A.M. Best Downgrades Ratings of AequiCap Insurance Company

The ratings reflect AIC's vulnerable risk-adjusted capitalization, significantly elevated underwriting leverage, unfavorable loss reserve development trends and dependence on reinsurance. Risk-adjusted capitalization in 2007 and 2006 was negatively impacted by substantial adverse loss reserve development from accident years 2002 through 2005 in the commercial automobile (truck) line of business. This adverse development resulted in a precipitous decline in surplus, partially offset by a capital contribution

A significant portion of the unfavorable development that occurred in 2007 was due to the commutation of a reinsurance contract in early 2006. Although AIC has taken substantial corrective actions to improve and track claims handling, the outlook reflects the execution risk associated with management's corrective actions to improve earnings and risk-adjusted capitalization.

The negative rating factors are modestly offset by the advantage AIC receives from its affiliated managing general underwriter, AequiCap Program Administrators, through which management has the flexibility to shift business to and from AIC, depending on market conditions. In addition, demonstrated financial support from the parent organization is evidenced by significant capital contributions over the last five years. However, debt at the parent organization has increased in recent years (over half of which came from the parent's shareholders), resulting in high financial leverage.

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