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Record First-Half 2004 Net Income of $815.8 million, or $5.88 per ordinary share

HAMILTON, BERMUDA, July 28, 2004 -- XL Capital Ltd (“XL” or the“Company”) (NYSE: XL) today reported netincome available to ordinary shareholders for the quarterended June 30, 2004 of $363.6 million, or $2.62 perordinary share, compared with $347.7 million, or $2.51per ordinary share, for the quarter ended June 30, 2003.Annualized net income return on ordinary shareholders’equity for the quarter was 21.7% compared with 20.8%for the year ago quarter.

‘Net income excluding net realized gains and losses on investments andnet realized and unrealized gains and losses on creditand investment derivative instruments, net of tax’,for the quarter increased 15% to $308.9 million, or$2.23 per ordinary share, compared with $268.6 million,or $1.94 per ordinary share, for the year ago quarter.Annualized return on ordinary shareholders’ equityon the same basis was 18.4% compared with 16.1% forthe year ago quarter. See below for a reconciliationof ‘net income excluding net realized gains andlosses on investments and net realized and unrealizedgains and losses on credit and investment derivativeinstruments, net of tax’ to net income availableto ordinary shareholders.

“XL delivered its second highest level of quarterlynet income ever this quarter, after our record performancein the first quarter. These results underscore the increasingvalue of our global diversified platform, significantlyexpanded product capabilities and focus on improvingpenetration of existing customer relationships,”said Brian O’Hara, President and Chief ExecutiveOfficer of XL.

“The combined ratio for our general operationsin the quarter was 87.6%, reflecting the strength ofour underwriting discipline and continued solid marketfundamentals, despite increasing competition in certainproduct lines.”

“Our Life and Annuity operations continue togain critical mass. During the quarter we completeda single premium annuity reinsurance transaction, representing$898 million in up-front premium, with a major UK lifeinsurance company. This was the fourth transaction withup-front premium in excess of $500 million that we havecompleted since entering the business in 1999.”

“We continue to deliver strong returns to shareholders,with net income return on ordinary shareholders’equity for the quarter of 21.7%, and 18.4% excludingnet realized gains and losses on investments and netrealized and unrealized gains and losses on credit andinvestment derivative instruments, net of tax,”said Mr. O’Hara.

For the six months ended June 30, 2004, net incomeavailable to ordinary shareholders increased 39% overthe year ago period to a record $815.8 million, or $5.88per ordinary share. ‘Net income excluding netrealized gains and losses on investments and net realizedand unrealized gains and losses on credit and investmentderivative instruments, net of tax’ for the sameperiod increased 23% to $637.7 million or $4.60 perordinary share.

Second Quarter 2004 Highlights (versus second quarter of 2003, unless noted):

  • Net premiums written from general operations increased 24% to $1.7 billion
  • Combined ratio from general operations improved 4.6 points to 87.6%
  • Net investment income increased 23% to $235.2 million
  • Cash flow from operations of $1.4 billion, or $1.9 billion including structured and spread transactions
  • Total net invested assets of $28.5 billion, up 12% from December 31, 2003
  • Total assets of $45.5 billion, up 12% from December 31, 2003
  • Book value per ordinary share was $47.40, up from $46.74 at December 31, 2003

SEGMENT HIGHLIGHTS:Insurance Operations Underwriting profit for the quarter was $109.8 million,an increase of 41% over the second quarter of 2003.Net premium written increased 36% to $1.2 billion, drivenprimarily by higher new business volumes, commutationson certain reinsurance treaties, greater retentionson new and existing product lines and the impact offavorable foreign exchange movements. The combined ratioimproved 2.3 points compared with the 2003 second quarterto 89.7%, driven by a 2.4 point improvement in the acquisitionexpense ratio, due primarily to changes in product mix.The loss ratio in the quarter of 63.8% was essentiallyflat versus the 2003 second quarter. During the quarter,the Company announced two important new initiativeswithin this segment: the launching of its whole accountcommercial property initiative with capacity of up to$500 million and the commencement of primary directors’and officers’ liability coverage in Europe.

Reinsurance OperationsGeneral Operations - Underwriting profit from GeneralOperations for the quarter was $108.9 million, an increaseof 71% from the second quarter of 2003. Net premiumwritten increased 3% from the 2003 second quarter to$537 million driven primarily by the impact of favorableforeign exchange movement. A low level of large lossesin the quarter compared with the year ago period contributedto a 9.6 point improvement in the loss ratio to 53.3%,among the lowest loss ratios in XL’s history.The acquisition and operating expense ratios increasedmodestly and the combined ratio was 84.4%.

Life and Annuity Operations – Income from Lifeand Annuity Operations for the quarter was $19.5 million,an increase of 68% from the second quarter of 2003.Net premiums written increased $917 million to $968million, largely reflecting the closing of a large,single premium annuity reinsurance transaction whichcontributed up-front premium of $898 million.

