S&P Rates Phila. Indemnity, Phila. Insurance; ‘AA-‘; Outlook Stable

February 5, 2009

Standard & Poor’s Ratings Services has assigned its ‘AA-‘ counterparty credit and financial strength ratings to Philadelphia Indemnity Insurance Co. and its sister company, Philadelphia Insurance Co. (collectively referred to as PHLY). S&P also said that the outlook on both of these companies is stable.

“The supported ratings on both companies are based on their strategic importance to Tokio Marine & Nichido Fire Insurance Co. Ltd. (TMNF) (‘AA’/Stable/A-1+) and therefore receive an uplift in the ratings,” explained credit analyst Taoufik Gharib. “According to our criteria, these ratings are capped at one notch below the ratings assigned to core group members.”

S&P added that “PHLY’s stand-alone characteristics include its strong competitive position, strong operating performance, and very strong capitalization. Offsetting these strengths are the company’s aggressive growth strategy (including the introduction of new products in a difficult insurance cycle), key-men risk, and relatively high gross property catastrophe exposure.

“On July 23, 2008, Tokio Marine Holdings Inc. (Tokio Marine; the parent company of TMNF) and Philadelphia Consolidated Holding Corp. (the parent company of PHLY) entered into an agreement under which Tokio Marine will acquire all outstanding shares of Philadelphia Consolidated for $61.50/share in cash, a 73 percent premium to Philadelphia’s closing price of $35.50. The total transaction value was approximately $4.73 billion and was completed on Dec. 1, 2008.”

S&P also noted that the “acquisition of PHLY is consistent with Tokio Marine’s strategy of expanding revenues and profits from international markets in the medium and long term. With limited growth potential in the domestic Japanese nonlife insurance market, Tokio Marine has been pursuing an international expansion strategy to achieve business growth and strengthen profitability.

“Therefore, the PHLY acquisition plays a vital and strategic role in the group’s strategy, allowing it to establish a significant presence in the U.S., the world’s largest insurance market. The acquisition will also let Tokio Marine create a well-balanced global portfolio, including domestic, developed, and emerging markets. Therefore, we view PHLY as a strategically important subsidiary of TMNF.

“PHLY constitutes a significant proportion of Tokio Marine’s pro forma consolidated position. For year-end 2007, PHLY’s figures were about 6 percent of the group’s pro forma net premiums written and about 5 percent of the group’s pro forma capital position. More importantly, PHLY’s net income was about 23 percent of the group’s pro forma figure.”

S&P also indicated that it “expects that PHLY’s gross premiums written will grow by about 10 percent in 2008. This growth strategy in a weak pricing environment is concerning and could affect future operating results. We expect that the company’s competitive position will remain strong following the acquisition. Despite soft pricing and catastrophe losses, operating performance will likely remain strong in 2008, with a combined ratio of 86 percent-88 percent.

“We expect that PHLY will continue to emphasize underwriting discipline and generate strong underwriting results in 2009 in line with historical results,” the bulletin continued. “Furthermore, capitalization will likely remain very strong, redundant, and supportive of the ratings in 2009. We expect TMNF to support PHLY’s capitalization and financial flexibility if needed, and we expect PHLY to maintain its strategically important status within TMNF. As a result, the ratings and outlook on PHLY should move in tandem with those on TMNF.

Gharib added: “If PHLY is successfully integrated, establishes itself as a cornerstone within the group, and materially contributes to the group’s turnover and earnings over the next two to three years, we might decide to view PHLY as core to TMNF. If that were to happen, we would then align the ratings on PHLY with those on the other core group members. Alternatively, we could revise the outlook to negative or lower the ratings on PHLY if its operating performance were to deteriorate significantly and affect its financial profile.”

Source: Standard & Poor’s – www.standardandpoors.com

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