Best Affirms Alea Group Subsidiaries ‘A-‘ Rating

July 3, 2003

A.M. Best Co. announced that it has affirmed the financial strength rating of A- (Excellent) of the insurance and reinsurance operating subsidiaries of the Alea Group Holdings (Bermuda) Ltd. The rating applies to: Alea London Limited, Alea (Bermuda) Ltd., Alea Europe Limited, Alea North America Insurance Company, Alea Global Risk Limited and Alea Jersey Limited. Best said the outlook on all the ratings is stable.

The rating agency cited the “excellent level of current consolidated risk-based capital, strong operating performance and consistently improving business profile,” as supporting the affirmation. It noted that an offsetting factor is “the high recent and projected growth in the underwriting portfolio, which could add pressure to the existing capital base.”

While the Alea subsidiaries risk-based capital is “excellent,” Best said “it will be under pressure as the aggressive premium growth projected through to 2005 materialises,” and warned that “any deviation from expected retained earnings during this period will trigger the need for additional funding to maintain capitalisation levels consistent with the current rating.” It expects that such additional funding to support growth will “come from either additional capital sources or additional aggregate reinsurance to be agreed upon within the next six months.”

A return on equity of 12.6 percent in 2002 testifies to the group’s “strong operating performance,” said Best. The improvement was in line with expectations “as the expansion of the underwriting portfolio during the hard market, the efficacy of the re-underwriting process since 1999 and Alea’s conservative investment strategy facilitated strong bottom line earnings of USD 56.2 million in 2002.”

Best also noted that the “combined ratio improved sharply to 90.9% in 2002 from 122.7% in 2001. ROE is expected to increase above 15% in 2003 and 2004.” The group has “improved its competitive position by embarking upon a focused management strategy of acquiring small or under-performing units with strong licensing capabilities in key markets and building the necessary infrastructure and underwriting controls capable of delivering strong and profitable growth.

“Alea is targeting rapid growth in U.S. casualty, specialty and ART business through to 2005, whilst market conditions are conducive to profitable augmentation and there is insufficient capacity for selected lines,” the bulletin continued. “Growth in 2003 is likely to be approximately half the level achieved in 2002; total gross premium increased by 90% to USD 931.6 million in 2002.” Independent external consultants have confirmed the adequacy of Alea’s pricing process.

Best said it “expects Alea to secure additional capital to finance the projected growth as required,” but warned, “failure to maintain the existing level of risk-based capital could lead A.M. Best to lower the rating.”

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