Group, with a positive outlook.

The rating applies to the group and its core insurance and reinsurance group members, which include: Bermuda-based companies XL Insurance, XL Financial Assurance and XL Mid Ocean Reinsurance, as well as XL Europe (based in Dublin), XL Capital Assurance (based in New York), NAC Re International and its US insurance pool, which consists of XL Insurance Company of New York, NAC Reinsurance, Greenwich Insurance, Indian Harbor Insurance and Intercargo Insurance.

Best considers these companies to be core subsidiaries to the XL Capital group, as they are integral to the group's strategy and critical to its success and viability.

In addition, these companies -- which generate most of the group's total business -- are material contributors to its market profile, operating performance and financial strength and are generally well established in their individual market segments.

Further, effective July 1, 1999, the US insurance pool has ceded 75 percent of its business offshore to its Bermuda-based affiliate, XL Mid Ocean Re.

The rating, Best says, reflects the group's global market capabilities, exceptional balance sheet strength, sustained profitable growth and the success of its management's strategies. These strengths are derived from the group's specialist operating strategy, experienced management team, disciplined underwriting approach and strong risk-management capabilities.

In addition, Best says, XL maintains a distinct competitive advantage as a Bermuda-domiciled organisation, given its favourable regulatory and tax environment.

The XL group also has considerable financial flexibility, given its conservative operating leverage, largely unencumbered balance sheet and ability to access the capital markets, Best reports. On a consolidated basis, XL has annualised net premiums of more than $1.5 billion, supported by capital of $5.5 billion.

Over the past several years, the group has successfully differentiated its market capabilities through organic growth, acquisition and joint venture, enabling it to expand its distribution base and offer a broad range of high excess insurance and reinsurance products to meet the changing demands of its customers for strategic financial risk solutions on both a traditional and non-traditional basis.

Best says that the success of XL's business strategies, which focus on a diverse portfolio of high-severity, low-frequency risks, is evident in its historically superior earnings trends, with pre-tax operating returns on earned premium of 47 percent (excluding realised capital gains) over the past five years, as well as in its growing leadership position in specialised markets. Through its acquisitions of Global Capital Re in 1997, Mid Ocean Re in 1998 and NAC Re in 1999, XL has emerged as a leader in the global reinsurance market, Best reports, ranking among the top 25 professional reinsurers worldwide, with net premiums of close to $900 million and dedicated surplus of $2.0 billion.

The group also has attained a significant position in the Lloyd's market through Mid Ocean Re's interests in the Brockbank Group, a leading managing agency and through NAC Re's interest in Denham. This increases the diversity of the group's revenue sources, Best says. Offsetting these positive rating factors are the ongoing market challenges associated with the group's large-account and reinsurance segments. These difficulties may be exacerbated by integration issues pertaining to significant recent acquisitions made by the group, as well as its recent entry into new business segments.

In addition, the relative immaturity of XL's long-tail casualty book and its potential exposure to Y2K liabilities present modest uncertainties, Best says, with regard to ultimate claims development. This is largely mitigated, however, by management's historically conservative reserving posture, as evidenced by reported redundancies in most accident years and outside actuarial analysis. Nevertheless, Best reports, the group's earnings are subject to a higher degree of volatility due to the nature of its business.

In addition, XL's capital structure includes a material amount of goodwill, created as a result of the 1998 acquisition of Mid Ocean Re. The goodwill effectively reduces the tangible net worth of the organisation.

Despite these concerns, Best believes the group is sufficiently capitalised to adequately absorb the impact of its various business risks. In addition, management has demonstrated its ability to manage risk in a manner that produces a superior rate of return.