A.M. Best Comments on Ratings Impact of Recent Florida Legislation; Revises Credit Risk Factor for Florida Hurricane Catastrophe Fund.

OLDWICK, N.J. -- In response to the recently passed insurance legislation in the Florida marketplace and in the on-going effort to maintain rating transparency, A.M. Best provides details regarding both the near-term and longer-term impact of this legislation on the financial strength ratings of primary and reinsurance companies in the methodology "Rating Implications of Recent Florida Legislation."

The legislative changes were significant and may have far reaching consequences in the Florida insurance market. As a result, A.M. Best will be evaluating the exposure of companies to recoverables from the Florida Hurricane Catastrophe Fund (FHCF) and the impact on companies' overall capitalization. Companies most exposed to negative rating pressure and rating downgrades will be those with large gross catastrophe exposure, and thus greater exposure to FHCF recoverables. Overall, the impact on a company's rating will be largely dependent on several factors; key among them is each organization's unique ability to manage through the regulatory and market challenges that lie ahead while maintaining adequate pricing and favorable risk-adjusted capitalization.

With the significant changes to the FHCF, A.M. Best believes it is prudent to increase the credit risk factor assigned to reinsurance recoverables derived via the fund. As a result, the credit risk factor for use in Best's Capital Adequacy Ratio model (BCAR) on a stress-tested basis will be 12% for recoverables from the FHCF. The increase in the credit risk factor is a result of A.M. Best's concerns regarding the contingent capital nature of the FHCF, the execution risk associated with the post-event issuance, the long-term impact on the insurance markets, and the uncertainty in the market subsequent a major event.

A.M. Best views the recent legislative changes as weakening the business profile of companies with significant concentration of Florida business. In addition, the prospective capitalization of property insurance writers is weakened, as they carry the burden of potentially unrecoverable reinsurance in the event of a major catastrophic event.

As it applies to the reinsurance segment, A.M. Best does not believe that the reforms will directly impact the financial strength ratings of reinsurers at this time. Given the size of the Florida catastrophe market, these changes will affect reinsurers in the context of premium generation and operating margins. The reforms are expected to eliminate billions of dollars of reinsurance premiums from the private reinsurance market which could result in a considerable amount of capacity becoming available for redeployment. As they look to recapture lost revenue, the manner in which reinsurers react to the legislative curtailment of the Florida reinsurance market could accelerate rate softening in non-coastal property regions and result in increased competition in casualty lines.

In the reinsurance segment, A.M. Best expects there will be pressure to either return capital to shareholders or redeploy capital in other markets outside of Florida. Moreover, the alternative sources of capacity such as side-car formations and start-up operations that arose in 2005 and 2006 will significantly decline due to the unexpected increase in reinsurance capacity.

Best will continue to monitor and evaluate the various market dynamics in Florida and their impact on our rating opinions. In addition, A.M. Best's assessment of the credit risk component of the Florida Hurricane Catastrophe Fund and its impact on our view of risk-adjusted capitalization will be monitored on an on-going basis.

For Best's Ratings, an overview of the rating process and rating methodologies, please visit www.ambest.com/ratings.

Founded in 1899, A.M. Best Company is a full-service credit rating organization dedicated to serving the financial services industries, including the banking and insurance sectors. For more information, visit www.ambest.com.