A.M. Best Affirms Rating of Sorema S.A. With a Negative Outlook.

Business Editors

OLDWICK, N.J.--(BUSINESS WIRE)--Nov. 8, 2000

A.M. Best has affirmed the A (Excellent) financial strength rating of Sorema S.A., Paris, France. The group rating applies to the parent company, Sorema S.A., and its wholly owned subsidiary Sorema North America Reinsurance Company with its subsidiaries, and is based on the consolidation of these companies. The group rating recognizes the unconditional guarantee from Sorema's parent, Groupama, Paris, France for all reinsurance and insurance business that is written by Sorema group companies. In addition, the group rating reflects the integrated operations of Sorema North America Reinsurance Company and Sorema S.A., which operate as a single reinsurance unit in terms of underwriting capacity and capabilities.

Sorema is the reinsurance arm of Groupama, the largest mutual and second-largest multibranch insurance group in France. Sorema derives financial, technical and commercial synergies as part of Groupama. Groupama fully supports Sorema as an important entity for its international presence in reinsurance and as a source of knowledge about international markets.

The rating reflects Sorema's solid capitalization and balance sheet liquidity, as well as its prudent reserving practices. Though consolidated shareholders' funds decreased by EUR 46 million during the year, Groupama will make a EUR 76 million contribution to Sorema, before year-end 2000, to offset 1999 losses from natural catastrophes of an identical amount. These produced a consolidated net loss of EUR 71 million. The rating recognizes the strengthening of traditional retrocession protections, which have been enhanced through a natural catastrophe risk securitization operation implemented in May 1999. The arrangement provides USD 17 million in additional protection while also providing security against the possible loss of retrocessionnaires.

Other positive developments are the group's current strategy of tightening risk selection, diversifying the portfolio and concentrating more capacity on medium-sized accounts where Sorema can bring added value, both in underwriting, through risk inspections, and financially by providing a lead line. While Sorema is a multi-line reinsurer with 80% of the portfolio in property classes, it offers specialist technical expertise in facultative covers for such niche areas as energy, petrochemical, agriculture and large industrial risks. A good geographic spread is maintained, with recent expansion into the emerging markets of South America, Southeast Asia and Eastern Europe.

Offsetting the positive factors are poor technical and operating results for 1999, with a progressive deterioration over the past two years, as losses have increased sharply and returns on equity have remained below 5%. The 1999 combined ratio deteriorated significantly, from 115% in 1998 to 144% as the group was affected by at least ten natural catastrophe loss events worldwide, including four earthquakes and six storms, hurricanes and typhoons. The most damaging were the December storms in France with a net cost to Sorema of EUR 27 million. In addition, industrial plants experienced abnormal claims frequency, particularly in petrochemicals, producing losses of EUR 23 million in Sorema's facultative book of business. This combination of events exposed the weakness of Sorema's traditional portfolio, which is particularly exposed to market cycles and overly dependent on large accounts.

The rating has a negative outlook based on the deteriorating trend in operating and financial strength. Consolidated results in 2000 are expected to improve while remaining negative, as Sorema Paris continues to be affected by late claims declarations from the December 1999 storms. Sorema's rating will be largely dependent on its execution of strategic initiatives, which will be monitored by A.M. Best.

A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com.