A.M. Best Affirms Ratings of Sirius International and Sirius America

July 10, 2003

A.M. Best Co. has affirmed the financial strength ratings of A (Excellent) of Sirius International Insurance Corporation (Sirius), Sweden, and its U.S. subsidiary, Sirius America Insurance Company (Sirius America), Delaware. The outlook on the ratings has been revised to negative from stable due to the uncertainty surrounding Sirius’ ownership by ABB Ltd.

The affirmation is based on Sirius’ superior level of consolidated risk-based capitalization and improved, albeit weak operating performance in 2002, offset by further adverse loss development at Scandinavian Re.

According to the A.M. Best capital model, Sirius’ risk-based capitalization is superior, although likely to weaken due to dividend payments to ABB and growth in traditional (re)insurance business. During 2002, Sirius paid SEK 456 million (USD 52.2 million) to ABB Ltd in accordance with its policy to distribute 100 percent of unconsolidated earnings through 2005.

Although consolidated income was significantly less in 2002, under existing terms, retained earnings must be at least equal to the proposed dividend, and solvency capital is otherwise protected from appropriation by ABB Ltd (SEK 5.3 billion (USD 611.7 million) of total SEK 6.8 billion (USD 781 million) consolidated adjusted capital in 2002 was held in a restricted reserve regulated by the Swedish Financial Supervisory Authority). Additionally in 2002, ownership of Sirius was transferred to a separate holding company, ABB Insurance Holding Sweden AB.

Consolidated earnings were weak in 2002, despite the sharp improvement in underwriting performance (61.1 percent loss ratio, down from 103.6 percent in 2001). Consolidated net income improved to SEK 24 million (USD 2.7 million) from a loss of SEK 557.5 million (USD 63.8 million) in 2001, despite the negative impact of an SEK 502 million (USD 57.4 million) write-down in the equity portfolio and accelerated payouts on several retrospective contracts underwritten by Scandinavian Re. Sirius International and Sirius America continued to report excellent underwriting performance in the first six months of 2003; however, A.M. Best expects Scandinavian Re to report further adverse underwriting losses for the full year.

ABB has publicly re-aligned Sirius within its “Non-Core Activities” division in 2002, and A.M. Best believes the uncertainty surrounding its current and future ownership has weakened Sirius’ credit profile. There have been several cases in which clients have withdrawn business in 2003 due to the deterioration in ABB’s financial position. Financial flexibility is necessarily constrained, and although Sirius’ capital is held to be significantly ring-fenced, the negative outlook reflects the potential for deterioration in Sirius’ business and capital position to a level inconsistent with the current rating.

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