A.M. Best Downgrades Unionamerica to B+

September 28, 2000

A.M. Best Co. has downgraded the financial strength rating of Unionamerica Insurance Company Limited, London to B+ (Very Good) from A (Excellent) and removed the rating from under review.

The actions follow the Sept. 19 announcement by Unionamerica’s new parent, The St. Paul Companies, that Unionamerica would be placed into run-off with effect from January 1, 2001. This decision was based on a strategic review undertaken by St. Paul of Unionamerica’s operations after its April acquisition of the MMI Companies, of which Unionamerica was a member.

Unionamerica was not considered by St. Paul to be a key component of the acquisition. The rating reflects Unionamerica’s status as a run-off entity and its lack of future revenue streams, offset by the commitment shown by its parent to support an orderly run-off of its liabilities.

Over the last year, Unionamerica recorded significant deterioration in prior-year loss reserves, virtually all of which was in respect of 1995 and subsequent underwriting years. This required reserve strengthening of USD 81.2 million in 1999 and USD 24.4 million in 2000. St. Paul support includes a stop loss reinsurance arrangement, underwritten by St. Paul Fire & Marine Insurance Company, with effect from July 1, 2000.

This arrangement protects the company against any underwriting losses, including losses arising from prior-year loss reserve development, during the term of the contract. This is a continuous contract with each party retaining the right to terminate the contract with 90 days prior notice, but with a minimum term of 12 months.

St. Paul also has provided the company with a revolving credit facility for USD 10 million to support its future liquidity position. Based on the strong support shown by St. Paul, A.M. Best believes that an orderly run-off of Unionamerica’s liabilities is achievable. However, this opinion, and consequently the company’s rating, are predicated on the maintenance of the stop loss reinsurance contract. A.M. Best will continue to monitor the run-off of Unionamerica’s portfolio through regular meetings with senior management, which will focus on the key issues of reserving adequacy, cashflow and balance sheet liquidity.

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