A.M. Best Affirms Rating of Subsidiaries of Alea Group

July 15, 2002

A.M. Best Co. has affirmed the financial strength rating of A- (Excellent) of the insurance operating subsidiaries of the Alea group.

The affirmation is based upon the excellent level of consolidated risk-based capital and financial flexibility, improved underlying operating performance in line with forecasts and enhanced market profile. Offsetting factors include Alea’s high level of receivables, increasing level of financial leverage and the operational repositioning of the Alea group companies. The rating applies to Alea London Limited, Alea (Bermuda) Ltd., Alea Europe Ltd., Alea North America Insurance Company, Alea Global Risk Limited and Alea Jersey Limited.

On a risk-adjusted basis, Alea’s consolidated capital base is excellent, strengthened by the injection of $247 million new equity in 2001. The operating subsidiaries of the Alea group continue to be managed as one unit with capital being allocated to maintain local solvency requirements and maximize tax efficiency. In addition, Alea has established unconditional mutual guarantees between the group’s six underwriting entities. Alea has in place several stop-loss protections acquired against adverse development from prior and current underwriting years and reinsurance recoverables in respect of outstanding losses represented 29.3% of consolidated total assets in 2001. Although 41 percent of its reinsurance protection is secured against letters of credit and funds withheld —thereby reducing the associated credit risk—these arrangements, together with Alea’s exposure to debtors’ balances (principally in respect of unearned premium) of $317 million in 2001, negatively impact the company’s overall liquidity.

Despite financial leverage increasing to the high end of the tolerance levels consistent with an A- rating, A.M. Best believes that Alea will continue to benefit from the financial support of Kohlberg Kravis Roberts & Co., the majority shareholder.

Alea’s underlying consolidated performance, excluding the impact of the World Trade Center, improved in line with expectations at year-end 2001 as reflected in the 72 percent consolidated loss ratio (65 percent excluding losses emanating from the World Trade Center). During 2002, Alea benefited from a favorable renewal season—particularly in the property and marine accounts underwritten out of London—where rate increases ranged between 20 percent-100 percent.

A.M. Best expects further improvements in the 2002 consolidated operating performance as new underwriting guidelines have led to the cancellation of a high proportion of unattractive risks, and new specialized underwriting expertise (professional lines markets) has been recruited to capitalize on market opportunities.

The group’s operating companies are well positioned to take advantage of current favorable market conditions under the emergent Alea brand.

A.M. Best expects consolidated gross premium income to increase by almost twofold in 2002; more than 50 percent of this increase is forecast to come from the re-pricing of existing business. Alea has refocused its strategy to become a mid-sized player targeting the reinsurance and risk management needs of small cedants on a global basis. However, A.M. Best regards as positive the short-term forecasts that Alea has provided both in terms of its conservatism and hence, attainability.

Expectations:

• Capital will be maintained at an excellent level, and financial leverage is not expected to increase further. Excesses over and above the tolerance level appropriate of an A- rating could have rating implications. Liquidity ratios should improve as reinsurance recoveries materialize.
• Alea’s consolidated operating performance is likely to improve with the consolidated combined ratio falling below 100 percent and return on equity reaching double-digits in 2002.

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