A.M. Best Affirms Rating of Goshawk Reinsurance Ltd.; Assigns Negative Outlook

October 22, 2003

A.M. Best Co. has affirmed the financial strength rating of A- (Excellent) of Goshawk Reinsurance Limited (Goshawk Re), Bermuda, and removed the rating from under review.

This follows detailed discussions with the Goshawk group as to the ongoing protection of Goshawk Re’s capital from the implications of the problems generated by the group’s Lloyd’s operation. Specifically, the ongoing maintenance of risk-adjusted capitalisation at Goshawk Re is more than commensurate with the rating.

The negative outlook reflects the increased uncertainty of Goshawk Re’s market profile and consequent prospective operating performance, particularly resulting from the challenge of building an attractive ongoing book and avoiding adverse selection.

The rating was placed under review with negative implications following an announcement by the parent, Goshawk Insurance Holdings plc, that it may breach its banking covenants due to the need for additional reserve strengthening at Lloyd’s Syndicate 102—which currently has a Best’s syndicate rating of A- (Excellent) reflecting the Lloyd’s market rating—and the potential impact that any shortfall of funding at the syndicate may have on the group’s overall financial flexibility. The banking covenants have since been suspended reflecting ongoing support from Goshawk’s banks.

Excellent risk-adjusted capitalization— The rating continues to reflect Goshawk Re’s stand-alone financial strength. In A.M. Best’s opinion, the company has a substantial excess of both current and prospective risk-adjusted capital relative to its financial strength rating despite the need to fund repayments of the USD 65 million term debt issued by its immediate holding company. A.M. Best has never credited this debt as economic capital when calculating Goshawk Re’s risk-adjusted capital. The reduced anticipated premium volumes and the decision to focus on shorter tail business reinforces the excellent prospective risk-adjusted capitalisation.

Increased uncertainty over operating performance— While current market conditions continue to support the potential for good operating performance, this is obviously highly dependent on the quality of business which Goshawk Re will write. With regard to business written to date, A.M. Best continues to monitor the run-off of a large quota share contract of a book of assumed property and casualty reinsurance written by a U.S. medical insurer that accounted for the majority of premium income in 2002. A recent independent reserve review revealed that Goshawk Re is carrying reserves in excess of the recommended value for this contract. In A.M. Best’s opinion, Goshawk Re is not materially exposed to losses arising from reinsurance of syndicate 102’s business, as there is only a very minor exposure to pre-2002 business.

Weakened business profile— A.M. Best believes that Goshawk Re is likely to suffer from the weakened group profile, and this has been factored into business generation and performance expectations. Furthermore, the company’s original business plan to develop a core book of third-party business was delayed by virtue of specific class underwriting positions and key management roles being filled later than planned.

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