Best Affirms Casiopea Re ‘A-‘ Ratings

April 27, 2007

A.M. Best Co. has affirmed the financial strength rating of “A-” (Excellent) and the issuer credit rating of “a-” of Luxembourg-based Casiopea Re S.A., the reinsurance captive of Spain’s Telefonica S.A., with a stable outlook.

The ratings reflect Casiopea Re’s solid current and prospective risk-adjusted capitalization and strong operating performance, despite the integration of the O2 Assurance portfolio.

In Best’s opinion, Casiopea Re’s current risk-adjusted capitalization remains strong, despite higher capital requirements from the integration of the O2 insurance portfolio in 2007. Absolute levels of capital and surplus (€225.1 million [$301.8 million]) at year-end 2006 are also strong and are expected to grow further from retained earnings and the allocation of equalization reserves.

The quality of capital is partially offset by a loan to the parent company, Telefonica, and the potential high dependence on retrocession in case of a larger claim. However, this is alleviated by the high quality of retrocessionaires.

Best also expects a deterioration in Casiopea Re’s underwriting performance in 2007 as a result of assuming O2 business, which consists mainly of O2 customers’ property risks. This portfolio has been written profitably, however, at a significantly higher combined ratio (92.8 percent in 2006) than Casiopea’s business (83.4 percent in 2006). Overall earnings in 2007 are likely to remain strong in the region of 25-30 million—although lower than in 2006—which translates into a return on premiums of approximately 20 percent.

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