S&P Affirms Inter-Ocean Re ‘A’ Rating; Outlook Revised to Negative

March 5, 2004

Standard & Poor’s Ratings Services announced that it has revised its outlook on Inter-Ocean Reinsurance Co. Ltd. (IORe) to negative from stable, but has affirmed its ‘A” counterparty credit and financial strength ratings.

“The ratings reflect the company’s stable business model, which provides regulatory arbitrage opportunities for its shareholders through a range of different structures,” said S&P. “Through its partnership with strongly capitalized shareholders, IORe assumes a substantial book of finite business from ceding companies throughout the world. A main strength of IORe is the limited risk retention, as underwriting and timing risks are fully retroceded to the company’s shareholders.

“Offsetting this is the company’s limited business position because of its heavy reliance on shareholders for its business growth. IORe’s credit strength and the ratings on IORe are limited to that of its active shareholders.”

S&P explained the negative out look as expressing its “concerns about IORe’s collateralization on two specific transactions.” It said that although it “anticipates a prompt resolution on the specific transactions, concerns about ongoing risk controls remain.” S&P expects IORe to continue generate return on equity (ROE) of between 4 and 7 percent over the next two to three years.

It also expects the company’s capital adequacy “to remain at or above the range appropriate for the rating, and tangible net worth is expected to be positive. IORe is expected to shift its business from that generated by one shareholder to business increasingly including cessions to different shareholders. At the current rating level, Standard & Poor’s expects cessions will be made to shareholders rated at least as highly as Inter-Ocean Re or collateralized to an ‘A’ level.”

The report also listed a number of positive “Major Rating Factors” emphasizing IORe’s low operational risk retention, conservative investment portfolio, stable business model, and very strong capital adequacy.

On the negative side S&P noted the company’s high dependence on shareholders for business, high reinsurance reliance and potential legal exposure vis-a-vis its retrocessionaires.

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