Financial Products and Services OperationsTotal income contribution in the quarter more than doubledover the second quarter of 2003 to $37.8 million, comprisedof $33.0 million from Financial Operations and $4.8million from Life and Annuity activities. The majorityof this increase resulted from a positive $47.7 millionchange in fair value of derivative form transactions,comprised of both increased premium and positive priceand credit changes, which more than offset a $9.1 milliondecrease in underwriting profit and a $15.3 millionreduction in equity in net income of financial affiliates.The decrease in equity in net income of financial affiliateswas driven primarily by the Company’s Primus GuarantyLtd affiliate, reflecting a negative change in the marketvalue of its credit default swap portfolio in the quarteras compared to a positive change in the year ago quarter.

Corporate ItemsNet investment income for the quarter increased 23%over the 2003 second quarter to $235.2 million, principallyreflecting 25% year-over-year growth in invested assets.Equity in earnings of investment affiliates was $26.7million, down 22% from the 2003 second quarter and down$43.6 million from the very strong results in the firstquarter of 2004.

Net realized gains on investments were $8.8 millionin the quarter compared with $93.7 million in the secondquarter of 2003. The reduction in realized gains wasdriven primarily by lower realized gains on US dollarfixed income securities. Net unrealized gains on investments,net of tax were $158.6 million at June 30, 2004, comparedwith $743.8 million at March 31, 2004. The reductionin net unrealized gains was driven primarily by an increasein US dollar, UK Sterling and Euro interest rates duringthe quarter.

Total operating expenses in the quarter were $247.7million, up 28% from the prior year quarter. The increasewas driven primarily by costs associated with complyingwith Sarbanes-Oxley requirements, new business initiatives,the continuing build-out of the Company’s globaloperations, as well as the unfavorable impact of foreignexchange movement. Compared with the first quarter ofthis year, expenses grew 1% in the quarter.

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A live on-line web cast of XL’s call with analystsand investors to review the second quarter 2004 resultswill be held at 10:00 a.m. Eastern Time on July 29,2004 at www.xlgroup.com. A telephone replay of theconference call will be available beginning at 1:00p.m. Eastern Time on July 29, 2004 until 8:00 p.m. EasternTime on August 5, 2004 by dialing (201) 612-7415 (accountnumber: 7716 and conference I.D. number: 109136). Anunaudited financial supplement relating to the Company’s2004 second quarter results is available on its website:www.xlgroup.com.

XL Capital Ltd, through its operating subsidiaries,is a leading provider of insurance and reinsurance coveragesand financial products and services to industrial, commercialand professional service firms, insurance companiesand other enterprises on a worldwide basis.

This presentation contains forward-looking statements that involve inherentrisks and uncertainties. Statements that are not historicalfacts, including statements about XL’s beliefs,plans or expectations, are forward-looking statements.These statements are based on current plans, estimates,and expectations. Actual results may differ materiallyfrom those projected in such forward-looking statementsand therefore you should not place undue reliance onthem. A non-exclusive list of the important factorsthat could cause actual results to differ materiallyfrom those in such forward-looking statements includesthe following: (a) greater frequency or severity ofclaims and loss activity than XL’s underwriting,reserving or investment practices anticipate based onhistorical experience or industry data; (b) developmentsin the world’s financial and capital markets whichadversely affect the performance of XL’s investmentsor access to such markets; (c) changes in general economicconditions, including foreign currency exchange rates,inflation and other factors; and (d) the other factorsset forth in XL’s most recent reports on Form10-K, Form 10-Q, and other documents on file with theSecurities and Exchange Commission. XL undertakes noobligation to update or revise publicly any forward-lookingstatement, whether as a result of new information, futuredevelopments or otherwise.

