Lloyd's Affirmed, Negative Outlook Removed

A.M. Best Co. has affirmed the "A" rating of Lloyd's and removed its negative outlook.

The negative outlook was affirmed June 28 to reflect A.M. Best's concerns over the accelerating rate of asbestos-related claims, which could lead to a significant shortfall in Equitas' reserves. The negative outlook has been removed because A.M. Best's assessment of these results and scenario stress testing undertaken on key variables have led A.M. Best to believe that Lloyd's is unlikely to be adversely affected by Equitas in the foreseeable future. A.M. Best's modeling also provides comfort that Lloyd's has the systems in place to manage any possible shortfall at Equitas should the current expectations of asbestos claims development be exceeded beyond the capacity of its balance sheet.

Nevertheless, A.M. Best believes it will be many years before it is possible to determine whether Equitas can adequately run-off its liabilities. The current uncertainty over Equitas' reserve development will remain a long-term factor in A.M. Best's rating analysis.

The current rating reflects Lloyd's excellent financial strength, strong business profile, strengthening of regulatory control and prospective improvements in operating performance. The rating applies to the business underwritten by all active syndicates, and to all policies underwritten since the 1993 year of account.

The St. Paul Companies Affirmed

A.M. Best Co. affirmed the "A+" financial strength rating (FSR) of The St. Paul Companies Inc., property/casualty subsidiaries.

Additionally, A.M. Best has assigned an "a+" rating to St. Paul's existing senior debt; an "a" rating to the existing zero coupon convertible subordinated note; an "a" rating to the existing capital securities issued by USF&G Capital I, II and III and MMI Capital Trust I; and an "AMB-1" rating on commercial paper issued by St. Paul. Furthermore, A.M. Best has assigned indicative ratings to securities to be issued under the $1-billion shelf registration filed by St. Paul.

The financial strength and debt ratings reflect the group's strong capitalization, conservative reserve strategy, historically favorable operating performance and dominant position within select commercial lines markets. These strengths are derived from St. Paul's strong brand recognition, specialized underwriting expertise, disciplined operating focus and growing global market presence.

The ratings also recognize the strategic repositioning of the group in recent years, having divested itself of underperforming businesses where it lacked sufficient scale to effectively compete. This has enabled the group to redirect valuable capital resources towards its core commercial and specialty lines operations where it can leverage its underwriting skills and loss-control capabilities in pursuit of business with higher risk-adjusted returns.

St. Paul's financial flexibility is excellent due to its moderate financial leverage, with a total debt plus preferred securities-to-capital ratio of 24 percent at June 30, and access to the capital markets. St. Paul's current holding company cash and dividend capacity is more than ample to cover its annual fixed charges. Furthermore, the company's profitability and consistency of earnings, as well as capital generation, should strengthen from price increases being implemented in the majority of its property/casualty business segments.

These positive rating factors are partially offset by the group's weakened core earnings over the past few years, stemming from unfavorable market conditions within most of its property/casualty business segments. Re-underwriting initiatives and the implementation of significant price increases over the past two years have benefited St. Paul's commercial and specialty business segments.

The current rating outlook is dependent upon management's success in addressing these challenges, reducing its reliance on excess of loss reinsurance and building on the company's firm foundation of overall reserve adequacy and underwriting capability to improve profitability and stabilize reserves.

Farmers Insurance Exchange Downgraded

Standard & Poor's (S&P) lowered its counterparty credit and FSR on Farmers Insurance Exchange group to "AA-" from "AA+" and placed the ratings on CreditWatch Negative.

At the same time, S&P lowered its subordinated debt rating on the Farmers surplus notes to "A-" from "A+" and placed it on CreditWatch Negative.

The ratings actions and CreditWatch status reflect weakening operating performance in a highly competitive personal lines sector, reduced, though still adequate level of capitalization, and limited financial flexibility.

Partially offsetting these weaknesses is Farmers' solid business position and its strategic importance to Zurich Financial Services as evidenced by its investment in deeply subordinated surplus notes.

The CreditWatch status is expected to be resolved in the fourth quarter of 2001 following a full-year review of Farmers' business plan and financial reforecast, including capital management solutions, at which point the ratings may be affirmed or lowered one notch.

Although Zurich does not own Farmers and bears no direct financial impact from Farmer's underwriting performance, the management fees earned by Farmers Group Inc. provide a steady earnings stream that is integral to Zurich's strategy of enhancing the stability of its financial profile.

As a consequence, S&P considers Zurich's relationship to Farmers strategically important and the ratings on Farmers' benefit from this implicit support.

2 Bankers Carriers Receive 'A'

First Community Insurance Company and Bankers Security Insurance Company, both multi-line property/casualty carriers writing personal and commercial insurance in all 50 states, have received an "A" rating from Demotech Inc.

In assigning the rating, Demotech evaluated several factors, including, but not limited to: annual and quarterly statements, changes in the composition of assets and liabilities, changes in working capital, and comparison of actual versus budget operating results.

Both First Community Insurance Company and First Community Insurance Co. are affiliates of Bankers Insurance Group, an insurance and financial services holding company in St. Petersburg, Fla. The rating process for a third affiliated carrier, Bankers Insurance Co., is still underway.

