2009 PC BIR Preface 07-28-09 - WEB NEW - A. M. BestIn 1984, A.M. Best embarked on global coverage of the insurance industry with the publication of Best's Insurance Reports®—Non-US

2009 BEST’S INSURANCE REPORTS—PROPERTY/CASUALTY — For Current Ratings access www.ambest.com — vii

Copyright © 2009 by A.M. Best Company, Inc.All rights reserved. No part of this report may be reproduced, stored in a retrieval system or transmitted in any form or by any means; electronic, mechanical, photocopying, recording or otherwise.

Founded in 1899, A.M. Best Company is a global, full-ser-vice credit rating agency dedicated to serving the financialand health care service industries. It began assigning creditratings in 1906, making it the first of today's credit ratingagencies to use symbols to differentiate the relative credit-worthiness of companies. Within the insurance segment,Best's Credit Ratings cover property/casualty, life, annuity,health, health maintenance organizations (HMOs), reinsur-ance, captive, and title insurance companies. A.M. Best pro-vides the most comprehensive insurance ratings coverage ofany credit rating agency, with reports and ratings maintainedon over 10,000 insurance entities worldwide, in approxi-mately 95 countries. A.M. Best is also a well-known and high-ly regarded source of information and commentary on glob-al insurance trends and issues through a host of other prod-ucts and services.

A.M. Best’s Mission Statement is “To perform a con-structive and objective role in serving the insurance mar-ketplace as a source of reliable information and ratingsdedicated to encouraging a financially strong industrythrough the prevention and detection of insurer insolven-cy.” We believe that this proactive role is vital to encour-

age prudent management of insurance companies and toimprove the industry’s financial strength for the benefit ofpolicyholders.

Best’s Credit Ratings and related financial informa-tion provide powerful tools for insurance decision-making and market research for insurance agents,brokers, risk managers, pension managers, employeebenefits administrators, investment bankers, insuranceexecutives, policyholders and consumers.

In 1900, A.M. Best first published what became knownas Best’s Insurance Reports®—Property/Casualty Editionwhich reported on 850 property/casualty insurers operat-ing in the United States. This was soon followed by itscompanion volume, Best’s Insurance Reports®—Life/Health Edition, which was published in 1906 report-ing on 95 legal reserve life insurers in the United States.For more than a century, these two annual publicationshave represented the most comprehensive source offinancial information on domestic insurers.

The 2009 Property/Casualty and Life/Health Editions ofBest's Insurance Reports®—United States & Canada containapproximately 3,300 and 1,850 insurance companies,respectively. A.M. Best rates or reports on virtually all U.S.and Canadian active insurers and a growing number ofCaribbean insurers. In addition, the 2009 editions containCanadian property/casualty, Canadian life, Caribbean lifeand Caribbean property/casualty insurers and reports onUnited States, European, and Canadian branches.

PREFACE2009 EDITION

AN EXPLANATION OF BEST’S CREDIT RATING SYSTEM AND PROCEDURES

SECTION TOPIC PAGEI Introduction viiII Sources of Information viiiIII Objective of Best’s Credit Rating System viiiIV Best’s Credit Rating Scale ixV Release of Financial Strength Ratings xiVI Assignment of Best’s Credit Ratings xiiVII Balance Sheet Strength xivVIII Operating Performance xixIX Business Profile xixX Affiliation Codes and Rating Modifiers xxiXI “Not Rated” (NR) Categories xxiiXII Financial Size Categories (FSC) xxiiiXIII Rating Distributions xxiiiXIV Definitions xxv

SECTION IINTRODUCTION

In 1984, A.M. Best embarked on global coverage ofthe insurance industry with the publication of Best'sInsurance Reports®—Non-US Edition, which currentlyreports, in CD-ROM format, on over 5,800 internationalproperty/casualty and life/health companies.

In 1999, A.M. Best expanded its rating assignments toinclude debt and insurance-linked securities. The issuanceof securities ratings for insurers and insurance holding com-panies is a natural extension of our expertise in providingfinancial strength ratings and reports on insurance organiza-tions to investors, analysts and policyholders. This focus alsoserves as the foundation for which ratings are issued to otherrisk-bearing institutions and entities, including captive insur-ers and alternative risk transfer facilities.

Within the insurance segment, A.M. Best now assignsratings to debt securities, surplus notes, preferred stockand hybrid debt instruments, commercial paper, collater-alized debt obligations, insurance-based liability or asset-backed securitizations and monetizations, risk-linkedsecurities, closed block securities, and institutional invest-ment products.

In addition to our rating products and services, A.M. Bestalso publishes a host of other complementary products thatare an extension of our knowledge of the industry. Someof these products include Best's Aggregates and Averages(industry-wide aggregate totals), Best's Underwriting Guide(an underwriter's guide to assessing over 500 commercialrisks), and Best's Loss Control Manual (a safety engineer'sguide to assessing insurance exposures and requirements).These products add to the understanding of the complexi-ties of the insurance industry and enhance our rating eval-uations as well as the value and scope of information weprovide our subscribers.

A.M. Best currently provides over 50 publications andservices to meet the needs of our customers who requiretimely, accurate and comprehensive information on thisdynamic industry. A.M. Best is dedicated to providing oursubscribers with the most useful and up-to-date informationand ratings available in the insurance industry.

The primary source of the information presented in thispublication is each insurance company’s official annual andquarterly (if available) financial statements as filed with theregulator of the state, province, territory or country in whichthe company is domiciled. In the United States, most ofthese financial statements are prepared in accordance withstatutory accounting requirements established by theNational Association of Insurance Commissioners (NAIC)and administered by the respective states. The Canadiancompany presentations are in the format prescribed by theOffice of the Superintendent of Financial Institutions (OSFI),

and some portions of the Canadian data are provided byBeyond 20/20 Inc., Ottawa, Canada.

Our comprehensive review of a company's financialstrength is supplemented by publicly available documents,such as Securities and Exchange Commission (SEC) filings inthe United States, Generally Accepted Accounting Principles(GAAP) or International Financial Reporting Standards (IFRS)financial statements. Other sources of information mayinclude audit reports prepared by certified public accoun-tants or actuaries, loss reserve reports prepared by lossreserve specialists, confidential documents provided by com-pany management, our proprietary Background andSupplemental Rating Questionnaires, and annual businessplans.

In arriving at a rating decision, A.M. Best relies on third-party audited financial data and/or other information pro-vided to it. While this information is believed to be reli-able, A.M. Best does not independently verify the accura-cy or reliability of the information. Any and all ratings,opinions and information contained herein are provided"as is," without any express or implied warranty. A ratingmay be changed, suspended or withdrawn at any time forany reason at the sole discretion of A.M. Best.

Consequently, no representations or warranties aremade or given as to the accuracy or completeness of theinformation presented herein, and no responsibility can beaccepted for any error, omission or inaccuracy in ourreports. Caution should be used in the interpretation andcomparison of the information shown due to the differ-ences which may exist between companies’ financialreporting standards, insurance operations, and parent/sub-sidiary relationships.

Financial Strength Ratings

A Best's Financial Strength Rating (FSR) is an indepen-dent opinion of an insurer's financial strength and ability tomeet its ongoing insurance policy and contract obligations.It is based on a comprehensive quantitative and qualitativeevaluation of a company's balance sheet strength, operatingperformance and business profile.

The Financial Strength Rating opinion addresses the rela-tive ability of an insurer to meet its ongoing insurance oblig-ations. The ratings are not assigned to specific insurance poli-cies or contracts and do not address any other risk, includ-ing, but not limited to, an insurer's claims-payment policiesor procedures; the ability of the insurer to dispute or denyclaims payment on grounds of misrepresentation or fraud; orany specific liability contractually borne by the policy or con-tract holder. A Financial Strength Rating is not a recommen-dation to purchase, hold or terminate any insurance policy,

viii — Best’s Financial Strength Ratings & Reports as of 07/20/09 — 2009 BEST’S INSURANCE REPORTS—PROPERTY/CASUALTY


SECTION II

SOURCES OF INFORMATION

SECTION III

OBJECTIVE OF BEST’S CREDITRATING SYSTEM

2009 BEST’S INSURANCE REPORTS—PROPERTY/CASUALTY — For Current Ratings access www.ambest.com — ix


contract or any other financial obligation issued by an insur-er, nor does it address the suitability of any particular policyor contract for a specific purpose or purchaser.

An important component of the evaluation processrequires an interactive exchange of information with theinsurance company’s management. As shown in the accom-panying table, Best's Financial Strength Ratings range fromour highest, A++ (Superior), to our lowest, F (In Liquidation).Companies that subscribe to our interactive rating service areassigned a Best's Credit Rating. A.M. Best may assign Best'sPublic Data Ratings (noted by the "pd" modifier) to Canadianproperty/casualty insurers as well as to U.S. health mainte-nance organizations (HMOs) and health insurers that do notsubscribe to our interactive rating process. These Public DataRatings will be assigned where, in Best's opinion, ratings areneeded due to market demand.

Best's Public Data Ratings are Best's opinion of the finan-cial strength of an insurer. Public Data Ratings are expressedusing the same rating scale and definitions as Best's interac-tive ratings of long-term financial strength but have a “pd”rating modifier applied to ensure the user is aware of themore limited information basis for the rating. Similar to ourinteractive ratings, the assignment of Best's Public DataRatings incorporates analysis of balance sheet strength, oper-ating performance and business profile. However, the analy-sis does not involve interaction with company management.

A Public Data Rating model, utilizing regulatory data filedby an insurance company or HMO with its regulator, is theprimary source for the quantitative analysis used in assign-ing Best's Public Data Ratings. The model evaluates the fivemost recent years of a company's financial performance.A.M. Best will not assign Public Data Ratings to companieswith less than three years of data. Other public documentsand disclosures may be used as part of the analytical processfor assigning Public Data Ratings. The assessment also con-siders certain qualitative factors such as prevailing markettrends and the current regulatory environment relevant tothe business of the legal entity being rated.

Best’s Financial Strength Rating opinions are dividedinto two broad categories—Secure and Vulnerable. Thisdelineation provides our subscribers with a gauge of howA.M. Best views a company’s ability to meet its obliga-tions to policyholders. Based on Best’s Insolvency Studies,Secure rated companies have experienced a very low rateof failure that is significantly lower than Vulnerable ratedcompanies (and companies unrated or not followed byA.M. Best). Hence, the justification for the two categories.

In Best’s opinion, the highest-rated Secure companieshave a very strong ability to meet their ongoing obligationsto policyholders, while the lowest-rated Secure companieshave a good ability. The time frame for the ability of Securecompanies to meet their current and ongoing obligations topolicyholders varies. The higher a company’s Secure rating,the greater its ability to withstand adverse changes in under-writing and economic conditions over longer periods of time.The time frame in which Vulnerable companies are expect-ed to meet their obligations also varies. “Fair,” “Marginal” and“Weak” rated companies may only have a current ability topay claims, while companies rated “Poor,” “Under RegulatorySupervision” and “In Liquidation” may not have an ability tofully meet their current obligations to policyholders.

Issuer Credit Ratings and Debt Ratings

A.M. Best also assigns Issuer Credit Ratings (ICR) andDebt Ratings to insurance operating companies and hold-ing companies and securities issued by these entities.While our annual publications include only FinancialStrength Ratings, Issuer Credit Ratings and Debt Ratingscan be found along with Financial Strength Ratings on theA.M. Best Web site, www.ambest.com.