                                  XL Capital Ltd                       SUMMARY CONSOLIDATED FINANCIAL DATA                           (U.S. dollars in thousands)                                   Three Months Ended       Six Months Ended    Income Statement Data:               June 30                 June 30                                       (Unaudited)             (Unaudited)                                     2004       2003       2004         2003    Revenues:    Gross premiums written --     general operations        $2,150,846 $1,855,038 $5,551,528    $4,846,087    -- life and annuity     operations                   993,035     75,889  1,108,920       187,213    -- financial operations        74,788    106,266    131,677       151,032    Net premiums written --     general operations         1,738,728  1,403,713  4,523,489     3,751,488    -- life and annuity     operations                   993,169     63,703  1,109,053       161,016    -- financial operations        71,850    104,466    124,184       148,462    Net premiums earned --     general operations         1,830,225  1,469,520  3,405,150     2,901,407    -- life and annuity     operations                   994,048     70,482  1,110,980       163,253    -- financial operations        34,024     35,807     66,612        62,780    Net investment income         235,177    190,551    463,523       382,455    Net realized gains on     investments                    8,763     93,687    124,100        89,024    Net realized and     unrealized gains (losses)     on derivative instruments     42,140    (12,257)    53,737         2,236    Equity in net income of     investment affiliates         26,733     34,306     97,109        61,104    Fee and other income            8,152      9,792     15,059        22,069                               $3,179,262 $1,891,888 $5,336,270    $3,684,328    Expenses:    Net losses and loss     expenses incurred         $1,099,910   $937,575 $2,063,854    $1,822,829    Claims and policy benefit     reserves                   1,006,509     83,225  1,140,572       202,783    Acquisition costs             347,408    298,550    624,678       538,862    Operating expenses            247,716    193,908    493,016       384,427    Exchange losses (gains)        15,913    (23,352)     5,189       (26,054)    Interest expense               54,961     46,282     95,018        92,422    Amortization of     intangible assets              3,257        375      6,514           750                               $2,775,674 $1,536,563 $4,428,841    $3,016,019    Net  income before     minority interest, income     tax expense and equity in     net (income) loss of     insurance and insurance     and financial affiliates    $403,588   $355,325   $907,429      $668,309    Minority interest               2,284      3,166      6,944         5,028    Income tax                     31,176     11,009     66,533        31,039    Equity in net (income)     loss of insurance and     financial affiliates          (3,556)   (16,522)    (1,981)       24,565    Net income from operations   $373,684   $357,672   $835,933      $607,677    Preference dividend           (10,080)   (10,013)   (20,160)      (20,161)    Net income available to     ordinary shareholders       $363,604   $347,659   $815,773      $587,516                                  XL Capital Ltd                       SUMMARY CONSOLIDATED FINANCIAL DATA                 (Shares in thousands, except per share amounts)                                           Three Months Ended Six Months Ended    Income Statement Data (continued) :          June 30           June 30                                               (Unaudited)       (Unaudited)                                              2004     2003     2004     2003       Weighted average number of ordinary        shares and ordinary        share equivalents :                137,655  136,791  137,568  136,527                                   Basic                                   Diluted 138,741  138,634  138,648  138,084       Per Share Data:       Net income available to        ordinary shareholders                $2.62    $2.51    $5.88    $4.25       Ratios -- General Insurance and        reinsurance operations       Loss ratio                            59.7%    63.2%    60.3%    62.1%       Expense ratio                         27.9%    29.0%    27.8%    27.2%       Combined ratio                        87.6%    92.2%    88.2%    89.2%                                 XL Capital Ltd                       SUMMARY CONSOLIDATED FINANCIAL DATA                    (In thousands, except per share amounts)    Balance Sheet Data:                     As at June 30,    As at Dec. 31,                                                   2004              2003                                               (Unaudited)       (Unaudited)    Total investments available for sale       $23,599,996       $20,775,257    Net payable for investments purchased          312,680            96,571    Cash and cash equivalents                    2,744,878         2,403,121    Investments in affiliates                    1,898,462         1,903,341    Total assets                                45,460,035        40,764,215    Unpaid losses and loss expenses             17,076,770        16,558,788    Deposit liabilities and policy     benefit reserves                            8,874,039         7,284,179    Notes payable and debt                       2,743,368         1,905,483    Total shareholders' equity                   7,076,572         6,936,915    Book value per ordinary share                   $47.40            $46.74

XL Capital Ltd RECONCILIATION

The following is a reconciliation of the Company’s (i) net income to‘net income excluding net realized gains and losseson investments and net realized and unrealized gainsand losses on credit and investment derivative instruments,net of tax’ (which is a non-GAAP measure, the“Exclusions”) and (ii) annualized returnon shareholders’ equity (based on net income minusthe Exclusions) to average ordinary shareholders’equity for the three and six months ended June 30, 2004and 2003 (in millions, except per share amounts):

