Best Affirms Electro Re ‘B++’ Rating

March 30, 2004

A.M. Best Co. announced that it has affirmed the financial strength rating of “B++” (Very Good) of Electro Re S.A. (Luxembourg) with a stable outlook.

“The rating reflects the reduction in Alcatel’s sales and required insurance premium volume on Electro Re’s business profile,” said Best. “It also reflects Electro Re’s weaker operating performance. Offsetting these factors is Electro Re’s excellent risk-adjusted capitalisation.”

Best noted that Electro Re’s gross written premiums are expected to stabilise in 2004, following a 33 percent decline to 55 million euros ($ 67 million) in 2003. It indicated that “as the captive insurer for Alcatel, Electro Re’s business profile depends upon the insurance premium volume based on Alcatel’s sales, which have declined in the last two years as a result of continued restructuring measures in response to adverse market conditions.”

Best said it “expects Electro Re’s underwriting performance to remain stable, following a deterioration in the non-life combined ratio to 102 percent in 2003, compared to 98 percent in 2002. This is mainly due to the maintenance of stable absolute expense levels against a significant decline in premiums. As a consequence of equity markets recovery, Electro Re posted positive investment returns. Investment income in 2004 will depend upon a further recovery of equity markets and Electro Re’s ability to hedge its long-term maturity bond portfolio to potential interest rate increases.”

The rating agency also noted that it expects “Electro Re to maintain an excellent risk-adjusted capitalisation, mainly through the build up of equalisation reserves from investment returns. Luxembourg’s accounting rules allow the allocation of profits to equalisation reserves, which can be utilised in the event of underwriting or investment losses.”

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