A Best's Debt/Issuer Credit Rating is an opinion regardingthe relative future credit risk of an entity, a credit commit-ment or a debt or debt-like security. Credit risk is the risk thatan entity may not meet its contractual, financial obligationsas they come due. These credit ratings do not address anyother risk, including but not limited to liquidity risk, marketvalue risk or price volatility of rated securities. The rating isnot a recommendation to buy, sell or hold any securities,insurance policies, contracts or any other financial obliga-tions, nor does it address the suitability of any particularfinancial obligation for a specific purpose or purchaser.

A Best's Long-Term Issuer Credit Rating is an opinion ofan issuer/entity's ability to meet its ongoing senior financialobligations. These ratings are assigned to insurance compa-nies, holding companies or other legal entities authorized toissue financial obligations.

A Best's Short-Term Issuer Credit Rating is an opinion ofan issuer/entity's ability to meet its senior financial obligationshaving original maturities of generally less than one year.

A Best's Long-Term Debt Rating is an independent opin-ion of an issuer/entity's ability to meet its ongoing financialobligations to security holders when due. This rating isassigned to specific issues such as debt and preferred stock.

A Best's Short-Term Debt Rating is an opinion of anissuer/entity's ability to meet its financial obligations havingoriginal maturities of generally less than one year. These rat-ings are assigned to securities such as commercial paper.

Type of Rating Opinions

Best’s Financial Strength RatingsInteractive Public Data

Rating Scale A++ to F A++ pd to D pd

Evaluation Quan. & Qual. Quan. & Qual.

Interaction with Mgmt. Yes No

Sufficient Exp. & Size Yes Yes

SECTION IVBEST’S CREDIT RATING SCALE

The Best’s Financial Strength Rating scale is comprisedof 16 individual ratings grouped into 10 categories, con-sisting of three Secure categories of “Superior,” “Excellent”and “Good” and seven Vulnerable categories of “Fair,”“Marginal,” “Weak,” “Poor,” “Under RegulatorySupervision,” “In Liquidation” and “Rating Suspended.”

Financial Strength Ratings

Secure

A++ and A+ (Superior)Assigned to companies that have, in our opinion, a superi-or ability to meet their ongoing insurance obligations.

A and A- (Excellent)Assigned to companies that have, in our opinion, an excellentability to meet their ongoing insurance obligations.

B++ and B+ (Good)Assigned to companies that have, in our opinion, a goodability to meet their ongoing insurance obligations.

Vulnerable

B and B- (Fair)Assigned to companies that have, in our opinion, a fairability to meet their ongoing insurance obligations, butare financially vulnerable to adverse changes in under-writing and economic conditions.

C++ and C+ (Marginal)Assigned to companies that have, in our opinion, a mar-ginal ability to meet their ongoing insurance obligations,but are financially vulnerable to adverse changes inunderwriting and economic conditions.

C and C- (Weak)Assigned to companies that have, in our opinion, a weakability to meet their ongoing insurance obligations, butare financially very vulnerable to adverse changes inunderwriting and economic conditions.

D (Poor)Assigned to companies that have, in our opinion, a poorability to meet their ongoing insurance obligations and arefinancially extremely vulnerable to adverse changes inunderwriting and economic conditions.

E (Under Regulatory Supervision)Assigned to companies (and possibly their subsidiaries/affili-ates) that have been placed by an insurance regulatoryauthority under a significant form of supervision, control orrestraint whereby they are no longer allowed to conduct nor-mal, ongoing insurance operations. This would include con-servatorship or rehabilitation, but does not include liquidation.It may also be assigned to companies issued cease and desistorders by regulators outside their home state or country.

F (In Liquidation)Assigned to companies that have been placed under an order ofliquidation by a court of law or whose owners have voluntarilyagreed to liquidate the company. Note: Companies that voluntar-ily liquidate or dissolve their charters are generally not insolvent.

S (Rating Suspended) Assigned to rated companies that have experienced sud-den and significant events affecting their balance sheetstrength or operating performance whereby the ratingimplications cannot be evaluated due to a lack of timelyor adequate information.

Best’s Long-Term Issuer Credit Ratings and Long-Term Debt Ratings

Best's Long-Term Issuer Credit Rating and Long-TermDebt Rating scale is comprised of 22 individual ratingsgrouped into 8 categories, consisting of four InvestmentGrade categories of "Exceptional," "Very Strong," "Strong"and "Adequate" and four Non-Investment Grade cate-gories of "Speculative," "Very Speculative," "ExtremelySpeculative" and "In Default."

Investment Grade

aaa (Exceptional)Assigned to issues where, in our opinion, the issuer hasan exceptional ability to meet the terms of the obligation.

aa+ and aa and aa- (Very Strong)Assigned to issues where, in our opinion, the issuer hasa very strong ability to meet the terms of the obligation.

a+ and a and a- (Strong)Assigned to issues where, in our opinion, the issuer hasa strong ability to meet the terms of the obligation.

bbb+ and bbb and bbb- (Adequate)Assigned to issues where, in our opinion, the issuer has anadequate ability to meet the terms of the obligation; howev-er, the issue is more susceptible to changes in economic orother conditions.

Non-Investment Grade

bb+ and bb and bb- (Speculative)Assigned to issues where, in our opinion, the issuer hasspeculative credit characteristics, generally due to a mod-erate margin of principal and interest payment protectionand vulnerability to economic changes.

b+ and b and b- (Very Speculative)Assigned to issues where, in our opinion, the issuer hasvery speculative credit characteristics, generally due to amodest margin of principal and interest payment protec-tion and extreme vulnerability to economic changes.

x — Best’s Financial Strength Ratings & Reports as of 07/20/09 — 2009 BEST’S INSURANCE REPORTS—PROPERTY/CASUALTY


ccc+ and ccc and ccc-and cc and c (Extremely Speculative)Assigned to issues where, in our opinion, the issuer hasextremely speculative credit characteristics, generallydue to a minimal margin of principal and interest pay-ment protection and extreme vulnerability to economicchanges.

d (In Default)Assigned to issues in default on payment of principal,interest or other terms and conditions, or when a bank-ruptcy petition or similar action has been filed.

While the above definitions apply to entities which do notissue insurance obligations, A.M. Best also assigns IssuerCredit Ratings to all rated insurance companies. In addition,it should also be noted that A.M. Best assigns Issuer CreditRatings to publicly traded holding companies, where a sig-nificant portion of cash flow is provided by insurance oper-ations. The definitions applied to insurance companies thatare assigned an Issuer Credit Rating are as follows: (aaa) -Exceptional; (aa) - Superior; (a) - Excellent; (bbb) - Good;(bb) - Fair; (b) - Marginal; (ccc, cc) - Weak; (c) - Poor; (rs) -Regulatory Supervision/Liquidation.

Best’s Short-Term Issuer Credit Ratings and Short-Term Debt Ratings

Best's Short-Term Issuer Credit Rating and Short-TermDebt Rating scale is comprised of 6 individual ratingsgrouped into 6 categories, consisting of fourInvestment Grade categories of "Strongest,""Outstanding," "Satisfactory" and "Adequate" and twoNon-Investment Grade categories of "Speculative" and"In Default."

Investment Grade

AMB-1+ (Strongest)Assigned to issues where, in our opinion, the issuerhas the strongest ability to repay short-term debt oblig-ations.

AMB-1 (Outstanding)Assigned to issues where, in our opinion, the issuer hasan outstanding ability to repay short-term debt obligations.

AMB-2 (Satisfactory)Assigned to issues where, in our opinion, the issuer hasa satisfactory ability to repay short-term debt obligations.

AMB-3 (Adequate)Assigned to issues where, in our opinion, the issuer hasan adequate ability to repay short-term debt obliga-tions; however, adverse economic conditions will likelyreduce the issuer's capacity to meet its financial com-mitments.

Non-Investment Grade

AMB-4 (Speculative)Assigned to issues where, in our opinion, the issuer has specu-lative credit characteristics and is vulnerable to adverse eco-nomic or other external changes, which could have a markedimpact on the company's ability to meet its financial commit-ments.

d (In Default)Assigned to issues in default on payment of principal,interest or other terms and conditions, or when a bank-ruptcy petition or similar action has been filed.

With the growing interest by non-policyholders in insurers'creditworthiness, A.M. Best draws a distinction between theFinancial Strength and Issuer Credit ratings. The FSR remains anopinion specific to the insurer's ability to meet ongoing insuranceobligations, while the ICR is an opinion as to the overall credit-worthiness of an insurer from the perspective of its senior cred-itors. This distinction is important when considering ratings otherthan an FSR within an insurance organization, since ratings bothof an organization's debt issues and of related legal entities, suchas holding companies, are tied to and based on the overall cred-itworthiness of the operating insurer.

Best’s rating opinions are formally evaluated at leastonce every 12 months. The annual review is based on com-prehensive information provided to A.M. Best, whichincludes annual and quarterly (if available) financial statu-tory statements filed with regulators and SEC filings (ifapplicable), together with other publicly available financialstatements prepared under GAAP or IFRS standards andconfidential documents including Best’s SupplementalRating Questionnaires (for interactive Best’s Credit Ratings).

With our interactive Best’s Credit Ratings, analysts main-tain rating contact with company management throughoutthe year and monitor each company’s performance. Ratingsare continually re-evaluated for changes that might arise dur-ing the year, or in conjunction with our ongoing dialoguewith company management.

Ratings are reviewed and released throughout the year fol-lowing a formal annual review, including upgrades, down-grades, affirmations, new assignments or ratings placed underreview (see section X, Affiliation Codes and Rating Modifiers).In addition, all ratings are reviewed following the receipt of theannual financial statements, as well as quarterly filings toensure there have been no material changes since the last for-mal rating review. Moreover, due to event-driven circum-stances, rating actions may be released outside of the sched-uled formal review process. Situations such as mergers or

2009 BEST’S INSURANCE REPORTS—PROPERTY/CASUALTY — For Current Ratings access www.ambest.com — xi


SECTION VRELEASE OF FINANCIAL

STRENGTH RATINGS

acquisitions, dramatic changes in financial information, legisla-tive/regulatory actions or current events are examples of occa-sions that may instigate a rating action or change. Best’s CreditRatings are updated and are released as soon as practicablethrough Best’s Internet Service via www.ambest.com—A.M.Best’s Web site. Rating upgrades and downgrades, as well asinitial ratings are also released through Best’s Rating Actions inBestWeek®, our most timely and complete release of ratings inprint. Selected rating changes and new ratings are publishedon a monthly basis in Best’s Review®, our monthly magazine.Finally, updated AMB Credit Reports - Insurance Professional(Unabridged) are available shortly after the publication of acompany’s updated rating assignment and following thereview of the company’s annual statutory statement.

Rating Outlooks

A rating outlook indicates the potential future direction of acompany's rating over an intermediate period, generally definedas the next 12 to 36 months. Rating outlooks can be positive,negative or stable. A positive outlook indicates that a companyis experiencing favorable financial and market trends, relative toits current rating level. If these trends continue, the company hasa good possibility of having its rating upgraded. A negative out-look indicates that a company is experiencing unfavorablefinancial and market trends, relative to its current rating level. Ifthese trends continue, the company has a good possibility ofhaving its rating downgraded. A stable outlook indicates that acompany is experiencing stable financial and market trends, andthat there is a low likelihood the company's rating will changeover an intermediate period. Positive or negative outlooks donot necessarily lead to a change in a company's rating. Similarly,a stable rating outlook does not preclude a rating upgrade ordowngrade. Rating outlooks appear immediately following theRating Rationale section of the company's AMB Credit Report.

