (“XLFA”), a Bermuda financial guaranty reinsurer, which is 86.8% owned by XL Capital through its wholly owned subsidiary, XL Insurance (Bermuda) Ltd. The remaining 13.2% of XLFA is owned by Financial Security Assurance Holdings Ltd., an unrelated company. Under the terms of this agreement, XLFA agrees to reinsure up to 90% of the Company’s acceptable risks. The Company is allowed up to a 30% ceding commission (or such other percentage on an arm’s-length basis) on ceded premiums written under the terms of this agreement.

The Company entered into a Facultative Master Certificate (the “XL Re Treaty”) with XL RE AM, effective as of December 1, 2002. Under the terms of the XL Re Treaty, XL RE AM agrees to automatically reinsure risks insured 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 a 30% ceding commission (or such other percentage on an arm’s-length basis) on ceded premiums written under the terms of this agreement.

Amounts ceded to affiliate reinsurers are as follows:
(U.S. Dollars in thousands)	Three Months		Three Months
	ended March 31,		ended March 31,
	2005		2004
Ceded premiums written	$	32,214	$	30,454
Ceded premiums earned		27,915		23,354
Ceding commission revenue		8,816		7,304
Ceded losses and loss adjustment expenses		3,606		2,559

Related Party Guarantees

In 2002, the Company began providing financial guaranty insurance policies insuring timely payment of investment agreements issued by XL Asset Funding Company I LLC, an affiliate of the Company. As of March 31, 2005 and December 31, 2004, the net aggregate amount of investment agreements insured was $264,200,600 and $255,730,165, respectively. These insurance policies are collateralized by investment securities, accrued interest, cash and cash equivalents, which as of March 31, 2005 and December 31, 2004 had an aggregate fair value of $270,653,686 and $262,421,920, respectively. Under these agreements, the Company recorded net premiums written and earned of $608,244 and $405,533 during the three months ended March 31, 2005 and 2004, respectively.

EX-99.2

XL FINANCIAL ASSURANCE LTD.
(Incorporated in Bermuda)

CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2005 AND 2004

XL FINANCIAL ASSURANCE LTD.
CONDENSED BALANCE SHEETS
AS AT MARCH 31, 2005 AND DECEMBER 31, 2004
(UNAUDITED)
(U.S. dollars in thousands, except per share amounts)

		2005			2004
Assets:
Investments :
Fixed maturities, at fair value
(amortized cost: 2005 - $840,399; 2004 - $794,190)	$	826,459		$	792,723
Short-term investments, at fair value
(amortized cost: 2005 - $90,413; 2004 - $88,227)		89,948			87,875
Total investments available for sale		916,407			880,598
Cash and cash equivalents		15,336			13,210
Accrued investment income		6,803			6,764
Deferred acquisition costs		83,271			83,868
Prepaid reinsurance premiums		56,640			52,486
Reinsurance balances receivable		14,059			40,859
Unpaid losses and loss expenses recoverable		57,482			55,441
Amounts due from parent and affiliates		34,999			32,708
Net receivable for investments sold		850			-
Derivative assets		19,751			17,396
Other assets		109			138
Total assets	$	1,205,707		$	1,183,468
Liabilities, Redeemable Preferred Shares and Shareholders’ Equity
Liabilities:
Unpaid losses and loss expenses	$	110,937		$	109,151
Deferred premium revenue		446,820			437,654
Reinsurance balances payable		3,255			4,022
Net payable for investments purchased		-			7
Accounts payable and accrued liabilities		1,877			2,738
Amounts due to parent and affiliates		12,848			11,482
Derivative liabilities		1,185			1,669
Dividend payable on preferred shares		2,431			1,950
Total liabilities	$	579,353		$	568,673
Redeemable Preferred Shares:
Series A Redeemable preferred shares (par value of $120 per share;
10,000 shares authorized; 363 issued and outstanding as at
March 31, 2005 and December 31, 2004, 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; 2,449 issued and outstanding as at
March 31, 2005 and December 31, 2004, respectively)	$	294		$	294
Additional paid-in capital		345,606			345,606
Accumulated other comprehensive loss		(14,405	)		(1,819	)
Retained earnings		255,859			231,714
Total shareholders’ equity	$	587,354		$	575,795
Total liabilities, redeemable preferred shares and shareholders’ equity	$	1,205,707		$	1,183,468

