S&P Lowers OCIL’s Avalon Re Notes

June 8, 2006

Standard & Poor’s Ratings Services has lowered its subordinated debt rating on Avalon Re Ltd.’s Series C variable rate notes, which are due June 6, 2008, to “CCC-” from “B.” Concurrently S&P removed the rating from its CreditWatch with negative implications, where it was placed on March 24, 2006.

S&P noted: “Avalon Re is a special-purpose reinsurance company that issued three notes of $135 million each. The notes cover successive layers of reinsurance to Oil Casualty Insurance Ltd. [OCIL] (rated A-/Stable/–).” The notes give OCIL “protection for three years against cumulative worldwide excess general liability exposures, including general liability risk, such as third-party bodily injury or property damage,” S&P continued.

“The Series C Notes were downgraded following Oil Casualty’s announcement that it is expected to incur losses of at least $140 million, with the potential to reach the full limit loss of $150 million,” explained S&P credit analyst Gary Martucci. “This loss is related to the December 2005 U.K. (Buncefield) fuel storage explosion.”

S&P further commented, that due to “the losses incurred at Buncefield and the full policy limit loss realized as a result of Hurricane Katrina, the Series C Notes are effectively at risk for any future losses for covered events.”

The rating agency will keep its ratings on Avalon’s Series A and Series B notes on CreditWatch negative, “pending receipt of addition information from Oil Casualty.” S&P said it “expects to resolve the CreditWatch status of these ratings within the next two weeks.”

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