Rating History

To enable the reader to track trends, Best's InsuranceReports contains a Five Year History section and Best's KeyRating Guide presents the five latest rating events.

The assignment of an interactive Best’s Financial StrengthRating (A++ to F) involves a comprehensive quantitative andqualitative analysis of a company’s balance sheet strength,operating performance and business profile.

For our interactive Best’s Financial Strength Ratings, webelieve this balanced method of evaluating a company onboth quantitative and qualitative levels provides a betterinsight of a company and results in a more discerning andcredible rating opinion.

The interpretation of quantitative measurements involves theincorporation of more qualitative considerations into the processthat may impact prospective financial strength. Our quantitativeevaluation is based on an analysis of each company’s reportedfinancial performance, utilizing over 100 key financial tests andsupporting data. These tests, which underlie our evaluation ofbalance sheet strength and operating performance, vary inimportance depending upon a company’s characteristics.

In assigning a Best’s Financial Strength Rating, additionalconsideration is given to balance sheet strength for thosecompanies that are exposed to shorter-duration liabilities(less than 2-3 years) or those companies maintainingextremely strong balance sheet strength. Companies exposedto short-duration liabilities face fewer unknown losses,reducing long-term risk. Alternatively, those companiesexposed to long-duration liabilities (over 7 years) face greateruncertainty and risk, and more importance is placed on oper-ating performance, which will need to be strong to sustain orenhance balance sheet strength over the long term. Thosecompanies with an extremely strong balance sheet are givenadditional consideration while improving their weak prof-itability.

A company’s quantitative results are compared withindustry composites as established by A.M. Best. Compositestandards are based on the performance of many insurancecompanies with comparable business mix and organization-al structure. In addition, industry composite benchmarks areadjusted from time to time for systemic changes in under-writing, economic and regulatory market conditions toensure the most effective and appropriate analysis.

Risk Management

An important aspect of any insurance company operation,risk management is the process by which companies systemati-cally identify, measure and manage the various types of riskinherent within their operations. The fundamental objectives of asound risk management program are to manage the organiza-tion's exposure to potential earnings and capital volatility, andmaximize value to the organization's various stakeholders.Enterprise Risk Management (ERM) has grown in importance ascompanies consider the correlation of many risks that they havehistorically managed independently, or deal with emerging riskissues inherent in many of today's more sophisticated productofferings.

The analysis of ERM is an integral part of the rating analy-sis and discussions with all rated companies. A company’srisk management capabilities are considered in the qualita-tive assessment of all three rating areas: balance sheetstrength, operating performance, and business profile.

Best believes that ERM encompasses a wide range ofactivities, from traditional risk management practices to theuse of sophisticated tools to identify and quantify risks. Oneof the tools used to quantify risks, and measure the volatilityand correlation of risks is an economic capital (EC) model.Best believes that a strong EC model—capturing and quanti-fying all the material risks and risk interdependencies of an

xii — Best’s Financial Strength Ratings & Reports as of 07/20/09 — 2009 BEST’S INSURANCE REPORTS—PROPERTY/CASUALTY


SECTION VIASSIGNMENT OF BEST’S

CREDIT RATINGS

2009 BEST’S INSURANCE REPORTS—PROPERTY/CASUALTY — For Current Ratings access www.ambest.com — xiii

organization—can be a valuable tool to an insurer, but it isjust one of many tools and processes utilized within the over-all risk management framework.

Group Ratings

Regulatory requirements and market dynamics oftenrequire insurers to set up subsidiaries or branch offices in for-eign countries. These overseas subsidiaries carry differing lev-els of importance and risk to their parent companies. Someare crucial to the success of the franchise, yet they mayrequire significant investment before they turn a profit. Forother insurers, the foreign operation may simply be an ancil-lary investment with a relatively short time horizon. These fac-tors and others weigh heavily in A.M. Best's ratings of insur-ance companies that are members of a group. The need forinternational insurers to set up operations in numerous juris-dictions to maintain access to market intelligence has broughtinto focus the notion of fungibility of capital—that is, an orga-nization's ability to allocate and deploy capital in the most effi-cient way where it is most needed. A.M. Best recognizes thatto sustain a competitive advantage, these groups must allocatetheir capital with maximum efficiency. However, to obtain aSecure credit rating, a certain minimum level of capitalizationmust be maintained at the insurance company level.

A.M. Best evaluates insurance groups to determine whatlevels of rating enhancement or drag are placed on the indi-vidual ratings of members of insurance groups. One of themain themes is the implicit and explicit support a parentprovides its insurance subsidiaries. These factors, togetherwith any legal constraints on the free flow of capital amongaffiliates, will determine an insurance subsidiary's ratingenhancement or drag and its ultimate rating assignment.

Rating members of complex, domestic or multinationalinsurance organizations is a difficult task. A.M. Best performscomprehensive quantitative and qualitative analyses of anorganization's balance sheet strength, operating perfor-mance and business profile. Every legal entity that maintainsan A.M. Best rating is reviewed on a stand-alone basis. Theentity's strengths and weaknesses are analyzed, without anybenefit or drag from its affiliation with a larger organization.Employing this approach allows A.M. Best to gauge the levelof policyholder security with no benefit from parental sup-port. Through this analysis, a stand-alone rating is deter-mined for all entities except those that possess a pooled (p)or reinsured (r) rating modifier (see section X, AffliationCodes and Rating Modifiers).

Recognizing that an insurer very often benefits greatlyfrom its inclusion within a strong, diversified group, the pub-lished ratings of these entities often include some element ofrating enhancement. This enhancement points to the insur-er's greater ability to compete successfully, generate earn-ings and sustain a strong balance sheet over time throughthe support of its parent or affiliate companies. To determinethis level of support, in addition to the stand-alone analysis,A.M. Best conducts a thorough, top-down evaluation of theorganization's strength on a consolidated basis.

A.M. Best uses its consolidated view of the organizationto conduct an enterprise-level analysis. This determines thehighest possible rating for the lead insurer within the group,accounting for strengths and weaknesses that may reside notonly within the insurance entities but also at the holdingcompany or at a non-insurance affiliate. With this informa-tion, A.M. Best determines whether or not the individualinsurance subsidiaries qualify for enhancement or drag totheir stand-alone ratings.

Parent/Subsidiary Relationships

The implicit or explicit support of a parent or affiliatecan affect an insurer's financial strength and therefore itsBest's Credit Rating. The assessment of support involvesa top-down, bottom-up analysis of the parent organiza-tion and each subsidiary. This analysis enables A.M. Bestto classify a company in one of three categories fromwhich its stand-alone rating will receive full ratingenhancement, partial rating enhancement or no ratingenhancement.• Subsidiaries that achieve full rating enhancement are criti-cal to the group's strategy and ongoing success; fully inte-grated into the group's strategic plan; carry the group nameor are easily identified with the group; are material to thebusiness profile of the group; are significant contributors tothe group's earnings; currently benefit from some form ofexplicit parental support and have a history of receivingexplicit support when needed.• Subsidiaries that achieve partial rating enhancement areimportant to the group's business strategy and profile; mayoperate on a more independent basis, through a separateidentity or distribution platform; provide a source of diversifi-cation to the group's earnings; are meaningful contributors tothe group's operating performance and/or financial strength;currently benefit from some form of explicit parental supportand are highly likely to receive future support. • Subsidiaries that receive no rating enhancement are mar-ginal to the group's overall strategy; can be readily soldwithout material impact to the group's ongoing operations;have a separate operating platform; are managed indepen-dently with a separate marketing identity; lack business syn-ergy with the parent's core operations; provide no mean-ingful diversification benefits; and are not a significant con-tributor to the group's earnings or capital.

Rating Start-up Insurers

Start-ups rated by A.M. Best are subject to the sameassessment of balance sheet strength and business profile asestablished companies receiving an interactive rating assign-ment. However, because these new entities have yet todemonstrate a track record in operating performance, Bestalso applies a stringent set of qualitative standards uponwhich initial ratings may be issued.

Some of the more specific considerations utilized by A.M.Best in assigning ratings to start-up insurers/reinsurers are


broken down into four critical areas: management, sponsor-ship, strategy, and capitalization. However, in addition tothese factors, certain conditions must be present, transcend-ing all other rating considerations for Best to proceed withan initial rating assignment.• Initial financing either must be in place or must be expect-ed to be executed prior to the initial rating assignment.• Appropriate management, staff and operational infrastruc-ture must be available to support initial activities.• A follow-up process to review the execution of the initialbusiness plan, along with a formal process to monitor thecompany's strategic and financial development, must beagreed to by A.M. Best and company management.• Stress-tested capitalization must conservatively support theassigned rating throughout the business plan.

In determining a company’s ability to meet its currentand ongoing senior obligations, the most important areato evaluate is its balance sheet strength. An analysis of acompany’s underwriting, financial, operating andasset leverage is very important in assessing its overallbalance sheet strength.

Balance sheet strength measures the exposure of a com-pany’s surplus to its operating and financial practices. Ahighly leveraged, or poorly capitalized company can showa high return on equity/surplus, but may be exposed to ahigh risk of instability. Conservative leverage or capitaliza-tion enables an insurer to better withstand catastrophes,unexpected losses and adverse changes in underwritingresults, fluctuating investment returns or investment losses,and changes in regulatory or economic conditions.

Underwriting leverage is generated from three sources:current premium writings, reinsurance recoverables and lossor policy reserves. A.M. Best reviews these forms of lever-age to analyze changes in trends and magnitudes. To mea-sure a company's exposure to pricing errors in its book ofbusiness, we review the ratio of gross and net premiumswritten to capital. To measure the company's credit expo-sure and dependence on reinsurance, we review the creditquality of a company's reinsurers and ratio of reinsurancepremiums and reserves ceded and related reinsurancerecoverables to surplus. To measure the company's expo-sure to unpaid obligations, unearned premiums and expo-sure to reserving errors, we analyze the ratio of net liabilitiesto surplus.

In order to assess whether or not a company's under-writing leverage is prudent, a number of factors unique tothe company are taken into consideration. These factorsinclude type of business written, spread of risk, quality andappropriateness of its reinsurance program, quality anddiversification of assets, and adequacy of loss reserves.

A.M. Best reviews a company's financial leverage in con-junction with its underwriting leverage in forming an overallopinion of a company's balance sheet strength. Financialleverage through debt, or debt-like instruments (includingfinancial reinsurance), may place a call on an insurer’s earn-ings and strain its cash flow. Similar to underwriting leverage,excessive financial leverage at the operating or holding com-pany can lead to financial instability. As such, the analysis offinancial leverage is conducted both at the operating compa-ny and holding company levels, if applicable.

To supplement its assessment of financial leverage, A.M.Best also reviews a company's operating leverage. A.M.Best broadly defines operating leverage as debt (or debt-likeinstruments) used to fund a specific pool of matched assets.Cash flows from the pool of assets are expected to be suffi-cient to fund the interest and principal payments associatedwith the obligations, substantially reducing the potential callon an insurer's earnings and cash flow. In other words, theresidual risk to the insurer would be insignificant as long asthe insurer possesses sound asset/liability, liquidity andinvestment risk management capabilities; exhibits low dura-tion mismatches; and minimizes repayment and liquidity riskrelative to these obligations. Best has established specific tol-erances for operating leverage activities that are applied ateach operating company, as well as at the consolidatedlevel. Generally, debt obligations viewed by A.M. Best as eli-gible for operating leverage treatment would be excludedfrom the calculation of financial leverage, unless one of thetolerance levels is exceeded.