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 MONTH PERIODS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
(U.S. dollars in thousands, except per share amounts)

		2005			2004
REVENUES :
Net premiums earned	$	28,460		$	24,597
Net investment income		8,274			5,140
Net realized gains (losses) on investments		(1,357	)		4,880
Fee and other income		495			-
Net realized and unrealized gains on derivative instruments		2,235			6,796
Total revenues	$	38,107		$	41,413
EXPENSES :
Losses and loss expenses	$	566		$	2,038
Acquisition costs		8,547			6,254
Operating expenses		1,768			2,054
Total expenses	$	10,881		$	10,346
NET INCOME	$	27,226		$	31,067
COMPREHENSIVE INCOME
Net income	$	27,226		$	31,067
Unrealized gains (losses)		(13,943	)		8,999
Less: reclassification for gains (losses) realized in income		(1,357	)		4,880
Other comprehensive gain (loss)	$	(12,586	)	$	4,119
COMPREHENSIVE INCOME	$	14,640		$	35,186

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 THREE MONTH PERIOD ENDED MARCH 31, 2005 AND FOR THE YEAR
ENDED DECEMBER 31, 2004
(UNAUDITED)
(U.S. dollars in thousands, except per share amounts)

		2005			2004
Common Shares – Number issued
Number of shares, beginning of year and period		2,449			2,057
Issuance of common shares		-			392
Number of shares, end of year and period		2,449			2,449
Common Shares – Issued at par
Balance - beginning of year and period	$	294		$	247
Issuance of common shares		-			47
Balance– end of year and period	$	294		$	294
Additional Paid-in Capital
Balance - beginning of year and period	$	345,606		$	220,653
Issuance of common shares		-			124,953
Balance – end of year and period	$	345,606		$	345,606
Accumulated Other Comprehensive Loss
Balance - beginning of year and period	$	(1,819	)	$	1,174
Other comprehensive loss		(12,586	)		(2,993	)
Balance - end of year and period	$	(14,405	)	$	(1,819	)
Retained Earnings
Balance - beginning of year and period	$	231,714		$	169,565
Net income		27,226			76,252
Dividends on Series A preferred shares		(3,081	)		(14,103	)
Balance - end of year and period	$	255,859		$	231,714
TOTAL SHAREHOLDERS’ EQUITY	$	587,354		$	575,795

The accompanying notes are an integral part of these condensed financial statements.

XL FINANCIAL ASSURANCE LTD.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
(U.S. dollars in thousands, except per share amounts)

		2005			2004
Cash flows provided by operating activities:
Net income for the period	$	27,226		$	31,067
Adjustments to reconcile net income to net cash provided by operating
activities:
Realized losses (gains) on investments		1,357			(4,880	)
Amortization of premium on fixed maturities		973			1,815
Net realized gains on investment derivatives		-			(19	)
Net realized and unrealized gains on credit derivatives excluding
cash received and paid		(2,854	)		(6,776	)
Net realized and unrealized losses on put option		15			-
Accrued investment income		(39	)		3,329
Unpaid losses and loss expenses		1,786			2,591
Deferred premium revenue		9,166			20,603
Unpaid losses and loss expenses recoverable		(2,041	)		(553	)
Deferred acquisition costs		597			(6,049	)
Amounts due from parent and affiliates		(2,291	)		(8,843	)
Accounts payable and accrued liabilities		(861	)		65
Amounts due to parent and affiliates		1,366			222
Prepaid reinsurance premiums		(4,154	)		(214	)
Reinsurance balances receivable		26,800			10,927
Reinsurance balances payable		(767	)		(2,896	)
Other assets		29			(19	)
Total adjustments		29,082			9,303
Net cash provided by operating activities		56,308			40,370
Cash flows used in investing activities:
Proceeds from sale of fixed maturities and short-term investments		137,470			1,375,699
Proceeds from redemption of fixed maturities and short-term investments		34,300			81,950
Purchase of fixed maturities and short-term investments		(223,352	)		(1,519,421	)
Net cash used in investing activities		(51,582	)		(61,772	)
Cash flows used in financing activities:
Dividends paid on Series A preferred shares		(2,600	)		-
Increase (decrease) in Cash and Cash Equivalents		2,126			(21,402	)
Cash and Cash Equivalents – Beginning of period		13,210			26,346
Cash and Cash Equivalents – End of period	$	15,336		$	4,944

