Best Rates U.K.’s Hiscox, Lloyd’s Syndicate, Bermuda Start-Up

December 19, 2005

A.M. Best Co. has announced its credit ratings on U.K. specialist and Lloyd’s insurer Hiscox plc. and its operating entities. It affirmed the financial strength rating (FSR) of “A-” (Excellent) and the issuer credit rating (ICR) of “a-” of Hiscox Insurance Company Limited (Hisco), and the ICR of “bbb-” of Hiscox plc, its ultimate parent.

Best also assigned an FSR of “A-” (Excellent) and ICR of “a-” to Hiscox Insurance Company (Bermuda) Limited, the Group’s newly capitalized Bermudan insurer. Best assigned a Syndicate Rating of “A” (Excellent) and an ICR of “a” to Lloyd’s Syndicate 33, which is managed by Hiscox Syndicates Limited. The outlook for all of the ratings is stable.

Best explained its ratings actions as follows:

Hiscox Insurance Company Limited and Hiscox plc
Hisco’s ratings reflect the company’s excellent risk-adjusted capitalization, consistently strong financial performance and its strong business profile for the specialist classes written. An offsetting factor continues to be the company’s high operating expenses.”

Hisco’s risk-adjusted capitalization remains excellent and will continue to be supportive of the company’s anticipated premium growth in 2005 – 2006. Best anticipates that total shareholders funds will grow through retained earnings to £150 million ($263 million) by year-end 2006 from £123 million at year-end 2004 ($ 215 million). It is anticipated that this will be sufficient to support projected premium growth of 10 percent a year in 2005 and 2006.

Best also believes that Hisco’s strong financial performance is likely to continue in 2005 and 2006 with a combined ratio of approximately 95 percent anticipated in both years. This is supported by the company’s position as a specialist underwriter, partially insulating it from softening market conditions for mainstream lines of business. An offsetting factor is Hisco’s high operating expense ratio, which A.M. Best anticipates will remain close to the 2004 level of 41.7 percent in both 2005 and 2006.

Hisco has a strong business profile in its specialist underwriting markets of high value householders and professional indemnity insurance, as a result of which the company maintains a high level of business retention. More than 80 percent of premium volume in 2004 was from renewal business. Growth in premium income is anticipated in 2005 and 2006 emanating from the company’s regional offices, where Hisco is developing relationships, and where market conditions remain good for its specialist lines.

Hiscox Insurance Company (Bermuda) Limited
The ratings reflect the company’s excellent initial risk-adjusted capitalization, excellent prospective underwriting results and the Hiscox group’s strong business profile for the classes of business Hiscox Bermuda will write. An offsetting factor is the company’s exposure to strong competition from a number of Bermudan start-up insurers.

Best believes that Hiscox Bermuda is likely to maintain strong risk-adjusted capitalization at year-end 2006 and 2007, based on conservative performance forecasts and A.M. Best’s specific insurance start-up criteria. Hiscox Bermuda’s initial capitalization of $500 million is, in A.M. Best’s opinion, sufficient to support projected net premium income of $ 260 million in 2006, taking into account the company’s likely level of exposure should it experience an adverse loss environment.

A.M. Best anticipates that Hiscox Bermuda will achieve a loss ratio of approximately 50 percent at year-end 2006, subject to catastrophe experience. Performance is likely to be supported by its underwriting portfolio of internal Hiscox group reinsurance of accounts with a proven track record of profitability. This business is likely to comprise approximately 50 percent of Hiscox Bermuda’s gross premium. Hardening rates in certain lines of business will also support the company’s prospective performance.

Hiscox Bermuda will be exposed to competition from other Bermudan start-up companies, many of which are larger when measured by absolute capital. However, A.M. Best believes that this factor is mitigated by the company’s access to business from other parts of the Hiscox group. This will be accessed through referrals and internal cessions from Hiscox Insurance Company Limited, Hiscox Insurance Company (Guernsey) Limited, Hiscox Inc in the United States and from Hiscox Dedicated Corporate Name Limited, which is a member of Lloyd’s Syndicate 33.

Lloyd’s Syndicate 33
The ratings reflect the syndicate’s strong operating performance and excellent business profile in the London market. Additionally, the syndicate benefits from the financial strength of the Lloyd’s market rating which underpins the security of all Lloyd’s syndicates. An offsetting factor is volatility in the syndicate’s reserves.

Best anticipates that the syndicate is likely to produce a return on capacity (after personal expenses) of 20 percent when the 2003 underwriting year is closed. This follows a 20.4 percent return in 2002, which placed the syndicate in the upper quartile of Lloyd’s syndicate performance for that year. This is partially offset by a prospective decline in returns in 2004 and 2005 as a result of high catastrophe losses in these years. A.M. Best believes that the syndicate will report a profit on capacity of approximately 9 percent when the 2004 year of account closes and that the syndicate’s 2005 net result is likely to be reduced as a result of US hurricane losses, leading to a near break-even final result for the year.

Syndicate 33 is one of the largest syndicates within the Lloyd’s market with allocated capacity of £775 million ($1.356 billion) in 2005, rising to £833 million ($1.458 billion) in 2006. The syndicate underwrites a well-diversified account both by business class and territory and leads a significant proportion of the business written (approximately 50 percent).

The rating also reflects anticipated volatility in the syndicate’s reserves. A.M. Best believes that there is likely to be a prior year deterioration when the 2003 year of account closes of approximately £10 million ($17.5 million), largely relating to US professional indemnity business. This follows a total aggregate shortfall of £48 million ($84 million) for the closed years 2000 – 2002, which also relates primarily to the same class of business. Prior to these shortfalls the syndicate reserved prudently making releases in each of its closed years from 1992-1999.

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