A.M. Best Affirms Ratings of Casiopea Re S.A.

A.M. Best Co. has affirmed the financial strength rating of A- (Excellent) and the issuer credit rating of “a-” of Casiopea Re S.A. (Casiopea Re) (Luxembourg), the reinsurance captive of Telefónica, S.A. The outlook for both ratings remains positive.

The ratings reflect Casiopea Re’s strong level of risk-adjusted capitalisation, historically profitable underwriting performance and integration within Telefónica’s enterprise risk management framework. The positive outlook reflects a general improvement in credit rating metrics over recent years.

A.M. Best considers that Casiopea Re’s already strong level of risk-adjusted capitalisation is likely to continue improving with the retention of profits in future years and decreasing capital requirements. Casiopea Re’s capital position is protected by a reinsurance programme of generally good credit quality, with the majority of retrocessionaires maintaining an A.M. Best financial strength rating of “A” or above. Looking forward, A.M. Best anticipates that Casiopea Re’s investment portfolio is likely to become increasingly conservative, with new investment guidelines restricting future exposure to equity securities to 15% of invested assets. Additionally, the reorganisation of O2’s handset insurance business will further reduce capital requirements during 2010 and 2011.

Casiopea Re has experienced significant exposure to the 2010 Chilean earthquake, estimated to be in the region of USD 200 million. Although Casiopea Re’s net retention is expected to be closer to USD 10 million after accounting for reinsurance recoverables and group deductibles, profitability for the 2010 underwriting year is likely to become pressured.

For an upgrade to be achieved, Casiopea Re would need to preserve a strong level of risk-adjusted capitalisation, maintain a profitable underwriting account and continue as a key tool within Telefónica’s enterprise risk management framework over the next two to three years. Furthermore, Telefónica itself would need to maintain a strong financial position.

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

The principal methodologies used in determining these ratings, including any additional methodologies and factors that may have been considered, can be found at www.ambest.com/ratings/methodology.

Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.