Trinom Ltd. Catastrophe-Linked Notes Rated

Fitch has assigned a "BB-" rating to the $60 million of class A-1 catastrophe-linked notes and a "BB" rating to the $97 million of class A-2 catastrophe-linked notes issued by Trinom Ltd. The notes mature June 18, 2004. The securities were issued to support a financial contract between the issuer and Zurich Insurance Co.

The financial contract covers the risk of certain U.S. (Gulf and East Coast) hurricanes, U.S. (California) earthquakes and European windstorms. The securities are structured such that the A-2 notes are exposed to loss only after a trigger event occurs while the A-1 notes are exposed to loss, at a higher level, from the date of closing. Thus, the A-2 notes provide frequency protection (i.e., protection against more than one event at a lower loss level) while the A-1 notes provide severity protection (i.e. protection from a single event at a high loss level). The risk structure of the contract is a modeled index trigger based on the physical parameters of the covered perils.

Fitch's ratings of the notes address the likelihood that investors will receive timely payment of interest and the ultimate payment of principal on the final maturity date. Morgan Stanley Dean Witter and Aon Capital Markets structured and underwrote the securities. Applied Insurance Research (AIR) provided the catastrophic models and risk analysis to support the transaction.

The ratings reflect Fitch's catastrophe-linked bond rating methodology that incorporates a review of: AIR's methodology and the models used to analyze the covered risks, the loss distributions resulting from AIR's analysis, and the securities' legal and structural soundness.

Horace Mann Debt Rating Lowered

Fitch has lowered the senior debt rating of Horace Mann Educators Corp. to "A-" from "A" and affirmed the "AA-" insurer financial strength (IFS) rating on the five insurance subsidiaries of Horace Mann Educators Corp.

The rating outlook is stable for both the debt rating and IFS ratings. Fitch lowered the senior debt rating to "A-" due to the company's continued earnings volatility and fixed charge coverage that is below expectations. The company's second quarter earnings announcement included additional charges for prior year loss reserve strengthening of $11 million.

Fitch lowered all Horace Mann IFS ratings on April 12 due to Fitch's view that the company's historical performance margin and property/casualty companies' operating results had declined from its previous reported levels. This action followed the company's fourth quarter operating loss due to a combination of prior year's loss reserve strengthening, poor claim experience caused by unusually harsh winter weather, and other miscellaneous charges.

The ratings continue to be supported by the company's solid capitalization and loss reserves, very strong catastrophe reinsurance protection, high quality, liquid investment portfolio, well-defined market niche, and Fitch's belief that core "run rate" earnings remain good.

PMA Capital Corp. Affirmed

S&P affirmed its "A" counterparty credit and FSR on four subsidiaries of PMA Capital Corp. (PMA Corp.): PMA Capital Insurance Co. (PMA Re) and the three members of PMA Insurance Group (PMAIG)—Pennsylvania Manufacturers Association Insurance Co., Pennsylvania Manufacturers Indemnity Co., and Manufacturers Alliance Insurance Co.

At the same time, S&P revised its outlook on these companies to negative from stable.

The revised outlook reflects lower-than-expected earnings at the operating subsidiaries, which are largely the result of reserve-strengthening actions taken by management at PMA Re in the third quarter of 2000 and at Caliber One Indemnity Co. (PMA Corp.'s excess-and-surplus subsidiary) in the first quarter of 2001. In the past, PMA Corp.'s consolidated operating results benefited to some extent from reserve releases at its operating subsidiaries (particularly at PMA Re), but S&P believes the group's current lack of a reserve cushion will challenge management to achieve future profitability targets without the aid of such releases.

Offsetting these factors are PMA Re's strong business position in the reinsurance market and continued operating improvements at PMAIG, following its restructuring in 1996. Further, capital adequacy at the operating companies remains extremely strong, with a consolidated capital adequacy ratio of 182 percent at year-end 2000.

Universal Underwriters Lowered

S&P lowered its FSR on Universal Underwriters Insurance Co. and its fully reinsured subsidiary, Universal Underwriters of TX, to "BBBpi" from "Api."

The rating action is based on the company's deteriorating capital position, high level of leverage, and volatility in operating performance. Based in Overland Park, Kan., UUI mainly offers insurance financial services to car dealerships and automotive-related businesses, licensed in all states (except Alaska) and the District of Columbia.

Among the major rating factors were: at year-end 2000, capitalization was marginal. The drop in surplus of 50.7 percent in 2000 to $219 million from $444 million in 1999 was caused primarily by the extraordinary dividends to stockholders. The company's liquidity ratio of 79.1 percent and high leverage, as measured by premiums and liabilities to surplus (7.1 times), in the context of adverse business, financial, or economic conditions, is viewed as a rating factor. Finally, the company has had volatile returns with, for example, ROAs ranging from 3.8 percent to 12.0 percent for the years 2000 and 1999, respectively. This is viewed as a limiting factor.

Although the company is a member of Zurich Insurance Co. Group, the rating does not include additional credit for implied group support.