The accompanying notes are an integral part of these condensed financial statements.

XL FINANCIAL ASSURANCE LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THREE MONTH PERIODS ENDED MARCH 31, 2005 AND 2004
(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 March 31, 2005, the Company was approximately 87% owned by XL Insurance (Bermuda) Ltd (a wholly-owned subsidiary of XL Capital Ltd); 5% by Financial Security Assurance Inc. (a wholly-owned subsidiary of Financial Security Assurance Holdings Ltd.) and 8% by Financial Security Assurance International Ltd. (owned 20% by XL Insurance (Bermuda) Ltd and 80% by Financial Security Assurance Inc.). At March 31, 2004, the Company was approximately 85% owned by XL Insurance (Bermuda) Ltd; 6% by Financial Security Assurance Inc. and 9% by Financial Security Assurance International Ltd. 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 derivatives 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 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.

Effective December 1, 2004 the Company established a trust account in accordance with Regulation 114 of the New York Insurance Department for the benefit of XLCA to secure the obligations of the Company to XLCA under the Treaty. This trust account is required for XLCA to take financial credit for statutory reporting purposes for the reinsurance cessions by XLCA to the Company under the Treaty, since the Company is not a licensed insurer or reinsurer in any state of the United States of America. At March 31, 2005, investments at an amortized cost of $930,812 were on deposit in the trust account.

XL FINANCIAL ASSURANCE LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THREE MONTH PERIODS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
(U.S. dollars in thousands, except per share amounts)

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 March 31, 2005 and for all periods presented, have been made.

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, 2004 financial statements and notes thereto. The December 31, 2004 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 March 31, 2005 and 2004 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 derivative instruments.

Recent Accounting Pronouncements

In March 2005, the FASB issued FASB Staff Position (“FSP”) FIN 46(R)-5, Implicit Variable Interests Under FASB Interpretation No. 46(R) which requires an enterprise to consider whether it holds an implicit variable interest in a Variable Interest Entity (“VIE”) and what affect this may have on the calculation of expected losses and residual returns of the VIE and the determination of which party, if any, is considered the primary beneficiary of the VIE. This statement will be effective for the first quarterly reporting period beginning after March 3, 2005 and is not expected to have a material impact on the Company’s financial condition or results of operations.

The Company has become aware of the SEC's recent review of the loss reserving practices of certain financial guarantee companies. The Company recognizes that there is diversity in practice among financial guarantee insurers and reinsurers with respect to their accounting policies for loss reserves. Current accounting literature, specifically FASB Statement of Financial Accounting Standards No. 60 "Accounting and Reporting by Insurance Enterprises" ("FAS 60) and FASB Statement of Financial Accounting Standards No. 97 "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments" ("FAS 97"), do not specifically address the unique characteristics of financial guarantee insurance contracts. Consequently, the accounting principles applied by the industry, as well as the Company, have evolved over time and incorporate the concepts of both short-duration and long-duration contracts accounting under the provisions of FAS 60 and FAS 97. It is our understanding that the SEC has requested that the FASB review this matter and provide guidance for the accounting of financial guarantee insurance contracts. The Company will continue its loss reserving methodology as noted above until further guidance is provided by the SEC or FASB.

