[January 23, 2015]

A.M. Best Affirms Ratings of Houston International Insurance Group, Ltd.'s Subsidiaries; Revises Outlook to Stable for Imperium Insurance Company

A.M. Best has affirmed the financial strength rating (FSR) of A- (Excellent) and the issuer credit ratings (ICR) of "a-" of Houston Specialty Insurance Company (HSIC) and its 100% reinsured subsidiary, Oklahoma Specialty Insurance Company (OSIC) (Oklahoma City, OK). The outlook for the above ratings is stable.

Concurrently, A.M. Best has revised the outlook to stable from negative and affirmed the FSR of A- (Excellent) and the ICR of "a-" of HSIC's subsidiary, Imperium Insurance Company (IIC). A.M. Best also has affirmed the FSR of A (Excellent) and the ICR of "a" of IIC's wholly owned subsidiary, Great Midwest Insurance Company (GMIC). The outlook for GMIC's ratings is stable. All companies ultimately are owned by Houston International Insurance Group, Ltd. (HIIG, Ltd.), which is headquartered in Houston, TX.

The ratings of HSIC and OSIC reflect their solid capitalization and improving operating results driven by the newer classes of business written by the member companies, which have more than offset the unprofitability of the discontinued legacy book of IIC. The execution risk involved with building the portfolio of newer classes of business, coupled with the persistent, negative impact of adverse prior year development on IIC's discontinued book and subsequently on the organization's operating results, partially tempers the positive rating factors.

The ratings of IIC, acquired through a merger in 2010, reflect its supportive capitalization and the continuing efforts by management to run off a substantial book of legacy program business. The overall claim count attributable to the legacy book has been substantially reduced over the past few years. The ratings also reflect the initial profitability of newer business that is being written in IIC as it continues taking steps to transform from a program business writer into a specialty admitted, niche company with more non-commodity type business sourced through distribution partners with longstanding relationships.

Partially offsetting the positive rating factors for IIC is its unfavorable net underwriting and operating performance, which still largely reflects the unprofitability of the legacy business that continues to produce adverse prior year loss reserve development. The successful run-off, however, has helped the company lower its once high reserve leverage to now stand below industry composite norms. Although IIC's rating outlook was revied to stable, its ability to sustain the improved experience shown in 2014, if not enhance results going forward, will be paramount rating considerations in the near term.

The ratings of GMIC recognize its role and position within the organization, its continued strong risk-adjusted capitalization, and solid liquidity. Partially offsetting these positive rating factors is the execution risk involved with considerable growth via newer books of business that have been integrated into GMIC's portfolio in recent years. Also of concern is the possibility that future operating performance might not be sustained at its excellent historic levels.

In July of 2014, HIIG, Ltd. completed a transaction with The Westaim Corporation in which newly formed Westaim HIIG Limited Partnership (Westaim HIIG) acquired capital stock from the previous majority owner resulting in an effective change of ownership. Westaim HIIG is now the majority owner of HIIG, Ltd. In conjunction with the transaction, each of the operating subsidiaries received considerable capital contributions from Westaim HIIG during the year in support of current and potential future growth strategies.

Positive rating actions or a favorable revision in the rating outlook for HSIC and OSIC could result from the ability to sustain or improve upon recent underwriting and operating results leading to further strengthened risk-adjusted capitalization. Potential negative rating action could result from a failure to maintain a level of improved operating performance, especially if that performance is hindered by further adverse prior year reserve development on the company's legacy program book.

Neither upward movement in the ratings nor a favorable revision of the rating outlook for IIC is anticipated over the near term. For such actions to occur, IIC will have to establish and sustain net operating profitability over the long term. Possible downward movement of the ratings or a negative revision of the rating outlook would be likely if underwriting and operating trends worsen, particularly if driven by more adverse development on the company's legacy program book.

A potential upgrade in GMIC's ratings could occur if the company generates a consistent level of underwriting and operating profitability, as its portfolio continues to incorporate newer, targeted classes of business and lines of coverage including medical stop loss business, which GMIC is expected to write in 2015 and beyond. Possible downward movement in the ratings or a negative revision of the outlook could result if the newer classes fail to generate profitable results and if the company's increasing underwriting leverage helps lead to a material deterioration in risk-adjusted capitalization.

The methodology used in determining these ratings is Best's Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best's rating process and contains the different rating criteria employed in the rating process. Best's Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

Key insurance criteria reports utilized:

• Rating Members of Insurance Groups
• Risk Management and the Rating Process for Insurance Companies
• Understanding BCAR for Property/Casualty Insurers

This press release relates to rating(s) that have been published on A.M. Best's website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please visit A.M. Best's Ratings & Criteria Center.

A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2015 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.

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