A.M. Best also evaluates asset leverage, which mea-sures the exposure of a company's surplus to investment,interest rate and credit risks. Investment and interest raterisks measure the credit quality and volatility associatedwith the company's investment portfolio and the potentialimpact on its balance sheet strength.

A company's underwriting, financial and asset leverage isalso subjected to an evaluation by Best's Capital AdequacyRatio (BCAR), which calculates the Net Required Capital tosupport the financial risks of the company associated withthe exposure of its investments, assets and underwriting toadverse economic and market conditions such as a rise ininterest rates, decline in the equity markets and above-nor-mal catastrophes. This integrated stress analysis evaluationpermits a more discerning view of a company's balancesheet strength relative to its operating risks. The BCAR isbased on audited financial statements and supplementalinformation provided by companies. A company's BCARresult is useful in determining a company's balance sheetstrength. A.M. Best also views insurance groups on a con-solidated basis and assigns a common BCAR result to groupconsolidations or multiple member companies that arelinked together through intercompany pooling or reinsur-ance arrangements.

A.M. Best recognizes that risk management tools and prac-tices across the insurance industry have advanced significant-ly in recent years. Developments such as the implementationof ERM programs, including economic capital models, more

xiv — Best’s Financial Strength Ratings & Reports as of 07/20/09 — 2009 BEST’S INSURANCE REPORTS—PROPERTY/CASUALTY


SECTION VIIBALANCE SHEET STRENGTH

2009 BEST’S INSURANCE REPORTS—PROPERTY/CASUALTY — For Current Ratings access www.ambest.com — xv

sophisticated catastrophe management, and dynamic hedgingprograms have headlined efforts of the insurance industry tomanage its growing exposure to potential earnings and capi-tal volatility.

Given the insurance industry's evolving risk profile and thesignificant recent advancements made in the risk manage-ment tools and practices, Best recognizes that a more eco-nomic, prospective view of capital can be another valuablesupplement to the rating process. As a result, Best is expand-ing the review of company-provided EC models in our devel-opment of capital requirements within the rating evaluationprocess. Best will consider using the output of company-pro-vided models for analytical purposes; however, the BCAR willstill be published as a common industry-wide baseline forcapital adequacy.

Capitalization Tests:

• Change in Net Premiums Written (NPW): A companyshould demonstrate an ability to support controlled busi-ness growth with quality surplus growth from strong inter-nal capital generation.

• NPW to Policyholders' Surplus (PHS): This ratio mea-sures a company's net retained premium in relation to itssurplus. This ratio measures the company's exposure topricing errors in its current book of business.

• Net Liabilities to PHS: This ratio measures a company'sexposures to errors of estimation in its loss reserves and allother liabilities. The higher the loss reserve leverage themore critical a company's solvency depends upon havingand maintaining adequate reserve levels.

• Net Leverage: This ratio measures the combination of acompany's net exposure to pricing errors in its currentbook of business and errors of estimation in its net liabili-ties after reinsurance, in relation to surplus.

• Ceded Reinsurance Leverage: This ratio measures thecompany's dependence upon the security provided by itsreinsurers and its potential exposure to adjustments onsuch reinsurance.

• Gross Leverage: This ratio measures a company's grossexposure to pricing errors in its current book of business, toerrors of estimating its liabilities, and exposure to its reinsurers.

• Best's Capital Adequacy Ratio (BCAR): The BCAR com-pares an insurer's adjusted surplus relative to the requiredcapital necessary to support its operating and investmentrisks. Companies deemed to have "adequate" balance sheetstrength normally generate a BCAR score of over 100% andwill usually carry a Secure Best's Credit Rating. However, thelevel of capital required to support a given rating level variesby company, depending on its operating performance andbusiness profile.

Adjusted surplus is reported surplus plus/minus adjust-ments made to provide a more comparable basis for eval-uating balance sheet strength. Such modifications includeadjustments related to equity in unearned premiums, lossreserves, and assets. Certain off-balance sheet items arealso deducted from reported surplus, such as encumberedcapital, debt service requirements, potential catastrophelosses and future operating losses.

Net Required Capital is calculated as the necessary levelof capital to support seven broad risk categories, includ-ing B1 (Fixed Income Securities); B2 (Equity Securities);B3 (Interest Rate); B4 (Credit); B5 (Loss and LossAdjustment Expense [LAE] Reserves); B6 (Net PremiumsWritten); and B7 (Business Risk). Net Required Capitalrepresents the arithmetic sum of capital required to sup-port each of the risk categories reduced by a covarianceadjustment. The covariance adjustment reduces a compa-ny's total capital requirement by recognizing that risksassociated with many of the seven categories are inde-pendent and do not occur at the same time.

Generally, over two-thirds of a property/casualty compa-ny's net capital requirement is generated from its B5 (Loss andLAE Reserves) and B6 (Net Premiums Written) risk compo-nents, which are influenced by a company's business profileincluding distribution of premium by line and location, size,underwriting leverage, loss reserve adequacy and stability,and premium rate adequacy. Conversely, generally over two-thirds of a life insurance company's net capital requirement isgenerated by C1 (Credit Risk) and C3 (Interest Rate Risk).

Natural Catastrophe Stress Test

In addition to requiring a company to maintain capitaliza-tion that can withstand the net, after tax, impact to surplusfrom a reasonably severe natural catastrophe, A.M. Best per-forms a stress test on the capitalization of a property/casualtyinsurer by adjusting BCAR to reflect the company's stressedrisk profile shortly following the occurrence of a catastrophicevent. The company's stressed risk profile includes reduc-tions to surplus for incurred loss and LAE and the cost of rein-statement premiums, increases to reinsurance recoverablesand net loss reserves, and a charge to surplus for the compa-ny's exposure to a subsequent event. This analysis provides apreview of a company's balance sheet strength as if the eventactually occurred, and reflects the notion that the company'sexposure remains essentially the same after the event as it wason the day of the event.

The amount of tolerance afforded to the deterioration inBCAR will be determined based on a number of quantitativeand qualitative factors. As part of this analysis, a company'soverall catastrophe risk management process is evaluated andconsidered along with the financial flexibility of a company todetermine its ability to avoid a material loss to capital, and torespond to any significant capital deterioration from suchevents. Companies that demonstrate strength in both of theseareas will be afforded the greatest amount of flexibility with-in A.M. Best's stress test of catastrophe exposure.


A.M. Best believes the keys to strong catastrophe riskmanagement are ensuring data quality in terms of theintegrity, completeness and timeliness of the data collected;monitoring aggregate and potential loss exposures on a fre-quent and consistent basis; and implementing controls thatestablish acceptable levels of exposure and integrate cata-strophe management into the underwriting process.

Other important considerations include a company'sexposure to multiple events in a season, historical volatili-ty of operating performance or balance sheet strength, theoverall level of catastrophe exposure to surplus on both agross and net basis, the capital markets' willingness to pro-vide funding, and the type of funding available.

Terrorism Risk

Despite the complexities in identifying, monitoring,quantifying and managing terrorism risks, A.M. Bestbelieves that a comprehensive terrorism risk managementprocess is crucial to the financial strength rating of anyinsurer with a material exposure to terrorism risk. A.M.Best's key concerns are the organization's aggregate expo-sure to terrorism, the number of insured locations, the geo-graphic concentration of insured exposures, the impact oncapitalization, and the uncertainty surrounding a govern-ment's long-term commitment to a federal backstop.Although a federal backstop can help reduce the impact ofterrorism losses, reliance on such a mechanism cannotreplace a sound risk management process.

For insurers with a material exposure to terrorism loss,a charge to surplus will be calculated that reflects the prob-ability of a large-scale attack, the location of the attack, thenumber of large exposure concentrations, the size of theexposures, the level of detail in the coding of exposures,and any offsets to the direct loss. These offsets includerecoveries from reinsurance, protection from federal back-stops and a federal tax offset. The terrorism charge will becompared with the insurer's natural catastrophe probablemaximum loss (PML), and the larger of the two chargeswill be used in the evaluation of the insurer's balance sheetstrength. In addition, insurers will be subject to a terror-ism stress test, which quantifies the impact that a large-scale attack could have on an insurer's balance sheetstrength if the protection from the federal backstop is notavailable.

Finally, A.M. Best will review the insurer's strategy, risktolerance, underwriting guidelines, and mitigation meth-ods. The level of detail and the frequency of the monitor-ing of its geographic concentrations and exposure to vari-ous types of attacks also will be factored into the evalua-tion of the insurer's financial strength.

Capital Structure/Holding Company

Holding companies (if present) and their associated capitalstructures can have a significant impact on the overall financialstrength of an insurance company subsidiary. Holding com-

panies can provide subsidiaries with a level of financial flexi-bility, including capital infusions, access to capital markets, andin some cases, additional cash flow sources from other opera-tions. Likewise, debt and other securities are typically obliga-tions of a holding company which, depending on the magni-tude of these obligations, can reduce the financial flexibility ofthe enterprise and potentially place a strain on future earningsand inhibit surplus growth at a subsidiary.

A.M. Best reviews both an insurer's capital structure and itsholding company's capital structure to determine if they aresound and unencumbered. This review includes an assess-ment of the quality of capital with a focus on the amount, com-position, and amortization schedule of intangible assets as wellas the presence of surplus notes at the operating company.

A holding company can have various types of finan-cial instruments, including debt securities, preferredstocks or other hybrid securities in its capital structure.For mutual companies, surplus notes can exist as a com-ponent of overall surplus. A.M. Best reviews the relativedebt and equity characteristics of a particular capitalsecurity in determining overall financial leverage. Ourreview focuses on specific terms and features of securi-ties, including the coupon and dividend rate, repaymentterms and financial and other covenants. Insurance sub-sidiaries generally fund debt service and other obliga-tions of their holding company through a combination ofdividends, tax-sharing payments and other expense allo-cation agreements with their holding company. As such,A.M. Best measures the extent to which an insurancecompany's earnings or the holding company's cash flowcan cover interest and other fixed obligations.

Integral to an insurer’s rating assignment is our assess-ment of a company’s ability to meet the debt service andother obligations associated with its parent’s capital structureand the risks that a capital structure imposes on a company.

Additionally, Best employs a top-down view of the totalorganization that includes a review of the non-insurance oper-ations of a holding company, to determine their impact, if any,on the overall financial strength of the insurance operations.

Quality and Appropriateness of Reinsuranceand Other Risk Mitigation Programs

Reinsurance plays an essential role in the risk-spreadingprocess and provides insurers with varying degrees of finan-cial stability. As a result, we evaluate a company's reinsuranceprogram to determine its appropriateness and credit quality. Acompany's reinsurance program should be appropriate relativeto its policy limits and underwriting risks, catastrophe expo-sures, business, financial capacity and the credit quality of thereinsurers involved. In addition, a reinsurance program shouldinvolve time-risk transfer and include reinsurers of good cred-it quality, since in the event of a reinsurer's failure to respondto its share of a loss, the reinsured or counterparty would haveto absorb a potentially large loss in its entirety.

