Mapfre Re's Financial Strength Rating Raised to 'AA-' by S&P

Standard & Poor's today raised its insurer financial strength and counterparty credit ratings of Mapfre Re Compania De Reaseguros, S.A. (Mapfre Re) to double-'A'-minus from single-'A'-plus. After detailed analysis, Standard & Poor's believes Mapfre Re to be strategically important to Mapfre Mutualidad de Seguros, the ultimate parent of the Mapfre Group. In addition, the company has a strong stand-alone rating profile that is supported by its strong market presence in the Spanish-speaking world, a sound balance sheet and capitalization, as well as a strong operating performance. Offsetting these strengths are the lack of significant presence outside of Spain and Latin America and a book of business that is concentrated by type.

Major rating factors are:

• Its strategic importance to Mapfre Mutualidad, the ultimate parent of the leading insurance group in Spain: Mapfre Re enjoys not only the name recognition of being a group company but also benefits from being the 100% reinsurer for Mapfre Mutualidad, Mapfre Seguros Generales and Mapfre Caucion y Credito in motor, property/marine, and surety/credit lines of business, respectively.
• Its strong market presence in the Spanish-speaking world: Mapfre Re is the largest Spain-based reinsurer and has been an autonomous subsidiary of the Sistema Mapfre since 1982. In addition, the company and its reinsurance subsidiaries are the market leaders in Latin America. The company covers a good deal of the globe from Madrid but has a branch office in London, which is expanding its spread into quality brokered lines of business, as well as offices throughout Latin America, Europe, and the Philippines.
• A sound balance sheet and capitalization: Mapfre Re maintains a sound balance sheet because of conservative investment and reserving practices, moderate catastrophe exposures and absence of significant long-tail business. The company's published solvency ratio of 42.5% is a conservative figure, in view of the significant hidden values on Mapfre's balance sheet, arising from reporting of affiliated investments at cost. On a risk-adjusted basis, the company has extremely strong capital adequacy.
• Its strong operating performance: Disclosed return on revenue has averaged 6% over the past five years. Over the same period, the underlying operating performance has been strong, as evidenced by a combined ratio that has averaged 99.7 percent.
• The quality and stability of its client relationships: Mapfre Re derives 84 percent of its book of business on a direct basis, while only 16 percent comes from brokers. The quality of Mapfre's direct relationships is witnessed by a client retention rate comfortably above 90 percent and longer-term approach to pricing with its clients.
• Its lack of significant market presence outside of Spain and Latin America: Mapfre Re and its subsidiaries have only a modest presence outside their traditional markets. In other markets, such as Europe (excluding Spain), North America and the Far East, they fulfill the role of a specialty niche reinsurer. Mapfre Re's best prospects for significant nonacquisition- related growth rest with a realization of its fledgling relationships in new markets, which are in the process of demonopolizing.
• The concentration of its book of business in proportional and property risks: As with most focused books of business, profitability is the primary concern and the long-term experience with most proportional clients and low limit retention on property business mitigates the apparent volatility of such a business profile.

OUTLOOK: STABLE
Standard & Poor's believes that Mapfre Re's operations should be similarly profitable in the future because of its quality core property and motor writings (but may be volatile in given years depending on the frequency and/or severity of catastrophes). The company's capital base will receive continuing support from its parent and will remain very strong. Historically, the group has supported such needs internally, but a partial spin-off of Mapfre Re in the first half of 1999, will serve to enhance the available group support.

Mapfre Re's published results will be sufficient to fund dividend obligations. Despite long-standing relationships, intense competition in reinsurance markets has begun to affect Mapfre Re's accounts, which will in turn cause margins to deteriorate in affected segments, Standard & Poor's says.