Best Assigns FSR to Lancashire

December 16, 2005

A.M. Best Co. has assigned a financial strength rating (FSR) of A- (Excellent) and an issuer credit rating (ICR) of “a-” to Lancashire Insurance Company (Lancashire) (Hamilton, Bermuda). Concurrently, A.M. Best has assigned an ICR of “bbb-” to the parent company, Lancashire Holdings Limited (Bermuda). The ratings have a stable outlook.

The rating assignments follow an equity capital contribution of approximately $1 billion from Lancashire Holdings Limited, which raised common shareholders’ equity of $963 million from public and private investors as well as $125 million in long term subordinated debt securities.

The initial ratings reflect Lancashire’s very strong risk-adjusted capitalization, which on a pro forma basis and after considering various stress test scenarios, remains in the superior range over a five-year time period. This favorable capital position, enhanced by the absence of legacy issues, is further augmented by a strong investor sponsorship, an excellent senior management track record and good financial flexibility through its listing on AIM, the London Stock Exchange’s international market specifically designed for smaller, growing companies.

As a newly formed Bermuda domiciled insurer, Lancashire’s operating activities will focus on a specialist approach targeting dislocated classes of business. The business plan encompasses a diversified mix of business, both geographically and by class, including direct short-tail property insurance and reinsurance as well as a small assumed casualty book of aviation terrorism and marine protection and indemnity classes of business.

A.M. Best expects that Lancashire will be successful in executing its business plan by attaining very favorable underwriting margins; that its success will be derived from its adherence to disciplined underwriting in targeted businesses and markets; and that the anticipated pricing improvements and bifurcation of risk in terms of pricing exposures, setting limits and broader exclusions will benefit its underwriting performance over the near term.

A.M. Best is also of the opinion that Lancashire’s risk management capability is adequate to protect its capital base from a loss outside of its planned risk tolerance. However, as with any start-up company, systems and operational controls relating to underwriting, risk management, claims, investments and financial reporting and the dexterity to maintain underwriting discipline have yet to be fully tested, including through the inevitable softening in the property/casualty insurance and reinsurance cycle. Nonetheless, A.M. Best believes that Lancashire’s capital resources, combined with the overall strength of its management, are sufficient to help mitigate these weaknesses for the assignment of its ratings.

Accordingly, A.M. Best will closely monitor the quarterly performance of Lancashire against its stated operating plan, and any material negative deviations in terms of management, earnings, capitalization or risk profile could result in downward pressure on the assigned ratings.

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