To be considered adequate for catastrophe protection, aprogram needs to protect a property/casualty company from

xvi — Best’s Financial Strength Ratings & Reports as of 07/20/09 — 2009 BEST’S INSURANCE REPORTS—PROPERTY/CASUALTY


2009 BEST’S INSURANCE REPORTS—PROPERTY/CASUALTY — For Current Ratings access www.ambest.com — xvii

impairment or insolvency, from large shock-losses such as a100-year wind storm, a 250-year earthquake, or its annualaggregate loss exposure. In addition, reinsurance should alsoprovide protection from a series of smaller storm losses thatdo not trigger recovery from a traditional catastrophe rein-surance program. In addition to spreading risk, reinsurancecan be utilized to leverage a company's surplus to enable itto write more business than would otherwise be possible.

Another method of mitigating catastrophe risk isthrough the issuance of a catastrophe bond, which is astructured debt instrument that transfers risks associatedwith low-frequency/high-severity events to investors.These instruments typically incorporate either an indemni-ty trigger (based on an issuing company's actual loss expe-rience), or some form of an index-based, parametric trig-ger (based on a pre-defined industry index). A.M. Bestrecognizes that parametric catastrophe bonds come with"basis risk" that must be considered in the FinancialStrength Ratings (FSRs) of the companies sponsoring thebond issues. Basis risk, in the context of catastrophebonds, generally reflects the possibility that a catastrophebond may not be partially or fully triggered (for coveredperils) even when the sponsor of the catastrophe bond hassuffered a loss. Through A.M. Best's analysis a determina-tion is made as to how much basis risk is inherent in a cat-astrophe bond, which determines how much reinsurancecredit will be given to the insurance/reinsurance companythat sponsors a catastrophe bond with a parametric trigger.

Sidecars are yet another way for insurers/reinsurers to mit-igate risk. A sidecar is a limited-life, special-purpose reinsur-ance vehicle that generally provides property catastrophequota-share reinsurance exclusively to its sponsor. Sponsorsof sidecars generally take reinsurance credit for transferringrisks to sidecars. While some sidecars may be capitalized tofull aggregate limits, others may not be adequately capitalizedto absorb losses that deviate from expectations. When capi-talization is inadequate, some of the risk originally assumed tobe fully hedged by a sidecar (in the determination of theBest's FSR of the sponsor) ultimately may be borne by thesponsor. This risk is referred to as "tail risk." A.M. Best's ana-lysts will assess tail risk to ensure that the appropriate rein-surance credit is given to the sponsor of a sidecar.

For life/health companies, a reliable reinsurance programmust consider sound risk management practices to providethe company with protection against adverse fluctuations inexperience. Since these risk transfer agreements on an under-lying policy or policies indemnify the company for insurancerisks, prudent evaluation of the economic impact on a com-pany's life, health, and annuity operations is critical.Incorporating reinsurance to manage a company's financialrisk that includes mortality, morbidity, lapse or surrender,expense, and investment performance presents a competi-tive risk to a counterparty’s future growth prospects andlong-term viability. Therefore, the range of reinsurance mustbe evaluated with the company's ability to manage its growthrelative to demands for life and health insurance coveragesunder existing economic and regulatory environments.

An insurer's ability to meet its financial obligations canbecome overly dependent upon the performance of itsreinsurers. A company can also become exposed to thestate of reinsurance markets in general. A significant depen-dency on reinsurance can become problematic if a majorreinsurer of the company becomes insolvent or disputescoverage for claims. It also can become a problem if gen-eral reinsurance rates, capacity, terms and conditionschange dramatically following an industry event. The morea company is dependent upon reinsurance, the more vul-nerable its underwriting capacity becomes to adversechanges in the reinsurance market. The greater this depen-dency, the greater our scrutiny of a company's reinsuranceprogram to determine its appropriateness and credit quali-ty and whether it is temporary or permanent in nature.

Over the past several years, direct life/health writers havebeen searching for other cost-effective capital solutions to fundreserves and/or transfer risk on a variety of products, includ-ing certain term and universal life products that are subject toreserve requirements of the Valuation of Life Insurance PoliciesModel Regulation, more commonly referred to as RegulationXXX. A number of life/health companies have developed cap-ital markets solutions through a securitized transaction utilizinga captive company. These securitizations are typically intend-ed to fund the difference between the statutory reserve and theeconomic reserve required to support the business accordingto the direct writer’s own analysis.

These transactions impact a company's financial strengthas measured by the BCAR calculation, and also impact acompany's operating leverage. By ceding reserves to a cap-tive company, the direct insurer's insurance risk is reducedon the BCAR. However, the captive is typically more thinlycapitalized than the direct writer for these reserves (thoughwithin regulatory guidelines), and the capital structure is typ-ically supported primarily through surplus notes, not equitycontribution. Additionally, the transfer of the reserves fromthe direct writer's balance sheet reduces surplus strain, free-ing the company to write even more business. These variousfactors are considered in evaluating the appropriateness ofthe insurer's overall reinsurance and risk mitigation program.

Adequacy of Loss/Policy Reserves

Reserves play an important role in determining the bal-ance sheet strength and flexibility of an insurance carrier, aswell as its underlying profitability. The ability to predict ulti-mate reserve requirements is as much an art form as it is ascience. Actuaries who certify a company's reserves typical-ly provide management with a range within which loss andloss adjustment expense reserves are deemed adequate. Therange of reserve adequacy estimated by actuaries can bevery significant. For casualty-oriented insurers, a 25% defi-ciency in current reserves may exceed policyholders' surplusand, therefore, render them technically insolvent.

For U.S. property/casualty companies, we evaluate reservingtrends through our proprietary loss reserve model to measureany equity imbedded in a company's loss reserves. Upon deter-


mining our estimate for a company's ultimate loss reserve posi-tion, it is discounted to determine an economic loss reserve posi-tion. Any difference (deficiency or redundancy) between thiseconomic reserve level and a company's carried loss reservelevel is then applied to our proprietary capital adequacy model(BCAR). This loss reserve equity adjustment, which can be size-able for property/casualty insurers, enables A.M. Best to "levelthe playing field" within our rating evaluation and better dis-criminate between companies that historically have under-reserved from those that have strong loss reserve positions.

Separately, we also evaluate a company's ability to monitorpremium adequacy and the degree of uncertainty in lossreserves. If the level of reserve uncertainty exceeds any equi-ty in the reserves, or is considered large in relation to netincome and surplus, we will require a company to maintain amore conservative capital position (i.e., BCAR score) for its rat-ing level. Loss reserve uncertainty and earnings drag are mostpronounced in the area of asbestos and environmental (A&E),and to a lesser extent, other emerging mass tort exposures.

We use both public and non-public reserve and paid lossdata in calculating several crude benchmarks to identify com-panies that may have a material exposure to A&E liabilities.Best's A&E analysis focuses on earnings and surplus drag asso-ciated with a company’s potential unfunded liabilities. Theseunfunded liabilities are calculated relative to a company’s mar-ket share of Best's industry-wide estimate for total A&E costsless the company's cumulative incurred losses recognized todate. Best's initial analysis also focuses on a company's relativefunding status as measured by its survival ratio (reserves torecent paid losses) against prevailing industry levels.

Casualty insurers that appear underfunded through Best'sbenchmarking analysis, receive significantly greater ratingsscrutiny. For these insurers, we require more detailed informa-tion related to their A&E claim trends, policies exposed, reserv-ing practices, and claims mitigation efforts, as well as their esti-mation of their ultimate liability through ground-up modeling.

For companies with sizeable exposure to A&E claims, A.M.Best requires these companies to perform appropriate ground-up A&E policy-by-policy exposure analysis to more accuratelydetermine their funding requirements for their ultimate A&E lia-bilities. Best believes that increased enhancements to, and mar-ket acceptance of, ground-up modeling are very important fora company to prudently manage its A&E liability exposures.

Key Loss Reserve Tests:

• Loss and LAE Reserves to PHS: This ratio measures thetrend and magnitude of loss reserves to surplus. The high-er the multiple of loss reserves to surplus, the more criticalreserve adequacy becomes to an insurer's solvency.

• Development to PHS: This ratio reflects the degree towhich year-end surplus was either overstated (+) or under-stated (-) in each of the past several years.

• Developed to NPE: If premium growth has been rela-tively steady, and if the product mix has not changed

materially, this ratio measures whether or not a company'sloss reserves are keeping pace with premium growth.

Quality and Diversification of Assets

The quality and diversification of assets contribute to acompany's financial stability. Invested assets (principallybonds, common stocks, mortgages and real estate) are eval-uated to assess the risk of default and the potential impacton surplus if the sale of these assets occurred unexpectedly.The higher the liquidity, diversification and/or quality of theasset portfolio the less uncertainty there is in the value to berealized upon an asset sale and the lesser the likelihood ofdefault. Therefore, a company's investment portfolio guide-lines are reviewed to identify a lack of diversification amongindustries or geographic regions, with particular attentionpaid to large single investments that exceed 10% of a com-pany's total capital. Companies that hold illiquid, undiversi-fied and/or speculative assets and have a significant under-writing exposure to volatile lines of business that are vul-nerable to unfavorable changes in underwriting and/or eco-nomic conditions can jeopardize policyholders' surplus.

Liquidity

Liquidity measures a company's ability to meet its antic-ipated short- and long-term obligations to policyholdersand other creditors. A company's liquidity depends uponthe degree to which it can satisfy its financial obligationsby holding cash and investments that are sound, diversifiedand liquid or through operating cash flow. A high degreeof liquidity enables an insurer to meet unexpected needsfor cash without the untimely sale of investments or fixedassets, which may result in substantial realized losses dueto temporary market conditions and/or tax consequences.

To measure a company's ability to satisfy its financial oblig-ations without having to resort to selling long-term investmentsor affiliated assets, we review a company's quick liquidity,which measures the amount of cash and quickly convertibleinvestments that have a low exposure to fluctuations in mar-ket value. We also review current liquidity to measure the pro-portion of a company's total liabilities that are covered by cashand unaffiliated invested assets. Operational and net cashflows are reviewed since they, by themselves, can meet someliquidity needs provided cash flows are positive, large and sta-ble relative to cash requirements. Finally, we evaluate the qual-ity, market value and diversification of assets, particularly theexposure of large single investments relative to capital.

Key Liquidity Tests:

• Quick Liquidity: This ratio measures the proportion ofnet liabilities covered by cash and investments that can bequickly converted to cash. This ratio may indicate a compa-ny's ability to settle its outstanding liabilities without prema-turely selling long-term investments or to borrow money.• Current Liquidity: This ratio measures the proportion of lia-bilities covered by unencumbered cash and unaffiliated invest-

xviii — Best’s Financial Strength Ratings & Reports as of 07/20/09 — 2009 BEST’S INSURANCE REPORTS—PROPERTY/CASUALTY


2009 BEST’S INSURANCE REPORTS—PROPERTY/CASUALTY — For Current Ratings access www.ambest.com — xix

ments. If this ratio is less than 100, the company's solvency isdependent on the collectibility of premium and reinsurancebalances and the marketability of investments in affiliates.

• Overall Liquidity: This ratio indicates a company's abili-ty to cover net liabilities with total assets. This ratio does notaddress the quality and marketability of premium balances,other receivables, affiliated investments and other assets.

• Operating Cash Flow: This test measures a company's abil-ity to meet current obligations through the internal generation offunds from insurance operations. Negative balances may indi-cate unprofitable underwriting results or low-yielding assets.

• Class 3-6 Bonds to PHS: This test measures exposure tonon-investment grade bonds as a percentage of surplus.Generally, non-investment grade bonds carry higherdefault and illiquidity risks.

