A.M. Best Co. has affirmed the financial strength rating (FSR) of A- (Excellent) and the issuer credit rating (ICR) of “a-” of Lancashire Insurance Company (Lancashire) (Hamilton, Bermuda). A.M. Best has also affirmed the FSR of A- (Excellent) and assigned an ICR of “a-” to Lancashire Insurance Company (UK) Limited (United Kingdom). Concurrently, A.M. Best has affirmed the ICR of “bbb-” and assigned a debt rating of “bb+” on $125 million subordinated notes, due December 2035 to Lancashire Holdings Limited (Hamilton, Bermuda). The outlook for all ratings is stable.

The affirmations reflect Lancashire’s successful first-year execution of operations, solid risk-based capitalization, increasing presence in targeted markets and development of risk management systems. Overall, Lancashire operated within the first year parameters presented during the initial rating process. In addition to meeting A.M. Best’s established requirements for new company formations, the affirmations also reflect Lancashire’s ability to sustain the stricter risk-based capital requirements for newly formed property catastrophe companies.

As a newly formed Bermuda domiciled insurer, Lancashire’s business profile is focused on a specialist approach to targeting classes of business. Management is developing a geographically diversified book of short-tail property insurance, as well as property reinsurance lines of business.

As part of the new company formation monitoring process, A.M. Best has been kept fully apprised of Lancashire’s progress. On balance, Lancashire has adhered to its 2006 business plan despite falling below its premium volume expectation for its first year of operations. During this period, risk-based capitalization remained fully supportive of the current ratings and within A.M. Best’s expectations.

In addition to being susceptible to low frequency high severity events, Lancashire will continue to be challenged by the softening market cycle and increased competition from both established companies and other new start-ups in the industry. The additional capacity brought to the market will dampen expected returns over the cycle if pricing of coverage fails to meet anticipated levels. Furthermore, the ability of Lancashire to effectively build and retain market acceptance will only be proven over time. Accordingly, A.M. Best will continue to closely monitor the quarterly performance of Lancashire against its stated business plan, and any material negative deviations in terms of management, earnings, capitalization or risk profile could result in downward pressure on the ICRs.

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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.