XL FINANCIAL ASSURANCE LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THREE MONTH PERIODS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
(U.S. dollars in thousands, except per share amounts)

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 March 31, 2005 was $5.2 billion. Approximately 95% and 4% of the portfolio is rated AAA and BBB, respectively, with the remainder being split amongst AA and A. The weighted average term of the contracts in force was 5.38 years.

For the three months ended March 31, 2005, the Company amended the presentation of credit derivative transactions in the statements of income to include certain components of the transactions in “gross premiums written”, “net premiums earned”, “net losses and loss expenses incurred” and “fee and other income”, and certain components of the change in fair value in “unpaid loss and loss expenses.” Previously, components of the transactions and the change in fair value were reflected in one line item under “Net realized and unrealized gains and losses on derivative instruments”, and the fair value had been reflected in “Derivative assets” and “Derivative liabilities.” There was no effect on net income as a result of this change and prior period results have been reclassified to reflect this presentation. This change in presentation is applicable only to credit default swaps assumed by the Company that are investment grade and that the Company intends and has the ability to hold to maturity and is consistent with practices in the financial guaranty insurance industry for reporting the results of such instruments. Results of the prior period presented have been reclassified to conform to the current period presentation.

In terms of the 2005 and 2004 condensed financial statements, the effect of the reclassification is outlined as follows:

		(Unaudited)
		Three Months Ended March 31,
		2005		2004
Income Statement
Net earned premiums	$	3,893	$	4,917
Net losses and loss expenses		974		747
Acquisition costs		15		61
Net realized and unrealized gains on derivative instruments		2,854		6,776
Total Income Statement Impact		5,758		10,885

XL FINANCIAL ASSURANCE LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THREE MONTH PERIODS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
(U.S. dollars in thousands, except per share amounts)

	(Unaudited)
	As at
	March 31,	December 31,
	2005	2004
Balance Sheet
Derivative assets	19,571	17,396
Derivative liabilities	1,185	1,669
Net losses and loss expenses	10,992	10,018

The Company is also party to a put option agreement and an asset trust expense reimbursement agreement with Twin Reefs Asset Trust (the “Asset Trust”). The put option agreement provides The Company with the irrevocable right to require the Asset Trust at any time and from time to time to purchase the Company’s non-cumulative perpetual Series B Preferred Shares with an aggregate liquidation preference of up to $200 million. The Company is obligated to reimburse the Asset Trust for certain fees and ordinary expenses. To the extent that any Series B Preferred Shares are put to the Asset Trust and remain outstanding, a corresponding portion of such fees and ordinary expenses will be payable by the Company pursuant to the asset trust expense reimbursement agreement. The put option agreement is perpetual but would terminate on delivery of notice by the Company on or after December 10, 2009, or under certain defined circumstances, such as the failure of the Company to pay the put option premium when due or bankruptcy. The put option is recorded at fair value with changes in fair value recognized in “Net realized and unrealized gains and losses on derivative instruments”. At March 31, 2005, the fair value adjustment was a $15 charge to income. In addition, put option premiums of $603 were recognized during the first quarter of 2005.

4. Reinsurance

The effect of reinsurance on premiums written and earned for the three month periods ended March 31, 2005 and 2004 is shown below:

	Assumed		Ceded			Net
Three months ended March 31, 2005
Premium written	$	43,053	$	(9,582	)	$	33,471
Premium earned		33,887		(5,427	)		28,460
Losses and loss adjustment expenses		2,954		(2,388	)		566
Three months ended March 31, 2004
Premium written	$	45,904	$	(7,217	)	$	38,687
Premium earned		31,600		(7,003	)		24,597
Losses and loss adjustment expenses		2,591		(553	)		2,038