Profitability

Profitable insurance operations are essential for a company tooperate as an ongoing concern. For an insurer to remain viablein the marketplace, it must perpetuate a financially strong balancesheet for its policyholders. When evaluating operating perfor-mance, Best's analysis centers on the stability and sustainability ofthe company's sources of earnings in relation to the liabilities thatare retained by the company. Since long-term balance sheetstrength is generally driven by operating performance, greaterimportance is placed on operating performance when evaluat-ing insurers writing long-duration business. Conversely, operat-ing performance is weighted less heavily for those insurers writ-ing predominantly short-duration business that also possess verystrong capitalization and a stable business profile.

A.M. Best reviews the components of a company's statuto-ry earnings over the past five-year period to make an evalua-tion of the sources of profits and the degree and trend of var-ious profitability measures. Areas reviewed include underwrit-ing, investments, capital gains/losses and total operating earn-ings, both before and after taxes. Profitability measures are eas-ily distorted by operational changes; therefore, we review themix and trends of premium volume, investment income, netincome and surplus. Also important to evaluating profitabilityis the structure of the company (stock vs. mutual), the lengthand nature of its insurance liability risks and how these ele-ments relate to the company's operating mission. The degreeof volatility in a company's earnings and the impact that thiscould have on capitalization and balance sheet strength is ofparticular interest to A.M. Best.

To supplement our review of profitability, A.M. Best analyzesthe company's earnings on a GAAP basis, IFRS basis, and any

other regulatory or accounting reporting in order to understandthe company's forms and measurements of profitability. Thisreview generally extends beyond the scope of publicly tradedcompanies since an increasing number of non-public insurersalso prepare, monitor and/or manage to GAAP, IFRS or otherforms of accounting reporting. Best recognizes that a properassessment of an insurer's current and prospective profitabilitymay involve a review of multiple accounting forms and resultsto ascertain the true economic picture.

Key Profitability Tests:

• Loss Ratio: This ratio measures the company's underlyingprofitability, or loss experience, on its total book of business.

• Expense Ratio: This ratio measures the company'soperational efficiency in underwriting its book of business.

• Combined Ratio after Policyholder Dividends: Thisratio measures the company's overall underwriting prof-itability. A combined ratio of less than 100 indicates thecompany has reported an underwriting profit.

• Operating Ratio: The operating ratio measures a com-pany's overall pre-tax operational profitability fromunderwriting and investment activities. An operatingratio of less than 100 indicates a company is able to gen-erate a profit from its core operations.

• Pretax ROR (Return on Revenue): This ratio measuresa company's operating profitability and is calculated as pre-tax operating income divided by net premiums earned.

• Yield on Invested Assets: This ratio measures the aver-age return on a company's invested assets before capitalgains/losses and income taxes.

• Change in PHS (Policyholders' Surplus): This ratiomeasures the annual change in a company's policyholders'surplus derived from operating earnings, investment gains,net contributed capital and other miscellaneous sources.

• Return on PHS: This ratio measures a company's efficiencyin utilizing its surplus on a total return basis. "Total return" is cal-culated as the overall after-tax profitability from underwritingand investment activities, including unrealized capital gains.

Business Profile IssuesBusiness profile can be an important component of Best's

rating evaluation. The factors that comprise an insurer's busi-ness profile drive current and future operating performance


SECTION VIIIOPERATING PERFORMANCE

SECTION IXBUSINESS PROFILE

and, in turn, can impact long-term financial strength and thecompany's ability to meet its obligations to policyholders.

Business profile is influenced by the degree of riskinherent in the company's mix of business, an insurer'scompetitive market position and the depth and experi-ence of its management. Lack of size or growth are notconsidered negative rating factors unless A.M. Bestbelieves these issues have a negative influence on thecompany's prospective operating performance and bal-ance sheet strength.

A.M. Best places greater emphasis on business profileissues for insurers writing long-duration business, suchas life, retirement savings, casualty lines, and reinsurancewhere long-term financial strength is critical. Conversely,less business profile emphasis is placed on auto andproperty writers as well as indemnity health insurerswriting shorter-duration contracts where short- to medi-um-term financial strength is of greater importance.

In addition, business profile issues increase in theirimportance at Best's highest rating levels. At the "Superior"level, insurers are expected to have strong balance sheetsand operating performance, and exhibit stable operatingtrends. What differentiates these companies is the strengthof their business profile, which typically translates intodefensible competitive advantages. This rating approach isconsistent with the requirements of today's marketplace,which is concerned with an insurer's financial strengthand market viability.

Key Business Profile Issues

• Spread of Risk: A company's book of business must beanalyzed by line in terms of its geographic, product anddistribution diversification. However, the size of a compa-ny, measured solely by its premium volume, cannot beused to judge its spread of risk.

Generally, large companies have a natural spread of risk.Similarly, a small company, which is conservatively man-aged, writes conservative lines of business and avoids a con-centration of risk, can attain the same degree of stability inits book of business as that experienced by a large compa-ny, with the exception of regulatory or residual market risks.

For property/casualty companies, the geographic loca-tion and concentration of a book of business can have agreat impact upon its exposure to catastrophic losses, suchas terrorist attacks, hurricanes, tornadoes, wind storms, hailor earthquakes. For property insurers, Best requires a com-pany to perform some degree of natural catastrophe mod-eling on its book of business.

Property insurers with potential exposures that havenever performed weather and earthquake catastrophe mod-eling are effectively required to do so in order to qualify forBest's Secure ratings (A++ to B+). Best believes that natur-al catastrophe modeling is critical and plays an importantrole in prudently managing property exposures. Best gath-ers catastrophe exposure and related reinsurance protectiondata through its Supplemental Rating Questionnaire.

The geographic location and lines of business written bya company also determine its exposure or vulnerability toregulatory or residual market risks that exist within certainjurisdictions. In addition, the mix of business must also becarefully evaluated. Because the underwriting experiencebetween lines of business varies dramatically, the under-writing risk profile of a company must be determined sincehigh-risk lines with volatile loss experience can impact thefinancial stability of an insurer, particularly one that is poor-ly capitalized and/or has poor liquidity.

• Revenue Composition: A by-line analysis of net pre-mium volume is important to determine changes in theamount, type, geographic distribution, diversification andvolatility of business written by a company, which caneither have a beneficial or adverse effect on its prospectiveprofitability. Underwriting income, investment income,capital gains, asset values and, consequently, surplus canbe significantly affected by external changes in economic,regulatory, legal and financial market environments, aswell as by natural and man-made catastrophes.

• Competitive Market Position: Analysis of an insur-er's operating strategy and competitive advantages byline is essential to assess a company's ability to respondto competitive market challenges, economic volatilityand regulatory change in relation to its book of business.Defensible and sustainable competitive advantagesinclude control over distribution, multiple distributionchannels, a low-cost structure, effective utilization andleveraging of technology, superior service, strong fran-chise recognition, a captive market of insureds, easy andinexpensive access to capital, and underwriting expertisewithin the book of business.

• Management: The experience and depth of managementare important determinants for achieving success. Becausethe insurance business is based on an underlying foundationof trust and fiscal responsibility, prudent management playsa more vital role than in most other industries.

Competitive pressures within virtually every insurancemarket segment have amplified the importance of man-agement's ability to develop and execute defensiblestrategic plans. Best's understanding of the operatingobjectives of a company's management team plays animportant role in its qualitative evaluation of the currentand future operating performance of a company. This isparticularly true when a company is undergoing arestructuring to address operational issues, balance sheetproblems or is actively raising capital.

• Insurance Market Risk: Insurance market risk reflectsthe potential financial volatility that is introduced by, andassociated with, the segment(s) of the insurance industryand/or the financial services sphere within which anorganization operates. Such risks may also be consideredsystemic risks and are generally common to all market

xx — Best’s Financial Strength Ratings & Reports as of 07/20/09 — 2009 BEST’S INSURANCE REPORTS—PROPERTY/CASUALTY


2009 BEST’S INSURANCE REPORTS—PROPERTY/CASUALTY — For Current Ratings access www.ambest.com — xxi

participants (i.e., financial services reform, health carereform, expansion of alternative markets, and integrationof health care providers). Insurance market risk can bebiased either positively or negatively by a number ofcompany-specific business factors.

• Event Risk: Event risk can encompass a variety of sud-den or unexpected circumstances that may arise and canpotentially impact an insurer's financial strength and itsBest's Credit Rating. When a sudden or unexpected eventoccurs, we evaluate the financial and market impact tothe insurer. For example, the potential exists for majorbusiness and distribution disruption associated with sig-nificant litigation, the potential for a "run-on-the-bank"due to a loss of policyholder/distributor confidence, eco-nomic collapse or the enactment of significant legislation.In addition, constraints imposed by regulators in the formof mandated rate rollbacks, extraordinary assessments,and mandatory market lock-in arrangements in catastro-phe-prone areas can adversely affect a company. Eventrisk may include changes in management, ownership,parental commitment, distribution, a legal ruling or regu-latory development. Finally, event risk can also be influ-enced by potential regulatory or legislative reforms, eco-nomic conditions, interest rate levels, and financial mar-ket performance, as well as societal changes. For interna-tional companies, and domestic insurers operatingabroad, political climates and sovereignty risks may alsohave a significant bearing on event risk.

Affiliation Codes and Rating Modifiers are added toBest’s Financial Strength Ratings to identify companieswhose assigned rating is based on a Group (g), Pooled(p), or Reinsured (r) affiliation with other insurers. In addi-tion, a company’s rating may be placed Under Review andbe subject to a near-term change, as indicated by the “u”rating modifier. A Best’s Financial Strength Rating maycarry a “pd” rating modifier, indicating that the companydid not subscribe to our interactive rating process. The “s”rating modifier is assigned to syndicates operating atLloyd’s that have subscribed to our interactive ratingprocess. These affiliation codes or modifiers appear as alowercase suffix to the rating (i.e., A g, A u, A pd, etc.).

Insurers with affiliation codes (g, p, r) indicate that theirrating is based on the consolidated performance of the com-pany and its affiliation with one or more insurers, which col-lectively operate, in Best’s opinion, as one coordinatedinsurance group and meets our criteria for the same rating.Accordingly, the Financial Size Category (see section XII) ofthese member companies usually equals that of the group.

Affiliation Codes

"g" Group Rating: Assigned to the parent company of agroup and is based on the consolidation of the parent com-pany and its insurance subsidiaries where ownership orboard control exceeds 50%.

The group rating is also assigned to subsidiariesdeemed to be integral to the group, which generally oper-ate under common management and/or ownership.Group rated subsidiaries typically demonstrate a combi-nation of the following characteristics. They are critical tothe group's strategy and ongoing success; fully integratedinto the group's strategic plan; carry the group name orare easily identified with the group; are material to thebusiness profile of the group; are significant contributorsto the group's earnings; currently benefit from some formof explicit parental support and have a history of receiv-ing explicit support when needed. In certain cases, groupratings are also assigned to sister companies owned by acommon holding company.

A stand-alone analysis is conducted on all insurance sub-sidiaries to assess each legal entity's stand-alone operatingperformance and capitalization, before consideration isgiven to any group rating enhancement.

"p" Pooled Rating: Assigned to a group whose membercompanies pool assets, liabilities and operating results andmaintain, in theory, the same operating performance andbalance sheet strength as other companies within the pool.Pooling is viewed as explicit financial support. The assets ofeach pool participant are available for the protection of allpool members' policyholders. In many cases, pooled affili-ates market under a common brand name and generallyoperate under common management and/or ownership.

