S&P Affirms American Re and Affiliates ‘A’ Ratings

September 10, 2004

Standard & Poor’s Ratings Services announced that it has affirmed its “A” counterparty credit and financial strength ratings on U.S.-based American Re-Insurance Co. and its subsidiaries American Alternative Insurance Corp. and Princeton Excess & Surplus Lines Insurance Co. (collectively referred to as American Re).

S&P also said it has “affirmed its counterparty credit and senior debt ratings on American Re Corp., an intermediary holding company that functions as American Re’s immediate parent company, and which is ultimately owned by German-based reinsurer Munchener Ruckversicherungs-Gesellschaft Aktiengesellschaft (Munich Re; A+/Stable/–).” The outlook on all of the ratings is stable.

The ratings are based on American Re’s “strong business position, improving operating performance, improving capital adequacy, and strong financial flexibility as a strategically important subsidiary of Munich Re,” said S&P.

“These positive factors are partially offset by American Re’s less diversified business mix, very poor historical operating performance, continued uncertainty with regards to loss reserve adequacy, and moderate execution risk,” it added.

S&P indicated that for the remainder of 2004, it “expects American Re’s accident year combined ratios to remain in the 98 percent -100 percent range. On a calendar-year basis, the combined ratio is expected to be 103 percent-105 percent, reflecting Standard & Poor’s expectation that further reserve development could occur throughout the year.

“Gross premiums are expected to decline in 2004 mainly due to American Re exiting the noncore credit enhancement business in 2003. Gross writings might grow or decline modestly in 2005 depending on market conditions and in view of management’s current conservative stance to not write underpriced business.

“Net premiums are expected to grow by 15 percent-20 percent in 2004, reflecting a reduction in the cession rate of certain quota-share arrangements. Net premium volume could increase further in 2005 if the variable quota-share is further reduced. As a result of lower cession rates to Munich Re, capital adequacy is expected to remain very strong but to decline moderately as reflection of expected higher writings on a net basis.”

A summary of the “Major Rating Factors” listed by S&P is as follows:
— Strong but less diversified business position. On a net written premium basis, American Re ranks as the eighth-largest U.S. reinsurer, reflective of substantial reinsurance cessions to Munich Re. Prospectively, Standard & Poor’s expects American Re to primarily focus on providing treaty, facultative, and alternative reinsurance products in the U.S. reinsurance market.
— Poor historical operating performance. Operating performance has been very poor in the past five years, with the group reporting an average GAAP combined ratio of 139 percent and ROR of negative 27 percent between 1999-2003.
— Continued reserve strengthening actions. In recent years, American Re has experienced significant reserve development for its 1997-2001 accident years as well as for asbestos claims. From 2001 through the first half of 2004 the group posted $3.5 billion in reserve additions, constituting 144 percent of the $2.4 billion GAAP year-end 2000 shareholders’ equity base, and an increase of 61 percent over its original year-end 2000 loss reserves.
— Deteriorating cash flow position. Cash flows deteriorated in 2003, with cash flow from operations declining to $361 million in 2003 from $996 million in 2002.
— Improved capital adequacy. American Re’s consolidated capital position improved significantly in 2003, with the capital adequacy ratio increasing to 189 percent in 2003 versus 131 percent in 2002.
— Strong financial flexibility. American Re benefits from strong financial flexibility as a strategically important member of the Munich Re organization.
— Execution risk. In response to significant operating difficulties, American Re has taken significant actions in the past 24 months to improve underwriting and operating controls within the group, as well as to significantly improve premium rate adequacy and the quality of the book of business. Although management has made significant progress in realigning the organization, Standard & Poor’s believes there is execution risk related to management’s ability to fully turn around operating performance and produce above-average returns over the next underwriting cycle.”

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