Best Affirms Winterthur ‘A-‘ Rating; Assigns ICR

January 25, 2005

A.M. Best Co. has affirmed the financial strength rating of “A-” (Excellent) of Winterthur Swiss Insurance Company and its core subsidiary, Winterthur Life Insurance Company, collectively known as Winterthur Group (Winterthur). Best also said it has assigned an issuer credit rating of “a-” to the rated entities and that the outlook on all ratings is stable.

“The ratings reflect Winterthur’s stabilisation of earnings, excellent capitalisation and the maintenance of a strong business profile in its core markets,” said Best. “An offsetting factor is the potential for additional reserving associated with its former subsidiary, Winterthur International.”

Best said it expects Winterthur’s pre-tax earnings to stabilize in 2005 at between SF1.0 billion ($842 million) and SF1.2 billion ($1 billion), “reflecting the effect of the transfer of guarantees for the group life policies to employers and the continuous focus on non-life underwriting. Despite some softening of rates in its core markets, Winterthur’s consolidated combined ratio is likely to remain at approximately 99 percent, partially driven by the execution of an expense reduction programme.”

Commenting on Winterthur’s business position, Best said it anticipates the company will “maintain a strong position in its core markets, mainly Switzerland, Germany and Spain, but expects marginal or no growth in consolidated gross non-life premiums [around SF 12 billion ($10.1 billion) for 2005], as some of these markets are mature and face increased competition, making further growth challenging.”

Consolidated life premiums are anticipated to grow marginally, between 1 and 2 percent in 2005, “mainly from unit-linked policies as A.M. Best expects stable premiums from group life policies in Switzerland. The new taxation rules for life policies in Germany are likely to also negatively affect new business production.”

Best also indicated that Winterthur’s excellent risk-adjusted capitalization had improved as expected, and said it “anticipates this level of risk-based capital to be maintained despite an increased exposure to lower quality bonds, increasing the potential for default risk.”

Commenting on the situation with Winterthur International, which was acquired by XL in July 2001, Best indicated that the remaining company “may be required to establish additional reserves for a litigation issue arising from the sale of Winterthur International. The time frame is uncertain, but a negative ruling against Winterthur could have a negative impact on the ratings.”

Best said it is “closely monitoring the issue.”

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