A.M. Best Affirms Rating of Labuan Reinsurance Co.

November 21, 2003

A.M. Best Co. has affirmed the financial strength rating of B++ (Very Good) of Labuan Reinsurance Company Ltd. (Labuan Re), Malaysia. The outlook is stable.

The rating reflects Labuan Re’s improving underwriting performance, conservative investment portfolio and shareholder commitment. Adding to these positive factors is the economic recovery in Malaysia and improving capital market environment.

During fiscal year 2002, Labuan Re’s underwriting performance improved significantly, as reflected in the reduction of the combined ratio from 148 percent in fiscal year 2001 to 105 percent in fiscal year 2002. The ratio continues to improve in the first half of fiscal year 2003, indicating a more positive result for the fiscal year end.

Labuan Re’s investment portfolio is prudent with very high concentration in cash assets. The exposure to equity markets is limited as the company employs a strict and conservative investment strategy. Moreover, Labuan Re’s investments are all hedged to U.S. dollars, and the credit quality of its fixed income portfolio has improved.

The company continues to receive support from its shareholders, which are all government-related, top-tier corporations in Malaysia. Since a major restructuring and recapitalization process in 1996, the company’s shareholders have remained unchanged. There is a minimal obligation for dividend payment, which allows the company to strengthen its capital position.

Partially offsetting factors are the company’s deteriorated risk-adjusted capital, less-established market position and weak underwriting performance.

The company’s solvency margin declined from 1,531 percent in fiscal year 2001 to 943 percent in fiscal year 2002. The Best’s Capital Adequacy Ratio (BCAR), which measures capitalization on a risk-adjusted basis, demonstrates a similar trend. A.M. Best remains cautious about the company’s solvency position as its business volume expands.

Overseas markets represent a significant portion of the company’s business; however, its ability to expand overseas business profitably continues to be hindered because of its relatively less competitive market position in the regions.

Despite the significant improvement in fiscal year 2002, the company’s underwriting performance still has room for future improvement; its five-year average combined ratio stands high at 125 percent. A.M. Best remains cautious about this trend.

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