Clarendon Outlook Stable

Standard & Poor's Ratings Services revised its outlook on Clarendon National Insurance Co. and two of its subsidiaries—Clarendon America Insurance Co. and Redland Insurance Co.—to stable from negative.

At the same time, S&P affirmed its "A+" counterparty credit and financial strength ratings on these three companies (collectively referred to as Clarendon). It also raised its counterparty credit and financial strength ratings on Insurance Corp. of Hannover (ICH) to "A+" from "BBB+". The outlook on ICH is stable.

The ratings on Clarendon are based on its strategic importance to its parent, Hannover Re; significantly improved risk controls; strong competitive position; strong and improved capital adequacy; and strong operating performance. Offsetting these positive factors are the continued risks associated with Clarendon's program business model and its high level of reinsurance utilization. S&P also indicated it views ICH as core to its parent, Clarendon, based on its full operational integration and strong parental support.

The revised outlook on Clarendon reflects the resolution of 82 percent of prior reinsurance disputes, loss portfolio transfers of its poorly performing businesses and S&P's expectation of continued strength in earnings and capital adequacy.

The rating agency expects Clarendon's operating results to improve substantially over the next two years, with its statutory combined ratio at 95 percent to 98 percent (including the estimated impact of Hurricane Charley in third quarter 2004) and pretax ROR of at least 8 percent to 10 percent. It also expects Clarendon's capital adequacy to remain at the current level of 152 percent or improve modestly.

According to S&P, Clarendon improved its risk controls significantly during the past couple of years, focusing primarily on gross underwriting profitability. Also, Clarendon's capital adequacy is strong and supportive of the current ratings in accord with S&P's capital adequacy model. Furthermore, Clarendon's historical operating performance is strong, as demonstrated by its five-year (1999 - 2003) average statutory combined ratio of 92 percent and 98 percent in 2003. S&P, however, views program business as riskier than a traditional insurer's business, as the two key functions of underwriting and claims are typically outsourced to third-party administrators and managing general agents. Finally, Clarendon's higher dependence on reinsurance compared with traditional insurers also adds volatility, as collections associated with reinsurance recoverables could become more of an issue.

Safeway Property Downgraded

A.M. Best Co. downgraded the financial strength rating to "B" (fair) from "B++" (very good) of Safeway Property Ins. Co., based in Gainesville, Fla. The outlook is negative. The downgrade recognizes the company's reduced capitalization as a result of its ultimate net exposure from Hurricane Charley. Due to expected losses, Safeway Property's capitalization declined by approximately 25 percent. Best also remains concerned with the company's significant premium growth in recent years and the elevated catastrophe exposure in the hurricane-prone Florida market. While operating performance has historically been favorable, the rating outlook is negative based on the company's fair capitalization and the continued high gross catastrophe exposure.

Federated National, American Vehicle

A.M. Best Co. placed the financial strength rating of "B" (fair) of Federated National Ins. Co. and the rating of "B+" (very good) of American Vehicle Ins. Co., both of Plantation, Fla., under review with negative implications.

These actions reflect the combination of anticipated significant net capital losses as a result of Hurricane Charley, as well as considerable premium growth in recent years. Although Federated National does carry catastrophe reinsurance protection that will mitigate the overall impact, a significant decline in surplus is expected. While American Vehicle—the sister company of Federated National—does not write any direct property exposure in Florida, it maintained a $2 million catastrophe retention on the behalf of Federated National and will also be impacted. A.M. Best is also concerned about significant premium growth, particularly over the first half of 2004, and the correspondingly elevated catastrophic exposure in the hurricane-prone Florida market.

Historically, the parent company, 21st Century Holding Company, has provided ongoing financial support to the statutory entities. Best anticipates the need for significant additional capital support over the near term. While the parent has access to capital, execution risk exists. In the absence of capital improvement, the ratings would likely be downgraded.

Allstate Floridian Under Review

A.M. Best Co. has placed the financial strength rating of "A-" (excellent) of Allstate Floridian Group under review with negative implications. This action reflects the potential capital decline associated with losses from Hurricane Charley and subsequently reduced risk-adjusted capitalization. It is being taken as a result of insufficient detailed information available to assess the ultimate financial impact of Hurricane Charley on Allstate Floridian, as well as the potential impact of Hurricane Frances and any subsequent events. Allstate Floridian, comprised of Allstate Floridian Ins. Co. and Allstate Floridian Indemnity Co., is the dedicated producer of Florida property business for the Allstate Insurance Group. The Allstate Floridian Group is a separate entity from the Allstate Insurance Group and thus receives a stand-alone rating from Best.

Erika Insurance Downgraded

A.M. Best Co. announced it downgraded the financial strength rating to "B++" (very good) from "A-" (excellent) of Swedish-based Erika Insurance with a stable outlook.

The downgrade reflects Best's reassessment of Erika's role within the EF Group, a provider of language courses worldwide, and the increased risk associated with the high dependence upon reinsurance from an affiliated company, Efekta Insurance. The rating also factors Erika's prospective improvement in earnings following the divestment of third party business. Best noted that Erika insures only those risks of EF clients, making it dependent upon the highly volatile travel industry, negatively impacting Erika's business flow and risk profile.

Since the divestment of third party business in 2003, there has been a significant increase in the credit and liquidity risk associated with Erika as it cedes 85 percent of the gross premiums written to Efekta. Best said it expects Erika's operating performance to improve from a lower loss ratio due to the company's better control of claims for group related business and reduced net premium. The EF business has had a very good record with an average loss ratio of 45 percent.