Best Ratings Report

Editor's note: This information is courtesy of A.M. Best Co.
For further information, visit www.ambest.com/ratings.


A.M. Best Co. has affirmed the financial strength rating (FSR) of A+ (Superior) and issuer credit ratings (ICR) of “aa-” of the Hartford Insurance Pool (The Pool) and its property/casualty members. Concurrently, A.M. Best has affirmed the ICR of “a”, debt ratings and shelf registration of The Hartford Financial Services Group, Inc. (The Hartford) (Hartford, CT) [NYSE: HIG]. The outlook for all ratings is stable.

The Pool’s ratings reflect its superior risk-adjusted capitalization, strong core operating results, disciplined risk management culture and excellent business position in the property/casualty insurance sector. These positive rating factors are derived from The Pool’s adherence to conservative operating fundamentals and commitment to diversified underwriting and marketing strategies that provide balanced growth opportunities. A.M. Best believes The Pool is well positioned to manage changing market dynamics such as reduced pricing and increased competition due to its significant depth and breadth of operations, well balanced risk selection, effective utilization of multiple distribution channels and superior capitalization, which is further bolstered by The Hartford’s strong financial flexibility and proven access to capital markets.

These favorable considerations are somewhat tempered by expected margin compression driven by softening market conditions throughout the property/casualty industry. Moreover, The Pool maintains exposure, albeit substantially reduced, to emerging asbestos and environmental claims and adverse loss reserve development on older accident years. However, management conducts annual ground-up loss reserve reviews for asbestos (second quarter) and environmental (third quarter) reserves, as well as an annual evaluation of reinsurance recoverables. Additional offsetting attributes are The Pool’s exposure to catastrophe events (natural and man-made), although it has a comprehensive reinsurance and catastrophe management program to limit its exposure to a single event.

The ratings for The Hartford represent the use of extraordinary notching as the overall enterprise benefits from the diversification of its equally important and diverse property/casualty and life operations, which
provide strong, sustainable earnings and cash flows. This has been evidenced by the even distribution of revenues and contributions to earnings from both operations in recent years, which tend to be largely uncorrelated. Also, the property/casualty and life operations maintain strong, market leading positions in their respective markets.

The ratings also recognize the improvement in The Hartford’s financial leverage and coverage measures through 2007, with an adjusted debt-to-total capital measure of 19% (including accumulated other
comprehensive income) and interest coverage of approximately 16.2 times.

However, leverage and coverage measures did deteriorate in first quarter 2008, primarily due to the negative impact of unrealized capital losses on stockholders’ equity and realized capital losses on earnings largely within the life business segments. Unrealized capital losses during first quarter 2008 primarily were due to the negative impact of credit spread widening on fixed income securities. Realized capital losses during the quarter were caused by the transition to a new accounting standard (SFAS 157), impairments and credit derivative losses. Despite this, A.M. Best believes The Hartford's earnings power remains strong, in the absence of unusual items, and should lead to improvement in financial leverage and interest coverage measures through the remainder of 2008.

****

A.M. Best Co. has affirmed the financial strength rating of B+ (Good) and the issuer credit rating of
“bbb-” of Inter-Industry Insurance Company Limited (III) (Isle of Man) and its wholly owned subsidiary, Insurco Ltd (Insurco) (Isle of Man). The outlook on both ratings has been revised to negative from stable.

The negative outlook reflects the company’s current and prospective deterioration in operating performance driven by weakening underwriting results, combined with a gradual reduction in premiums written over the
past five years. Offsetting factors are its solid capital position and niche business profile.

In A.M. Best’s view, the continued reduction in premium volumes, with an increase in claims frequency and higher expense ratio is anticipated to keep the combined ratio above 100% in the short to medium term. The
company’s operating performance is expected to be pressured going forward with profits being reliant on investment income, which is expected to provide lower investment returns. A.M. Best views that the company faces significant challenges improving its performance given the current competitive market environment. III’s risk-adjusted capitalisation is expected to remain strong in 2007 and 2008, despite the losses experienced during the past year.

III operates in specialty chemical and manufactured buildings markets, where it provides commercial general liability and umbrella cover through Insurco. The company has a niche business profile, which is
comprised of a small number of insureds written through Insurco. In A.M. Best’s opinion, the high level of exposure per risk relative to capital and surplus and a lack of a retrocession programme results both in potential earnings volatility and exposes risk-adjusted capitalisation to deterioration in the event of large losses.

****

A.M. Best Co. has affirmed the financial strength rating of B+ (Good) and issuer credit rating of “bbb-” of Western Isles Insurance Company Limited (WIICL) (Isle of Man). The outlook for both ratings is negative.

The ratings reflect WIICL’s solid projected risk-adjusted capitalisation, good operating performance and improving business profile. An offsetting factor is the weak capital position of the parent company, Soglassye Insurance Company LLC, a general Russian insurer.

WIICL’s capital position is prospectively expected to remain strong, despite growth in net written premiums of 75%. The company has developed its profile through increasing third party business volumes from Russia, for which WIICL is expected to have low retentions levels. It is essential for the company to have controlled growth, supported by sufficient retained earnings to ensure its capital position is strengthened going forward.

Furthermore, the negative outlook reflects the weak, though gradually improving capital position of its parent.