S&P Lowers Polygon Insurance to BBB-; On Watch Development

August 3, 2000

Standard & Poor’s today lowered its counterparty credit and insurer financial strength ratings on the U.K. specialist aviation insurance company Polygon Insurance Co. Ltd. (to triple-‘B’-minus from triple-‘B’-plus and, at the same time, placed these ratings on CreditWatch with developing implications.

The downgrade of PICL’s ratings follows the heavy losses suffered by the company in 1999 and the consequent weakening of its capital position. The placement of PICL’s ratings on CreditWatch with developing implications reflects the present uncertainty concerning the future rating profile of the Polygon Group following the decision by shareholders to seek a strategic partner from within the insurance industry to acquire a majority interest in the Polygon Group.

PICL is a Guernsey-based specialist aviation insurer and the main operating company within the Polygon Group–a group that provides a range of financial services, including captive and third-party aviation insurance, underwriting management, captive and corporate management services, insurance brokerage, trust administration, and investment management.

The Polygon Group is owned by five independent airlines: KLM (30.8% shareholding); SAS (30.8%); Swiss Air Group (30.8%); Austrian Airlines (5.0%); and Finnair (2.5%). PICL had a very unprofitable year in 1999. At an underwriting level, the combined ratio deteriorated to a poor 210.3%, reflecting a significant deterioration from the 1998 underwriting year and the continuing weak market conditions throughout 1999.

The year was also badly affected by a computer error affecting past years, without which the combined ratio would have been 164.4%. Rising interest rates depressed the 1999 investment returns and the bottom-line result, therefore, represented a significant negative 19.7% ROE.

Capitalization has weakened as a consequence of these losses, but remains strong, and continues to underpin PICL’s investment-grade rating. Standard & Poor’s will maintain close contact with management during the sale process and will review the ratings when the future ownership position of the Polygon Group has been clarified.

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