Best Affirms FSR for Ecclesiastical

October 20, 2005

A.M. Best Co. has affirmed the financial strength rating of A- (Excellent) and assigned an issuer credit rating of “a-” to Ecclesiastical Insurance Office plc (EIO) (United Kingdom). The rating outlook remains stable.

The ratings reflect EIO’s excellent risk-adjusted capitalization, excellent underwriting performance and strong business profile within its niche market. An offsetting factor continues to be the company’s high exposure to equities.

In A.M. Best’s opinion, EIO is likely to continue to consolidate its excellent risk-adjusted capitalization in 2005, supported by strong retained earnings and the placement in April 2005 of irredeemable preference shares, with a nominal value of GBP 19 million (USD 33 million), for GBP 23 million (USD 40 million). A.M. Best’s projection for shareholders’ funds for year-end 2005 is a 21% increase to GBP 255 million (USD 446 million). A.M. Best believes that this improvement is partly cyclical, reflecting the benefit of strong market conditions for EIO’s specialist lines.

A.M. Best believes that EIO will continue to produce excellent underwriting returns in 2005. EIO’s position as a niche insurer is expected to partially insulate it from the softening market, allowing it to maintain its combined ratio in the range of 90% to 95% in 2005 and 2006.

This represents a deterioration from 2004’s combined ratio of 84% as claims return to a more normal level after a particularly benign period in 2003 and 2004.

EIO’s business profile in the niche church and charity sectors remains excellent. A.M. Best believes the company’s consistently high retention rate (anticipated to be over 90% for 2005) in its core portfolios reflects its customer-focused approach. EIO also benefits from high penetration rates in other specialist areas such as independent schools and care homes, and A.M. Best anticipates that the company will continue to successfully develop its commercial portfolio with a focus on risks related to its core business.

An offsetting factor is EIO’s exposure to equities, which A.M. Best anticipates will remain at approximately 25% of 2005’s total invested assets (26% in 2004). A.M. Best believes that whilst this has supported relatively high yields (8.3% in 2004), it exposes the company’s future earnings to volatility.

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