Best Affirms American Re Ratings; Assigns ICR; Outlook Changed to Negative

December 28, 2004

A.M. Best Co. announced that it has affirmed the financial strength ratings of “A+” (Superior) of American Re Corporation Group’s member companies, which include American Re-Insurance Company, American Alternative Insurance Corporation and The Princeton Excess & Surplus Lines Insurance Company (all domiciled in Wilmington, Del). Best has also assigned an issuer credit rating of “aa-” to American Re and has affirmed its debt rating of “a-” on its senior unsecured notes. The outlook for all ratings has been revised to negative from stable.

“These ratings reflect American Re’s excellent risk-adjusted capitalization, its dominant business franchise and the explicit financial support provided by its ultimate parent, Munich Re (Germany),” said Best. “These strengths are derived from American Re’s extensive risk management and innovative product offerings augmented by its access to alternative risk markets through its primary subsidiaries, all of which have fostered long-standing relationships with its targeted clients. The ratings also recognize American Re’s strategic importance to Munich Re, serving as its reinsurance operating platform in the United States.”

Best observed: “Munich Re has provided considerable benefits to American Re over the past several years in the form of capital infusions, retrocessional support and accident year stop loss covers, which have served to provide American Re with capacity while allowing it the opportunity to focus on improving its underwriting performance and financial position.

“However, despite the support provided by Munich Re, American Re’s overall financial position has been hampered over the past three years by significant and repeated adverse development charges covering the 1997 to 2001 accident years, as well as asbestos liabilities, thereby dampening the effects of favorable underwriting trends experienced at the peak of the current insurance market cycle.

“Accordingly, underwriting performance has suffered on a calendar year basis and the improvement in stand-alone risk-adjusted capitalization has fallen short of A.M. Best’s expectations due to continued development in its prior year core reserves.

“The revision of the outlook to negative indicates that despite Munich Re’s support, the sustainability of American Re’s ratings is contingent on its ability to improve underwriting performance over the next 12 months and further replenish its capital base. Continued weak underwriting performance and static risk-adjusted capitalization could put further pressure on the assigned ratings.”

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