A.M. Best Downgrades and Places Under Review Rating of Brandywine Grou

    Business Editors

    OLDWICK, N.J.--(BUSINESS WIRE)--Jan. 6, 2005--A.M. Best Co. has downgraded the financial strength rating to B- (Fair) from B+ (Very Good) of Brandywine Group (Brandywine) and has placed the rating under review with negative implications pending regulatory approvals. The Brandywine Group consists of Century Indemnity Company (Century Indemnity) and its two wholly-owned subsidiaries, Century Reinsurance Company and ACE American Reinsurance Company. These companies are in runoff and constitute the majority of the asbestos and environmental (A&E) liabilities of ACE Group (ACE) (NYSE:ACE) (Bermuda).
    Additionally, A.M. Best has affirmed the financial strength ratings of A+ (Superior) and A (Excellent) of ACE and ACE American Pool, respectively, which takes into consideration the announced change in management. These ratings have a stable outlook. The debt and financial strength ratings of the remaining subsidiaries remain unaffected. All companies are located in Philadelphia, PA, unless otherwise specified.
    The Brandywine rating downgrade is based on A.M. Best's increase in its estimate of Brandywine's ultimate asbestos liabilities as well as the significantly reduced protection available under the $800 million reinsurance protection from the ACE American Pool.
    The downgrade follows ACE's announcement that it intends to take a $298 million after-tax GAAP charge for prior year reserve deficiency including an addition of approximately $95 million to its bad debt reserve within the Brandywine companies. The charge causes a negative capital position at Century Indemnity, which ACE intends to address with an immediate $100 million surplus note. The capital will be provided by ACE INA Holdings, Inc. (Pennsylvania), allowing the surplus position to remain positive.
    In addition, ACE announced its intention to sell its assumed reinsurance runoff businesses within Brandywine, which would reduce reserves by approximately $1 billion or 17% of Brandywine's liabilities. The sale will cause a minimal statutory loss (mainly due to discounting) and a nominal GAAP gain. The primary benefit of this sale would be to reduce Brandywine's assumed reinsurance exposure while a secondary benefit would be to reduce liabilities ceded to National Indemnity Company (NICO) (Nebraska) with liabilities currently ceded to the ACE American Pool of approximately $200 million.
    The Brandywine reserve charge is based on its internal best estimate of reserves, which is materially less than the outside actuarial best estimate. The charge will be ceded to the ACE American Pool companies under the existing $800 million reinsurance protection, after which no amount of protection remains at year end 2004. While the charge is well within the expectations of A.M. Best regarding A&E deficiencies, A.M. Best believes the charge is less than conservative when compared to the outside actuaries' midpoint. Considering the results of the outside actuarial opinion and additional information from ACE, A.M. Best has increased its estimate of Brandywine's ultimate asbestos liabilities while significantly reducing its estimate of its environmental liabilities, which led to the rating downgrade. It should, however, be noted that the NICO cover has begun to pay claims and more than $2 billion of remaining coverage will continue for years before the cash is exhausted.
    A.M. Best has reviewed the capital models of all of the ACE companies affected by the Brandywine charge. Brandywine remains minimally capitalized after a $100 million surplus note from ACE INA Holdings, Inc. Subsequent to the charge, the capital levels of the affected subsidiaries remain within the appropriate range for their rating. Moreover, the capital of ACE is sufficient to withstand a charge roughly equivalent to the actuarial best estimate. A.M. Best expects that additional charges will need to be taken in the next several years. However, given ACE's current capital levels and its substantial earnings projections, potential charges taken in subsequent years should be readily absorbed.
    For current Best's Ratings, independent data and analysis on more than 3,000 individual property/casualty companies, groups and industry composites, please visit http://www.ambest.com/pc.
    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 http://www.ambest.com.

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CONTACT: A.M. Best Co. Public Relations Jim Peavy (908) 439-2200, ext. 5644 james.peavy@ambest.com or Rachelle Striegel (908) 439-2200, ext. 5378 rachelle.striegel@ambest.com or Analysts Joyce Sharaf (908) 439-2200, ext. 5046 joyce.sharaf@ambest.com or Karen Horvath (908) 439-2200, ext. 5371 karen.horvath@ambest.com

KEYWORD: NEBRASKA PENNSYLVANIA NEW JERSEY INTERNATIONAL LATIN AMERICA INDUSTRY KEYWORD: INSURANCE BANKING SOURCE: A.M. Best Co.

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