Moody's downgrades Security Capital Assurance subs XLCA and XLFA to B2; outlook is negative

Moody's Investors Service has downgraded to B2, from A3, the insurance financial strength ratings of XL Capital Assurance Inc. ("XLCA"), XL Capital Assurance (U.K.) Limited and XL Financial Assurance Ltd ("XLFA"). In the same rating action, Moody's also downgraded the debt ratings of Security Capital Assurance Ltd (NYSE: SCA -- preference shares to Ca from B3) and a related financing trust. Today's rating action concludes a review for possible downgrade that was initiated on March 4, 2008, and reflects the company's severely impaired financial flexibility and the company's proximity to minimum regulatory capital requirements relative to our estimations of expected case losses. The outlook for the ratings is negative. Moody's ratings on securities that are guaranteed or "wrapped" by a financial guarantor are generally maintained at a level equal to the higher of a) the rating of the guarantor or b) the published underlying rating. However, as XLCA and XLFA's ratings are downgraded below theinvestment grade level, and reflecting current rating agency policy,Moody's will withdraw ratings on XLCA and XLFA-wrapped securities for which there is no published underlying rating. Should the guarantors'ratings subsequently move back into the investment grade range or should the agency subsequently publish the underlying rating, Moody's would reinstate the rating to the wrapped instruments. For further information please see Moody's recently published special comment entitled: Assignment of Wrapped Ratings When Financial Guarantor Falls Below Investment Grade (May 6, 2008). SCA has recorded approximately $750 million in cumulative losses arising from its mortgage-related exposures, primarily from ABS CDOs and to a lesser extent, second-lien RMBS transactions. At 1Q2008, XLCA had $167 million of statutory surplus, which is approximately $102 million above the statutory minimum regulatory requirement. Moody's notes that XLCA cedes a majority of premiums and losses to XLFA under a quota share reinsurance arrangement, which substantially increases the amount of resources XLCA may draw upon to pay claims. At 1Q2008, XLFA had approximately $1.2 billion of capital. During 4Q2007, XLCA entered into various additional reinsurance arrangements with XLFA designed to maintain XLCA's statutory surplus above the minimum threshold. SCA has stated that it could incur adverse case basis loss reserve development of up to approximately 80% of its established case basis reserves at 1Q2008 (net of reinsurance), and still maintain compliance with its regulatory solvency requirements. However, Moody's has estimated expected case losses on the firm's mortgage risks to be in the range of $2 billion,suggesting that meaningful further losses may be recognized and regulatory capital further depleted. The rating agency added that if XLCA's capital were to fall below the regulatory minimum, there could be material adverse effects on the firm's financial condition. A meaningful portion of XLCA's credit exposure was written in credit default swap (CDS) form, and contains a clause that exposes the firm to mark to market termination in the event of insolvency. A breach of minimum regulatory capital requirement heightens the risk of regulatory intervention, which could trigger a market value termination of the CDS contracts. Moody's has re-estimated expected and stress loss projections on SCA's insured portfolio, focusing on the company's mortgage-related exposures, as well as other sectors of the portfolio potentially vulnerable to deterioration in the current environment. Based on Moody's revised assessment of the risks in SCA's portfolio, estimated stress-case losses would approximate $6.6 billion at the Aaa rating threshold. This compares to Moody's estimate of SCA's total claims paying resources of approximately $3.5 billion, a capital position more consistent with a rating in the single-B category. According to Moody's, the negative outlook on SCA's ratings reflects continued uncertainty with respect to the amount of losses that will ultimately arise from the company's insured portfolio and attendant risks that could occur if losses develop adversely, including the potential of regulatory intervention. SCA has stated that it continues to work toward mitigating the financial stresses impacting the company, including the commutation, restructuring or settlement of its obligations with its CDO counterparties and the commutation or settlement of various reinsurance arrangements with XL Capital Ltd. Moody's will continue to evaluate SCA's ratings in the context of changes to the company's strategic and capital management plans, as well as the future performance of the company's mortgage-related exposures relative to expectations and resulting capital adequacy levels. The rating agency noted that upward rating pressure could occur if SCA is able to successfully execute on its restructuring plans, although there is considerable uncertainty about the outcome and timing of those efforts. Conversely, downward rating pressure could occur if minimum regulatory capital requirements are breached. LIST OF RATING ACTIONS The following ratings have been downgraded: XL Capital Assurance Inc. -- insurance financial strength to B2 from A3; XL Capital Assurance (U.K.) Limited -- insurance financial strength to B2from A3; XL Financial Assurance Ltd -- insurance financial strength to B2 from A3; Security Capital Assurance Ltd -- provisional rating on senior debt to (P)Caa3 from (P)Ba1, provisional rating on subordinated debt to (P)Ca from (P)Ba2 and preference shares to Ca from B3; and Twin Reefs Pass-Through Trust -- contingent capital securities to Caa2from Ba1. OVERVIEW OF SECURITY CAPITAL ASSURANCE Security Capital Assurance Ltd is a Bermuda-domiciled holding company whose primary operating subsidiaries, XL Capital Assurance Inc. and XL Financial Assurance Ltd, provide credit enhancement and protectionproducts to the public finance and structured finance markets throughout the United States and internationally. For the three months ended March 31, 2008, SCA reported a net loss available to common shareholders of $97 million. As of March 31, 2008, SCA had shareholders' equity of approximately $348 million.