Best Takes Various Rating Actions in Wake of Katrina

September 15, 2005

Due to the evolving effects of Hurricane Katrina, A.M. Best Co. has been aggregating public and private information in order to assess the financial impact it will have on insurers.

A.M. Best expects all rated companies will be able to meet their current loss obligations despite the projected magnitude of the potential insured losses. However, the insured losses from Hurricane Katrina have had a significant impact on some insurers, leaving potential capital shortfalls relative to their current rating level and also calling into question the risk management capabilities of some insurers.

The determination of the potential impact of Hurricane Katrina and A.M. Best’s subsequent analysis of catastrophe risk management will take some time, and additional rating actions are likely in the future.

However, based on the information known to A.M. Best at this time, the following rating actions have been taken:

Olympus Re

The financial strength rating (FSR) has been downgraded to B+ (Very Good) from A- (Excellent), the issuer credit rating (ICR) has been downgraded to “bbb-” from “a-” and both have been placed under review with negative implications.

Allmerica Financial Property & Casualty Companies

The FSR of A- (Excellent), the ICR of “a-” and the debt ratings have been placed under review with negative implications.

Balboa Insurance Group

The FSR of A (Excellent) and the ICR of “a” have been placed under review with negative implications.

DaVinci Re

The FSR of A (Excellent) and the ICR of “a+” have been placed under review with negative implications.

Endurance Specialty

The FSR of A (Excellent), the ICR of “a” and all debt securities have been placed under review with negative implications.

Florists Mutual Group

The FSR of A- (Excellent) has been placed under review with negative implications.

Imagine Insurance Company Ltd

The FSR of A- (Excellent) and the ICR of “a-” have been placed under review with negative implications.

IPCRe

The FSR of A+ (Superior) and the ICR of “aa-” have been placed under review with negative implications.

Louisiana Farm Bureau Mutual Insurance Company

The FSR of A- (Excellent) has been placed under review with negative implications.

Mississippi Farm Bureau Mutual Insurance Company

The FSR of A+ (Superior) has been placed under review with negative implications.

Montpelier Re

The FSR of A (Excellent), the ICR of “a” and all debt securities have been placed under review with negative implications.

Mutual Savings Fire Insurance Company

Mutual Savings Life Insurance Company

The FSR of B- (Fair) has been placed under review with negative implications.

Odyssey Re

The FSR of A (Excellent), the ICR of “a” and all debt securities have been placed under review with negative implications.

PartnerRe Group

The FSR of A+ (Superior), the ICR of “aa-” and all debt securities have been placed under review with negative implications.

PXRE

The FSR of A (Excellent), the ICR of “a” and all debt securities have been placed under review with negative implications.

XL Capital

XL Life Insurance and Annuity

XL Life Ltd (Bermuda)

The FSR of A+ (Superior), the ICR of “aa-” and all debt securities have been placed under review with negative implications.

The following companies previously had already been under review for reasons other than losses relating to Hurricane Katrina. Due to the magnitude of losses caused by this recent hurricane, the scope of A.M. Best’s review is now extended to include an evaluation of the impact relating to Hurricane Katrina.

Alea Group

The FSR of A- (Excellent) and the ICR of “a-” remain under review with negative implications.

American Re

The FSR of A (Excellent) and the ICR of “a” remain under review with negative implications.

Munich Reinsurance

The FSR of A+ (Superior), the ICR of “aa” and all debt ratings remain under review with negative implications.

Transatlantic Re

The FSR of A+ (Superior) and the ICR of “aa-” remain under review with negative implications.

State Farm Group

Due to its significant market share within the affected region, the financial strength of State Farm has drawn a great deal of interest. A.M. Best has reviewed the ability of State Farm to absorb varying levels of loss. A.M. Best is comfortable that State Farm can withstand substantial losses from Katrina and still maintain capitalization supportive of its FSR of A++ (Superior).

Accordingly, A.M. Best has affirmed the rating of State Farm Mutual Automobile Insurance Company and its reinsured affiliate. The rating of A+ (Superior) of State Farm Fire & Casualty has not been affirmed at this time due to the potential impact of the losses on this specific subsidiary and the possible need for capital support from its parent.

Lloyd’s of London

With regard to Lloyd’s of London, while Lloyd’s is expected to take a significant share of the industry’s loss from Katrina, the current loss impact to the organization is not outside A.M. Best’s expectations. Accordingly, A.M. Best believes that Lloyd’s overall capitalization position post-Katrina remains supportive of its current FSR of A (Excellent) and ICR of “a”, which remain unchanged at this time. However, A.M. Best recognizes that it is still early and estimates are subject to change. A.M. Best is continuing to gather information regarding recoverables, collateral and liquidity.

A.M. Best is continuing to gather information on all primary insurance and reinsurance companies with losses stemming from Katrina, and may take further rating actions in the future. A.M. Best has reviewed the potential loss exposure for those insurance organizations with the largest loss exposure relative to their capital. Given the magnitude of the loss and the difficulty of assessing the potential losses from Katrina, some companies have not yet been able to provide their estimated loss exposure, and many loss estimates may change once the uncertainties of loss coverage are clarified. A.M. Best has accounted for a potential increase in losses within its initial review of companies. Those companies yet to provide estimates are expected to provide some basis for their potential loss within the next week. As greater certainty of losses is provided, there are likely to be other rating actions related to this event.

As part of A.M. Best’s analysis, each company is evaluated based on its ability to withstand the impact from a major catastrophic event. Further, those companies with significant gross catastrophe exposure are tested for their ability to absorb additional catastrophe losses.

While the level of a company’s risk-adjusted capital is a significant rating factor for the current rating action, a company’s demonstrated risk management capability is also an important rating consideration. Therefore, during the under review period, A.M. Best will not only be assessing the reasonableness of each company’s recapitalization plan (whether from earnings or a capital raise) but will also be reevaluating each company’s risk management capability and controls. Therefore, the replenishment of capital alone may not be sufficient to sustain a company’s previous rating.

Although it is expected that the magnitude of this specific loss event will help to highlight the significant risk an insurer can face from catastrophic events–and Hurricane Katrina is expected to result in more conservative underwriting and pricing in the market–it is still too early to gauge the extent of this future impact. Further, should the long-term ramifications of this loss event be a long-term positive for pricing, individual companies may require additional capital resources to fully participate in the reemergence of a hardening market.

Hurricane Katrina is proving to be the most costly catastrophe in U.S. history. A.M. Best has accumulated the losses from communications from rated insurers and utilized its own estimates where information is not yet available. To date, announced and estimated losses for individual companies total just over $30 billion, but the assumptions behind the estimates from companies vary widely.

A significant unknown at this point is how much of the resulting insured loss will stem from flood damage and the amount of coverage provided for a large amount of loss that may be subject to dispute. Accordingly, the range of possible ultimate insured losses from Hurricane Katrina is very significant and will not be known for some time. Specifically, there will likely be both political and marketing pressure on primary insurance companies to cover property losses under windstorm coverage, even though the damage may more likely have resulted from flood damage. If primary companies are required to extend coverage for these losses, a significant share will likely be borne by reinsurers who will likely “follow the fortunes” of primary companies having exceeded their underlying retention.

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