Best Affirms Catlin Group Ratings; Outlook Negative

April 2, 2007

A.M. Best Co. has affirmed the financial strength ratings of “A” (Excellent) and the issuer credit ratings of “a” of Bermuda-based Catlin Insurance Company Ltd. (CICL) and the UK-based Catlin Insurance Company (UK) Ltd. (Catlin UK). Best also affirmed the debt rating of “bbb” of CICL’s $600 million preferred stock and the issuer credit rating of “bbb” of the Bermuda-based Catlin Group Limited (CGL), the ultimate parent company of CICL and Catlin UK.

“These rating actions remove the under review status of the ratings of CICL, Catlin UK and CGL originally applied in October 2006 as a result of concerns relating to the level of CGL’s consolidated catastrophe exposure and the likely future impact of major events on risk-adjusted capitalization,” said Best. However, the outlook for all of the ratings is negative.

At the same time, Best affirmed the issuer credit rating of “bbb” of UK-based Wellington Underwriting plc, which is now a subsidiary of CGL, and the debt ratings of “bbb-” of Wellington’s $27 million and €7 million ($9.4 million) subordinated notes. The outlook for these ratings has also been revised to negative from stable.

“The ratings of CICL reflect the company’s excellent risk-adjusted capitalization, excellent financial performance and strengthened profile,” said Best. Following its analysis, the rating agency indicated that it is “satisfied that CGL’s consolidated risk-adjusted capitalization following its acquisition of Wellington is sufficiently strong to absorb the impact of likely future major catastrophe events.”

However, Best explained, “the negative outlook reflects CGL’s continued exposure to integration risks following CGL’s acquisition of Wellington. The ratings of Catlin UK reflect explicit support from its parent, CICL.” In A.M. Best’s opinion, CICL’s risk-adjusted capitalization still remains excellent following the transaction.

Best also noted that following CGL’s acquisition of Wellington, “CICL is the repository for the greater part of the Catlin group’s capital as well as its underwriting risk, largely through intra-group quota share agreements. As such, CICL will assume the majority of the group’s increased exposure following the Wellington acquisition. However, A.M. Best believes that an anticipated increase in CICL’s capital and the addition in January 2007 of $600 million from CICL’s preferred stock issue is sufficient–in A.M. Best’s risk-adjusted analysis–to offset this increase. CICL provides funds for Lloyd’s Syndicate 2003’s funds at Lloyd’s through the corporate members of the syndicate.”

Concerning future prospects, Best said it expects CICL “to continue to produce excellent technical results in 2007 with a combined ratio of approximately 80 to 85 percent. This is an increase over its combined ratio in 2006 of 72 percent, reflecting softening in rates and a higher allowance for catastrophe losses than actually experienced in 2006. The company’s low combined ratios are partly due to low underwriting expenses, achieved because much of its business derives from reinsuring Catlin UK and Lloyd’s Syndicate 2003, which is managed by Catlin Underwriting Agencies Ltd.”

While Best acknowledged that “CICL’s business profile was enhanced by the purchase of Wellington by CGL,” it considers that there “is nevertheless substantive integration risk arising from the purchase, which may make it difficult for CGL to fully realize the value of its investment.

“After the purchase of Wellington, intangible assets (including goodwill) on CGL’s balance sheet increased to $868 million at year-end 2006 from $64 million the previous year, partly due to recognition of the value of Lloyd’s Syndicate 2020’s capacity at Lloyd’s purchased from individual Names. Lloyd’s Syndicate 2020 is managed by Wellington Underwriting Agencies Ltd.

“CICL provides explicit support to Catlin UK in the form of a 60 percent quota share treaty. An implicit supporting factor also reflected in Catlin UK’s rating is the integral part that it plays in the Catlin group’s strategy, with the company accounting for approximately 15 percent of CGL’s anticipated gross premium income in 2007 (up from 11 percent in 2006). Additionally, Catlin UK shares common management and systems with CICL.”

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