CSG Under Review

A.M. Best Co. placed the financial strength ratings (FSR) of the insurance subsidiaries operating within Combined Specialty Group Inc. (CSG) under review with negative implications. The rating action follows Aon Corporation's second quarter earnings announcement in which Aon said it would withdraw previous plans to spin-off CSG, the accident and health and property/casualty underwriting operations of the organization. The rating action highlights the significant uncertainties surrounding the ultimate ownership of CSG, the adverse impact from one-time charges taken in the second quarter, weaker than expected profits from Aon's underwriting operations and the potentially unfavorable resolution of financial reporting matters involving the SEC.

The ratings will remain under review as Aon evaluates its various options regarding the disposition of CSG. The financial strength ratings of the property/casualty and life/health insurance companies currently reflect A.M. Best's view of CSG assuming the proposed spin-off would occur. Despite the negative implications, A.M. Best believes that CSG's core specialty accident/health and warranty operations remain fundamentally sound, and acknowledges the breadth and depth of the new management team.

A.M. Best's indicative senior debt rating of "a-" on securities to be issued by CSG is also placed under review with negative implications and will move in tandem with the financial strength ratings of the group.

Vesta Affirmed

Fitch Ratings affirmed "BBB-" insurer financial strength ratings of Vesta Insurance Group's insurance subsidiaries. A "BBB-" rating was assigned to Florida Select Insurance Company (Florida Select), and Vesta's "BB-" senior debt rating and the "B+" capital securities rating of Vesta Capital Trust I were affirmed. The outlook is negative.

The action considers Vesta's continued progress in recovering from a series of negative events in 1998 and 1999. Fitch believes that Vesta's strategy is reasonable and views positively management's dexterity in adapting to ever-changing competitive conditions. Vesta significantly expanded its homeowners' insurance operation in 2001 with the acquisition of Florida Select, and expanded its non-standard auto insurance operation with investment in Instant Auto Insurance Holdings Inc. (Instant Auto). Additionally, Vesta continued to profitably grow its specialty insurance business.

A number of developments offset these positives. In 2001 Vesta experienced significant adverse loss reserve development in its discontinued reinsurance and commercial insurance businesses. This reserve development added $30 million to losses. Increased loss severity in bodily injury, uninsured motorist and under-insured motorist coverages raised Vesta's loss ratios in its standard auto business in 2001. Vesta also incurred a $25 million charge in 2001 to settle a securities class action lawsuit. Positively, the securities settlement caps VTA's liability in the suit and is partially mitigated by an outstanding claim Vesta has made against its primary director' and officers' (D&O) insurer. Vesta expects its claim will be adjudicated in 2002 and any damages received will be recognized as a gain when settled.

The ratings assume Vesta has now adequately reserved for losses in discontinued commercial and reinsurance segments. Fitch expects Vesta to expand its homeowners' insurance business in select target markets where it appears to have a competitive advantage and believes management will continue to operate its standard auto business with profitability as its primary goal. Vesta is expected to continue to resolve its reinsurance collection issues and other disputes through the arbitration process.

Gulf Rated 'A+'

A.M. Best Co. has assigned a financial strength rating of "A+" (Superior) to the re-established Gulf Insurance Group, and removed from under review the rating of six companies, which were previously part of the Travelers Property/Casualty Pool. The action follows the $139 million capital investment in Gulf's immediate parent, Commercial Insurance Resources Inc. (CIRI), by outside investors and approximately 75 senior employees of Gulf Insurance Company, as well as the re-establishment of the Gulf Insurance Group pool, which will be retroactive to January 1, 2002. The rating also takes into account Gulf's ceding of more than $230 million of non-core businesses along with $183 million of loss reserves, both via 100 percent quota share to Travelers Indemnity Company.

Members of the re-established Gulf Insurance Group include Gulf Insurance Company (Hartford, Conn.) and its affiliates, Select Insurance Company, Atlantic Insurance Company and Gulf Group Lloyds (all of Irving, Texas), and Gulf Underwriters Insurance Company (Hartford). As part of this transaction, Gulf Insurance Holdings UK Ltd. will be dividended to Travelers Indemnity. The financial strength rating of "A++" (Superior) of Gulf Insurance Company UK Ltd. was lowered to "A+" (Superior) and also removed from under review as it now cedes all of its specialty business via 100 percent quota share to Gulf.

Prior to joining Travelers Property & Casualty Pool on October 1, 2001, (retroactive to January 1, 2001), Gulf was assigned an A.M. Best financial strength rating of "A+" (Superior). Although ownership has changed somewhat, A.M. Best believes Gulf remains well managed and is strongly positioned in its markets. Other positive factors include Gulf's strong capitalization, highly specialized and diversified product offerings, proven track record and benefits derived from its affiliation with Travelers. Partially offsetting these factors is the underwriting deterioration and greater earnings volatility over the past few years, continued broker concentration and reinsurance dependence. Gulf produced an uncharacteristically high combined ratio of 121.4 percent in 2001, primarily due to the events of September 11. Excluding September 11, Gulf's normalized combined ratio of 102.7 percent was higher than Gulf's historical results.

OneBeacon Affirmed

A.M. Best Co. has affirmed the financial strength rating of "A" (Excellent) of the insurance subsidiaries of OneBeacon Insurance Group. A.M. Best also affirmed the indicative shelf registration ratings for Fund American Companies Inc. These affirmations follow the completion of A.M. Best's annual rating review of the group's balance sheet and operating results.

These ratings reflect OneBeacon's excellent capitalization, strong agency franchise and prospective earnings capacity, which is enhanced by the availability of significant reinsurance protection on the group's asbestos and environmental (A&E) losses as well as other significant mass tort liabilities and improved operating fundamentals. The positive implications of OneBeacon's ownership by White Mountains Insurance Group Ltd., its strengthened management team, as well as the refocused business strategy and improved balance sheet quality were also influences.

These positive rating factors are offset by OneBeacon's subpar historical earnings, stemming largely from loss development on business acquired with its 1998 merger with General Accident. Sizable operating losses were generated by extraordinary reserving actions taken at the time of the 1998 merger and again in 2000 and 2001. Those, along with restructuring charges and World Trade Center losses in 2001, contributed to a reduction in statutory policyholders' surplus of 36 percent during the past two years. Moreover, the financial leverage (debt plus preferred stock to total capital) of White Mountains is relatively high at 38 percent. However, management intends to refinance $260 million of the company's debt during the latter half of 2002 with funds raised either through a public offering of White Mountains' common stock or by exercising an option to issue common stock directly to the holder of the debt, thus providing for reduced financial leverage and additional flexibility in the parent's capital structure.

A.M. Best believes the series of actions taken by the new management team to minimize prior year loss development, stabilize investment earnings and improve underwriting performance will result in greater earnings potential for OneBeacon. The rating outlook is stable.

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