The pooled (p) affiliation code is typically assigned if thepooling agreement is joint and several; pure/net; stand-alone capitalization supports the assigned rating after thepool is considered; includes coverage for any prior year lossreserve development, and the run-off of all liabilitiesincurred on policies incepted prior to termination; owner-ship or board control exceeds 50% and includes a 12-monthnotice of termination.

"r" Reinsured Rating: Assigned to a company with 100%quota share of all gross premiums, losses and expenses(unless regulatory restrictions apply). Reinsurance is viewedas explicit financial support. In many cases, reinsured affili-ates market under a common brand name and generallyoperate under common management and/or ownership.

The reinsured (r) affiliation code is typically assigned ifstand-alone capitalization supports the assigned rating afterthe reinsurance is considered; the contract contains no losscaps or loss corridors; includes coverage for any prior yearloss reserve development, and the run-off of all liabilitiesincurred on policies incepted prior to termination; ownershipor board control exceeds 50% and includes a 12-monthnotice of termination.


SECTION X

AFFILIATION CODES ANDRATING MODIFIERS

Rating Modifiers

“u” Under Review: Assigned to companies with potentialnear-term rating changes (typically within six months) dueto a recent event or abrupt change in their financial condi-tion, which may have positive, developing, or negative rat-ing implications. A rating placed under review with positiveimplications indicates that, based on information currentlyavailable, there is a reasonable likelihood the company's rat-ing will be raised as a result of A.M. Best's analysis of therecent event. Conversely, a rating placed under review withnegative implications indicates that, based on informationcurrently available, there is a reasonable likelihood the com-pany's rating will be lowered as a result of A.M. Best's analy-sis of the recent event. A rating placed under review withdeveloping implications indicates that, based on informationcurrently available, there is uncertainty as to the final ratingoutcome, but there is a reasonable likelihood the company'srating will change as a result of A.M. Best's analysis of therecent event.

A company's rating remains under review until A.M. Bestis able to fully determine the rating implications of the eventbefore affirming, upgrading or downgrading the rating.Generally, a company's rating is placed under review for lessthan six months.

“pd” Public Data Rating: Assigned to Canadian proper-ty/casualty insurers and HMOs and health insurers (UnitedStates) that do not subscribe to our interactive ratingprocess. Best’s Public Data Ratings reflect both qualitativeand quantitative analyses using publicly available data andother public information. Public Data Ratings will beassigned where, in Best’s view, ratings are needed due tomarket demand.

“s” Syndicate Rating: Assigned to syndicates operatingat Lloyd’s that meet our minimum size and operatingexperience requirements for a Best’s Credit Rating andsubscribe to our interactive rating process.

RATING MODIFIER/AFFILIATION CODE DISTRIBUTION

Of the 2,286 individual total ratings assigned in Best's2009 property/casualty publications, 1,572 or 69% werealso assigned a Rating Modifier or Affiliation Code. Theirdistribution follows.

The current universe of rated property/casualty compa-nies account for roughly 95% of the premium volume in theUnited States. However, A.M. Best also reports on 1,017property/casualty companies that are not assigned a ratingopinion. Because of their small size, Not Rated (NR) insur-ers constitute only 5% of the industry's premium writings.

For Not Rated (NR) companies, a condition exists thatmakes it difficult for A.M. Best to develop an opinion onthe company's balance sheet strength and operating per-formance. Generally, these companies do not qualify for aBest's Credit Rating because of their limited financial infor-mation, small level of surplus, lack of sufficient operatingexperience, or due to their dormant or run-off status.

Companies are assigned to one of five Not Rated(NR) categories.

NR-1 (Insufficient Data) Assigned predominately to small companies for which A.M.Best does not have sufficient financial information requiredto assign rating opinions. The information contained in theselimited reports is obtained from several sources, whichinclude the individual companies, the National Association ofInsurance Commissioners (NAIC) and other data providers.Data received from the NAIC, in some cases, is prior to thecompletion of the cross-checking and validation process.

NR-2 (Insufficient Size and/or Operating Experience) Assigned to companies that do not meet A.M. Best’s mini-mum size and/or operating experience requirements. To beeligible for a letter rating, a company must generally have aminimum of $2 million in policyholders’ surplus to assurereasonable financial stability and have sufficient operatingexperience to adequately evaluate its financial performance,usually two to five years. General exceptions to theserequirements include companies that have financial orstrategic affiliations with Best-rated companies; companiesthat have demonstrated long histories of financial perfor-mance; companies that have achieved significant marketpositions; and newly formed companies with experiencedmanagement that have acquired seasoned books of businessand/or developed credible business plans.

NR-3 (Rating Procedure Inapplicable) Assigned to companies that are not rated by A.M. Best,because our normal rating procedures do not apply due to acompany’s unique or unusual business features. This catego-ry includes companies that are in run-off with no active busi-ness writings, are effectively dormant, or underwrite financialor mortgage guaranty insurance. Exceptions to the assign-ment of the NR-3 designation include run-off companies thatcommenced run-off plans in the current year or inactive

xxii — Best’s Financial Strength Ratings & Reports as of 07/20/09 — 2009 BEST’S INSURANCE REPORTS—PROPERTY/CASUALTY


RATING MODIFIER/ NUMBER OFAFFILIATION CODE COMPANIES

g - Group 713p - Pooled 435r - Reinsured 347pd - Public Data 53u - Under Review 47

Subtotal 1,595Dual Assignment (23)

Total Modifier/Affiliation Code Ratings 1,572

SECTION XI“NOT RATED” (NR) CATEGORIES

2009 BEST’S INSURANCE REPORTS—PROPERTY/CASUALTY — For Current Ratings access www.ambest.com — xxiii


companies that have been structurally separated fromactive affiliates within group structures that pose poten-tial credit, legal or market risks to the group's active com-panies.

NR-4 (Company Request) Assigned to companies that are assigned a Best's CreditRating following a review of their financial performance,but request that the assigned letter rating not be pub-lished on their company. The NR-4 is assigned followingthe publication of a final letter-rating opinion.

NR-5 (Not Formally Followed)Assigned to insurers that are not formally evaluated forthe purposes of assigning a rating opinion. It is alsoassigned retroactively to the rating history of traditionalU.S. insurers when they provide prior year(s) financialinformation to A.M. Best and receive a Best’s CreditRating or another NR designation in more recent years.Finally, it is assigned currently to those companies thathistorically had been rated, but no longer provide finan-cial information to A.M. Best because they have been liq-uidated, dissolved, or merged out of existence.

A.M. Best assigns a Financial Size Category (FSC) toeach letter-rated company. The FSC is designed to pro-vide the subscriber with a convenient indicator of thesize of a company in terms of its most recent cross-checked submission of year-end, first-, second- or third-quarter regulatory surplus and related accounts. Manyinsurance buyers consider buying insurance coveragefrom companies that they believe have the sufficientfinancial capacity to provide the necessary policy limitsto insure their risks.

Best's Financial Size Category is based on reportedpolicyholders' surplus plus conditional or technicalreserve funds, such as the asset valuation reserve (AVR),other investment and operating contingency funds andmiscellaneous voluntary reserves reported as liabilities inU.S. dollars.

The FSC is represented by Roman numerals rangingfrom Class I (the smallest) to Class XV (the largest). Thedistribution by FSC based upon individual companiesand rating units is shown below.

The following section provides the distribution of Best'sFinancial Strength Ratings on both an individual companyand rating unit basis as of July 20, 2009. In addition, thissection provides the distribution of companies assigned toNot Rated (NR) categories.

2009 FINANCIAL SIZE CATEGORY (FSC)BY INDIVIDUAL COMPANIES

AdjustedFinancial Policyholders’ NumberSize Surplus of DistributionCategory ($ Millions) Companies Percentage CumulativeClass I Less than 1 2 0.1 % 0.1 %Class II 1 to 2 16 0.7 0.8Class III 2 to 5 50 2.2 3.0Class IV 5 to 10 115 5.1 8.1Class V 10 to 25 188 8.3 16.4Class VI 25 to 50 155 6.8 23.2Class VII 50 to 100 194 8.5 31.7Class VIII 100 to 250 352 15.5 47.2Class IX 250 to 500 212 9.3 56.5Class X 500 to 750 171 7.5 64.0Class XI 750 to 1,000 73 3.2 67.2Class XII 1,000 to 1,250 79 3.5 70.7Class XIII 1,250 to 1,500 86 3.8 74.5Class XIV 1,500 to 2,000 71 3.1 77.6Class XV 2,000 or greater 507 22.4 100.0 %

Subtotal 2,271E & F Rated Companies 15

Grand Total 2,286

SECTION XIIFINANCIAL SIZE CATEGORIES (FSC)

2009 FINANCIAL SIZE CATEGORY (FSC)BY RATING UNITS

AdjustedFinancial Policyholders’ NumberSize Surplus of DistributionCategory ($ Millions) Rating Units Percentage CumulativeClass I Less than 1 2 0.2 % 0.2 %Class II 1 to 2 16 1.5 1.7Class III 2 to 5 50 4.7 6.4Class IV 5 to 10 113 10.6 17.0Class V 10 to 25 178 16.7 33.7Class VI 25 to 50 135 12.7 46.4Class VII 50 to 100 147 13.8 60.2Class VIII 100 to 250 175 16.5 76.7Class IX 250 to 500 82 7.7 84.4Class X 500 to 750 43 4.0 88.4Class XI 750 to 1,000 23 2.2 90.6Class XII 1,000 to 1,250 16 1.5 92.1Class XIII 1,250 to 1,500 19 1.8 93.9Class XIV 1,500 to 2,000 13 1.2 95.1Class XV 2,000 or greater 52 4.9 100.0 %

Subtotal 1,064E & F Rating Units 15

Grand Total 1,079

SECTION XIII

RATING DISTRIBUTIONS

The term "rating unit" applies to either individual insurers ora consolidation of member companies. The rating unit formsthe financial basis on which A.M. Best performs its rating eval-uation. The name of a company's rating unit is identified in itsfull report and can also be found in the Company Groups sec-tion of our publications. The financial results of rating unitsmore accurately represent the way insurance groups operateand manage their businesses. Therefore, the rating distributionbased on a rating unit basis is the more appropriate rating dis-tribution to gauge A.M. Best's overall opinion of the financialhealth of the universe of insurance companies we rate.

xxiv — Best’s Financial Strength Ratings & Reports as of 07/20/09 — 2009 BEST’S INSURANCE REPORTS—PROPERTY/CASUALTY

2009 PROPERTY/CASUALTY RATING DISTRIBUTION*BY RATING UNITS

RatingFSR Category Number Percent

Secure RatingsA++ Superior 17 1.6 %A+ Superior 84 7.8

Subtotal 101 9.4

A Excellent 266 24.6A- Excellent 356 33.0

Subtotal 622 57.6

B++ Good 151 14.0B+ Good 104 9.6

Subtotal 255 23.6Total Secure Ratings 978 90.6 %

Vulnerable RatingsB Fair 51 4.7 %B- Fair 17 1.6

Subtotal 68 6.3

C++ Marginal 10 0.9C+ Marginal 3 0.3

Subtotal 13 1.2

C Weak 3 0.3C- Weak 1 0.1

Subtotal 4 0.4

D Poor 1 0.1E Under Regulatory Supervision 12 1.1F In Liquidation 3 0.3

Subtotal 16 1.5Total Vulnerable Ratings 101 9.4 %Total Rating Opinions 1,079 100.0 %

