Ohio Casualty Group Lowered

A.M. Best Co. lowered the financial strength rating of the Ohio Casualty Group, Fairfield, Ohio, from "A" (Excellent) to "A-" (Excellent). The rating applies to the five pool members led by Ohio Casualty Insurance Company and a separately rated affiliate. A silent outlook has been placed on the group's rating.

According to A.M. Best, the rating action reflects the sharp deterioration in the group's earnings and the significant reduction in policyholders' surplus over recent years, led by rising loss cost trends and expenses and adverse prior accident year loss reserve development. In addition, this rating action reflects the significant challenges that management will face in its efforts to restore earnings to levels consistent with A.M. Best's "A'' (Excellent) rating standards.

A.M. Best further indicated that the group's calendar year underwriting results have deteriorated significantly over the last two years due mostly to pricing inadequacy (particularly in commercial lines) and catastrophe losses. Declining surplus levels, coupled with double-digit growth in written premium from the acquisition of Great American Insurance Company's commercial lines book, has led to a meaningful increase in operating leverage measures to levels that exceed the group's composite norm. Capitalization is further constrained by above average investment leverage, attributable to Ohio Casualty's sizable common stock portfolio and holdings of non-investment grade fixed income securities.

Despite this negative rating action, A.M. Best stated that the group has maintained its Excellent rating status due to its solid capitalization, as well as the strategic initiatives put in place by management. These include a new management team which has been proactive in implementing directives aimed at returning the group to operating profitability. At the forefront of management's strategy is an aggressive expense containment policy that directly affects all areas of the organization.

HCC Insurance Holdings Affirmed

HCC Insurance Holdings recently received affirmation of Standard & Poor's "A'' counterparty credit rating on HCC Insurance Holdings and "AA'' counterparty credit and financial strength ratings on three subsidiaries of HCC: Houston Casualty Co., Avemco Insurance Co., and US Specialty Insurance Co. (collectively referred to as Houston Casualty). Simultaneously, S&P revised its outlook on HCC and Houston Casualty from negative to stable. In addition, S&P assigned a preliminary "A'' senior debt, "A-'' subordinated debt, and "BBB+'' preferred stock ratings to HCC's $600 million universal shelf offering registration.

S&P said the ratings on Houston Casualty reflect the group's strong business profile, strong operating performance, and extremely strong capitalization. Offsetting these strengths are the group's significant utilization of reinsurance, aggressive premium growth, and acquisition appetite. According to S&P, the revised outlook reflects HCC's significantly improved financial leverage, which declined to 7.5 percent as of the first quarter of 2001 from 35 percent at the time of the acquisition of Centris Group Inc. at year-end 1999. The group's combined ratio is expected to be lower than 90 percent in 2001, with further improvements in 2002. In addition, although HCC's strong premium growth in the last two years is placing some pressure on operating capital at the insurance subsidiaries, S&P said it expects strong profits at these operations to enable the group to maintain capital adequacy ratios above 175 percent.

PHICO Group Downgraded

The financial strength rating of The PHICO Group, Mechanicsburg, Pa., has been downgraded to "B'' (Fair) from "B++'' (Very Good) with a negative outlook by A.M. Best Co.

This rating action applies to the group's three pool members, led by PHICO Insurance Company, as well as a Bermuda affiliate, PHICO Re Ltd., which is provided reinsurance protection through a separate agreement with the lead company. This rating action reflects the group's recent poor operating performance and the resulting weak capitalization. PHICO experienced significant premium growth in prior years in a soft market by expanding into new, unfamiliar jurisdictions and underwriting new, larger and more complex types of accounts. Also, the group has been adversely impacted by the increase in severity of claims that has evolved in medical malpractice.

The group writes professional liability, general liability and workers' compensation coverages for hospitals and physicians. It ranks among the 20 largest writers of medical professional liability insurance in the United States with an estimated 2 percent market share based on direct malpractice premiums written.

Steamship Mutual Affirmed

The "A'' (Excellent) financial strength rating of Steamship Mutual Underwriting Association (Bermuda), Limited has been affirmed by A.M. Best Co.

The rating action reflects the maintenance of the club's leading position within the International Group and the P&I industry, strong capital position and extensive reinsurance protection. Offsetting factors include the continuing competitive pressures in global insurance and reinsurance markets and the deterioration in the club's operating performance for the year under review.

As of Feb. 20, 2000, Steamship Mutual had retained and built upon its leading successful position in the P&I market. Entered tonnage remained relatively unchanged at 64.1 million, compared with 64.5 million in 1999, and ranked Steamship fourth in the International Group of Clubs. Diversification on a geographic, vessel-type and business-class basis was maintained, and management continued to be active in establishing new business ventures and launching innovative products.

Free reserves increased to $113.7 million, a rise of 7% on the level reported at the end of the prior period. In A.M. Best's opinion, the capital level remains secure and the Club continues to derive significant benefits from its mutual structure whereby it has access to additional funds through calls on members should the need arise.

Meadowbrook Withdrawn

Standard & Poor's has removed from Credit Watch and lowered its counter party credit and financial strength ratings on Star Insurance Co. and its wholly-owned subsidiary, Savers Property & Casualty Insurance Co.—collectively known as Meadowbrook Insurance Group (Meadowbrook)—to "BB+'' from "A''. These ratings had been placed on CreditWatch with negative implications on Feb. 20, 2001. At management's request, Standard & Poor's subsequently withdrew these ratings.

The ratings had been placed on CreditWatch following the group's fourth-quarter 2000 earnings release, whereby the group reported a net loss of $19.2 million for the quarter.

These rating actions reflect S & P's concerns that the group might fall below accepted levels of regulatory capital as measured by the National Association of Insurance Commissioner's risk based capital ratio. As of year-end 2000, Star Insurance Co. reported a risk based capital ratio of 208 percent.

S&P Withdraws Philadelphia Ins Co. Ratings

Standard & Poor's has withdrawn its "A'' counterparty credit and financial strength ratings on Philadelphia Insurance Co. and Philadelphia Indemnity Insurance Co., members of the Philadelphia Insurance group of companies.

The ratings were withdrawn at the company's request. The Prior ratings were based on the following:

Philadelphia has adopted a successful niche strategy, enabling it to maintain growth rates significantly above the industry for several consecutive years. The group has recently increased its size and scope substantially, with double-digit organic growth and the 1999 acquisition of mobile home and homeowners' writer, Liberty American Insurance Group, Inc. (Liberty American), leading premium volume to triple in the last five years. 2000 proved to be another year of strong growth, with net premiums increasing by 35 percent to $264 million.

Operating performance has been very strong, with the five-year combined ratio at 88 percent and ROR averaging 16 percent.

Capitalization remains strong, as indicated by a capital adequacy ratio of 141 percent in 2000. This represents a decline from ratios of previous years, however, and indicates the greater utilization of capital as the group increases premium volume.

Financial flexibility is good, with the holding company benefiting from its access to the capital markets.

Lumbermens Mutual Casualty Cos

Standard & Poor's has affirmed all outstanding interactive ratings on Lumbermens Mutual Casualty Cos. (the Kemper Insurance Cos., collectively Kemper). The outlook is stable.

Kemper occupies a strong business position as one of the top five players in the workers' compensation market. Kemper has continued to report weak operating results despite management's ongoing efforts to realign the book of business to focus on bottom-line profitability in recent years. Although some of these efforts are beginning to affect operating performance, statutory earnings will continue to be weak until 2002.