                                         Three Months Ended   Six Months Ended                                              June 30             June 30                                            (Unaudited)         (Unaudited)                                           2004      2003      2004      2003    Net income available to     ordinary shareholders               $363.6    $347.7    $815.8    $587.5    Net realized (gains) losses on     investments, net of tax              (13.7)    (96.5)   (121.3)    (82.2)    Net realized and unrealized gains     on investment derivatives,     net of tax                           (14.8)     (3.9)    (17.7)     (8.5)    Net realized and unrealized     (gains) losses on credit     derivatives, net of tax              (26.2)     21.3     (39.1)     21.9    Net income excluding net realized     gains and losses on investments     and net realized and unrealized     gains and losses on credit and     investment derivative     instruments, net of tax             $308.9    $268.6    $637.7    $518.7    Per ordinary share results:    Net income available to     ordinary shareholders                $2.62     $2.51     $5.88     $4.25    Net income excluding net realized     gains and losses on investments     and net realized and unrealized     gains and losses on credit and     investment derivative     instruments, net of tax              $2.23     $1.94     $4.60     $3.76    Weighted average ordinary     shares outstanding:    Basic                                 137.7     136.8     137.6     136.5    Diluted                               138.7     138.6     138.6     138.1    Return on Ordinary Shareholders'     Equity:    Average ordinary     shareholders'equity               $6,702.1  $6,671.3  $6,489.2  $6,550.0    Net income excluding net realized     gains and losses on investments     and net unrealized gains and     losses on credit and investment     derivative instruments,     net of tax                          $308.9    $268.6    $637.7    $518.7    Annualized net income excluding     net realized gains and losses on     investments and net realized and     unrealized gains and losses on     credit and investment derivative     instruments, net of tax           $1,235.6  $1,074.4  $1,275.4  $1,037.4    Annualized Return on Ordinary     Shareholders' Equity - Net income     excluding net realized gains and     losses on investments and net     unrealized gains and losses on     credit and investment derivative     instruments, net of tax              18.4%     16.1%     19.7%     15.8%

Comment on Regulation G

This press release contains the presentation of (i) ‘net income excludingnet realized gains and losses on investments and netrealized and unrealized gains and losses on credit andinvestment derivatives, net of tax’ and (ii) annualizedreturn on ordinary shareholders’ equity (basedon net income minus the Exclusions) to average ordinaryshareholders’ equity. These items are “non-GAAPfinancial measures” as defined in Regulation G.The reconciliation of such measures to the most directlycomparable GAAP financial measures in accordance withRegulation G is included above.

XL presents its operations in the way it believes will be most meaningful anduseful to investors, analysts, rating agencies and otherswho use XL’s financial information in evaluatingXL’s performance. This presentation includes theuse of ‘net income excluding net realized gainsand losses on investments and net realized and unrealizedgains and losses on credit and investment derivatives,net of tax’. Investment derivatives include allderivatives entered into by XL other than weather andenergy and credit derivatives (discussed further below).

Although the investment of premiums to generate income (or loss) and realizedcapital gains (or losses) is an integral part of XL’soperations, the determination to realize capital gains(or losses) is independent of the underwriting process.In addition, under applicable GAAP accounting requirements,losses can be created as the result of other than temporarydeclines in value without actual realization. In thisregard, certain users of XL’s financial information,including certain rating agencies, evaluate earningsbefore tax and capital gains to understand the profitabilityof the recurring sources of income without the effectsof these two variables. Furthermore, these users believethat, for many companies, the timing of the realizationof capital gains is largely opportunistic and are afunction of economic and interest rate conditions. Inaddition, with respect to credit derivatives, becauseXL generally holds its financial guarantee contractswritten in credit default derivative form to maturity,the net effects of the changes in fair value of thesecredit derivatives are excluded (similar with othercompanies in the financial guarantee business) as thechanges in fair value each quarter are not indicativeof underlying business performance of XL’s financialguarantee operations. Unlike these credit derivatives,XL’s weather and energy derivatives are activelytraded (i.e., they are not held to maturity) and are,therefore, not excluded from net income as any gainsor losses from this business are considered by managementwhen evaluating and managing the underlying business.

In summary, XL evaluates the performance of and manages its business to producean underwriting profit. In addition to presenting netincome (loss), XL believes that showing net income (loss)exclusive of the items mentioned above enables investorsand other users of XL’s financial informationto analyze XL’s performance in a manner similarto how management of XL analyzes performance. In thisregard, XL believes that providing only a GAAP presentationof net income (loss) makes it much more difficult forusers of XL’s financial information to evaluateXL’s underlying business. Also, as stated above,XL believes that the equity analysts and certain ratingagencies who follow XL (and the insurance industry asa whole) exclude these items from their analyses for the same reasons and they requestthat XL provide this non-GAAP financial informationon a regular basis.

Return on average ordinary shareholder’s equity(“ROE”), excluding net realized gains andlosses on investments and net realized and unrealizedgains and losses on credit and investment derivativeinstruments, net of tax (the “Exclusions”),is a widely used measure of any company’s profitability.Annualized return on average ordinary shareholders’equity (minus the Exclusions) is calculated by dividingannualized net income minus the Exclusions for any periodby the average of the opening and closing ordinary shareholder’sequity. The Company establishes target ROE’s forits total operations, segments and lines of business.If the Company’s ROE return targets are not metwith respect to any line of business over time, theCompany seeks to re-evaluate these lines. In addition,the Company’s compensation of its senior officersis significantly dependant on the achievement of theCompany’s performance goals to enhance shareholdervalue which include ROE.