No Rating OpinionsNR-1 Insufficient Data 531 50.9 %NR-2 Insufficient Size/

Operating Experience 29 2.8NR-3 Rating Procedure Inapplicable 147 14.1NR-4 Company Request 25 2.4NR-5 Not Formally Followed 311 29.8

Total No Rating Opinions 1,043 100.0 %

Total Reported Units 2,122

*As of July 20, 2009

2009 PROPERTY/CASUALTY RATING DISTRIBUTION*BY INDIVIDUAL COMPANIES

RatingFSR Category Number Percent

Secure RatingsA++ Superior 73 3.2 %A+ Superior 386 16.9

Subtotal 459 20.1

A Excellent 778 34.0A- Excellent 610 26.7

Subtotal 1,388 60.7

B++ Good 205 9.0B+ Good 120 5.2

Subtotal 325 14.2Total Secure Ratings 2,172 95.0 %

Vulnerable RatingsB Fair 58 2.5 %B- Fair 23 1.0

Subtotal 81 3.5

C++ Marginal 10 0.4C+ Marginal 3 0.2

Subtotal 13 0.6

C Weak 3 0.2C- Weak 1 0.0

Subtotal 4 0.2

D Poor 1 0.0E Under Regulatory Supervision 12 0.5F In Liquidation 3 0.2

Subtotal 16 0.7Total Vulnerable Ratings 114 5.0 %Total Rating Opinions 2,286 100.0 %

No Rating OpinionsNR-1 Insufficient Data 531 52.2 %NR-2 Insufficient Size/

Operating Experience 29 2.9NR-3 Rating Procedure Inapplicable 147 14.4NR-4 Company Request 25 2.5NR-5 Not Formally Followed 285 28.0

Total No Rating Opinions 1,017 100.0 %

Total Reported Companies 3,303

*As of July 20, 2009


ORGANIZATION TYPES

Insurance transactions are conducted primarilythrough five types of organizations—stock companies,mutual companies, U.S. Lloyds organizations, ReciprocalExchanges and Risk Retention Groups. A brief descriptionof the legal structure and function of each is as follows:

• Stock Companies: Stock companies are corporations,the financial ownership of which is comprised of capitalstock which is divided into shares. Ultimate control ofstock insurance companies is vested in the shareholders.

• Mutual Companies: Mutual companies are corporationswithout capital stock. Ultimate control of mutual insurancecompanies is vested in their policyholders.

• U.S. Lloyds Organizations: These organizations are volun-tary unincorporated associations of individuals. Each individ-ual assumes a specified portion of the liability under each pol-icy issued. The organizations operate through a common attor-ney-in-fact appointed for this purpose by the underwriters.

• Reciprocal Exchanges: These organizations are com-posed of a group of persons, firms or corporations com-monly termed "Subscribers'' who exchange contracts ofinsurance on a Reciprocal or Inter-Insurance plan throughthe medium of an attorney-in-fact. Under this plan, eachSubscriber executes an agreement identical with that exe-cuted by every other Subscriber, empowering the attor-ney-in-fact to assume on his behalf an underwriting liabil-ity on policies issued by the Exchange covering the risksof the other Subscribers. Customarily, the attorney-in-factis compensated by payment of a percentage of premiumincome, out of which most operating expenses are paid.

• Risk Retention Groups (RRG): These entities, formedunder the federal Liability Risk Retention Act of 1986 of theUnited States, enable businesses or professionals with sim-ilar risks to band together to provide needed liability cov-erages for each other. Under statute, RRGs are precludedfrom writing certain coverages, most notably property linesand workers' compensation. RRGs predominantly writemedical malpractice, general liability, professional liability,product liability and excess liability coverages. An RRG canbe formed as a mutual or stock company or a reciprocal.

INSURANCE LICENSES

In our reports, we list the states, provinces, and terri-tories in which a company is licensed or approved

(where required) to do business. States have the author-ity to regulate insurance companies and have controlledinsurance mainly through the licensing power. Thelicense is a document that indicates an insurer has metthe minimum requirements established by state statuteand is authorized to engage in the lines of business forwhich it has applied.

The importance of a company being licensed in a particulardomicile determines not only the protection to the insured pro-vided by the regulatory authorities to assist if a problem arises,but also the protection afforded the insured by guaranty fundlaws generally apply only to licensed insurers. Each jurisdictionhas its own statutes and there are a number of different licens-ing requirements.

In addition to licensed insurers, there are several otherspecialty types of companies, that exist in the field of insur-ance such as reinsurers, non-admitted surplus lines carriersand risk retention groups.

A reinsurer is a company that agrees to indemnify, forconsideration, the ceding company against all or part of aloss that the latter may sustain under policies that it hasissued. Reinsurers do not always have to be licensed andmay operate on an approved basis in some states. A sur-plus lines insurer is a company that underwrites risks forwhich insurance coverage generally is not availablethrough a company licensed in the insured's state (anadmitted insurer). This business, therefore, is placed witha non-admitted insurer (a company not licensed in thestate) in accordance with excess or surplus lines provisionsof state insurance laws. A risk retention group is an insur-er that generally is not licensed in a state but operatesunder the authority of the federal Liability Risk RetentionAct of 1986.

Since there are a number of different licensing require-ments, we have used seven descriptions to signify the gen-eral status of a company in a particular jurisdiction.

• State of Domicile: The state in which the company isincorporated or chartered. The company is also licensed(admitted) under the state's insurance statutes for thoselines of business for which it qualifies.

• Licensed: Indicates the company is incorporated (orchartered) in another state but is a licensed (admitted orchartered) insurer for this state to write specific lines ofbusiness for which it qualifies.

• Licensed for Reinsurance Only: Indicates the company islicensed (admitted) to write reinsurance on risks in this state.Indicates the company is incorporated (or chartered) in anoth-er state but is a licensed (admitted) reinsurer for this state.

• Approved for Reinsurance: Indicates the company isapproved (or authorized) to write reinsurance on risks inthis state. A license to write reinsurance may not berequired in these states. Indicates that the company isaccredited or credit is allowed for reinsurers domiciled and

2009 BEST’S INSURANCE REPORTS—PROPERTY/CASUALTY — For Current Ratings access www.ambest.com — xxv


SECTION XIV

DEFINITIONS

licensed in another state. These reinsurers meet size andregulatory filing requirements that were included as part ofthe NAIC Model Law on Credit for Reinsurance.

• Credit for Reinsurance (Other): Indicates that thecompany meets state requirements other than licensingor accreditation. Included are reinsurers that maintaintrust funds, reinsurance arrangements that are requiredby law (pools, joint underwriting associations, state-owned or controlled companies) and qualified trustagreements and letters of credit arrangements. Theserequirements were also specified under the Model Law.

• Approved or not Disapproved for Surplus Lines:Indicates the company is approved (or not disapproved) towrite excess or surplus lines in this state.

• Authorized under federal Liability Risk RetentionActs (Risk Retention Groups): Indicates companiesoperating under the federal Products Liability RiskRetention Act of 1981 and the Liability Risk RetentionAct of 1986. Indicates states in which the companyoperates for members whose business or activities aresimilar or related with respect to the liability to whichmembers are exposed by virtue of any related, similar,or common business, trade, product, services, premises,or operations. Companies are licensed in the state ofdomicile only.

BALANCE SHEET TERMS

• Unaffiliated Investments: Cash, bonds, stocks, mort-gages, real estate and accrued interest, excluding invest-ments in affiliates and real estate properties occupied bythe company.

• Investments in Affiliates: Bonds, stocks, collateralloans, short-term investments in affiliates, and real estateproperties occupied by the company.

• Premium Balances: Premiums and agents' balances incourse of collection; premiums, agents' balances andinstallments booked but deferred and not yet due; billsreceivable, taken for premiums and accrued retrospectivepremiums.

• Total Admitted Assets: This item is the sum of all admit-ted assets. These assets are valued in accordance with statelaws and regulations, as reported by the company in itsfinancial statements filed with state insurance regulatoryauthorities.

• Losses and Loss Adjustment Expenses: This item rep-resents the total reserves for unpaid losses and loss adjust-ment expenses, including reserves for incurred but notreported losses (IBNR), if any, and supplemental reservesestablished by the company.

• Unearned Premiums: The calculated aggregate netamount, after deducting reinsurance credits, which aninsurance company would be obliged to tender to its pol-icyholders as return premiums for the unexpired terms,should it cancel every policy in force.

• Conditional Reserves: This item represents the aggre-gate of various reserves which, for technical reasons, aretreated by companies as liabilities. Such reserves, which aresimilar to free resources or surplus, include unauthorizedreinsurance, dividends to policyholders undeclared andother similar reserves established voluntarily or in compli-ance with statutory regulations.

• Policyholders' Surplus: This item is the sum of paid-incapital, paid-in and contributed surplus, and net earnedsurplus, including voluntary contingency reserves.

INCOME STATEMENT TERMS

• Direct Premiums Written: This item represents theaggregate amount of recorded originated premiums,other than reinsurance, written during the year whethercollected or not at the close of the year (plus retrospec-tive audit premium collections), after deducting all returnpremiums.

• Reinsurance Assumed: Premiums assumed from other affil-iated and non-affiliated insurance companies for reinsurance.

• Reinsurance Ceded: Premiums ceded to other affiliatedand non-affiliated insurance companies.

• Net Premiums Written: This item represents grosspremiums written, direct and reinsurance assumed, lessreinsurance ceded.

• Net Premiums Earned: This item represents theadjustment of the net premiums written for the increaseor decrease during the year of the liability of the com-pany for unearned premiums.

• Business Net Retention: The percentage of a compa-ny's gross writings that are retained for its own account.Gross writings are the sum of direct writings andassumed writings.

• Losses Incurred (Pure Losses): Net paid losses duringthe current year plus (minus) the change in loss reservessince the prior year-end.

• Loss Adjustment Expenses: Expenses incurred toinvestigate and settle losses.

• Underwriting Expenses Incurred: Expenses, includ-ing net commissions, salaries and advertising costs, whichare attributable to the production of net premiums written.

xxvi — Best’s Financial Strength Ratings & Reports as of 07/20/09 — 2009 BEST’S INSURANCE REPORTS—PROPERTY/CASUALTY


• Net Underwriting Income: Net premiums earnedless incurred losses, loss adjustment expenses, under-writing expenses incurred, and dividends to policy-holders.• Other Income/Expenses: Miscellaneous sources ofoperating income or expense that principally relate to pre-mium finance income or charges for uncollectible premi-um and reinsurance balances.

• Net Investment Income: Investment income earnedduring the year less investment expenses and deprecia-tion on real estate.

• Pretax Operating Income: Pretax operating earnings,before any capital gains, generated from underwriting,investment and other miscellaneous operating sources.

• Income Taxes: Incurred income taxes (includingincome taxes on capital gains) reported in each annualstatement for that year.

• Net Income: Total after-tax earnings generated fromoperations and realized capital gains.

• Change in Policyholders' Surplus: The annual changein a company's policyholders' surplus derived from oper-ating earnings, investment gains, net contributed capitaland other miscellaneous sources.

2009 BEST’S INSURANCE REPORTS—PROPERTY/CASUALTY — For Current Ratings access www.ambest.com — xxvii


Documents

2009 PC BIR Preface 07-28-09 - WEB NEW - A. M. BestIn 1984, A.M. Best embarked on global coverage of the insurance industry with the publication of Best's Insurance Reports®—Non-US