Western Specialty Rated 'R'

Standard & Poor's assigned its "R" financial strength rating to Western Specialty Insurance Co. in recognition of an order of liquidation issued by the Cook County Circuit Court in Illinois on May 6. Western Specialty's active business was to be canceled within 31 days from the date of entry into the order of liquidation, on the policy's expiration date, or when the insured person cancels the policy, whichever takes place first.

Western Specialty is a subsidiary of Western Holdings Inc. The company originally commenced operations in 1986 underthe name Oak Brook Property & Casualty Insurance Co., which was placed in liquidation in 1996.

Major lines of business include commercial multiple peril, workers' compensation, other liability and private auto. The company is licensed in California and Illinois.

Zenith Nat'l Ratings Fall

S&P lowered its counterparty credit rating on Zenith National Insurance Corp. (ZNT) to "BB+" from "BBB-" and its ratings on ZNT's affiliates, Zenith Insurance Co. and ZNAT Insurance Co. (Zenith), to "BBB+" from "A-" due to poor but improving operating results in workers' comp and large losses in 2000 and 2001 in assumed reinsurance. The outlook is stable.

Bad conditions in its primary workers' comp market have adversely affected Zenith, according to an S&P analyst. Its assumed reinsurance has suffered heavy losses from weather-related events and from the Sept. 11 attacks.

By consistently adhering to its strategy, Zenith has positioned itself to take advantage of good conditions in the California market for the next year or two, despite the activities of the State Fund. If profitability in assumed reinsurance is at roughly the average of what Zenith has produced in this line over the years, ZNT and Zenith should record satisfactory earnings through at least 2002.

Oil Ins. Ltd. on Watch Negative

S&P's lowered its counterparty credit and financial strength ratings on Oil Insurance Ltd. to "A+" and placed the company on CreditWatch with negative implications because of catastrophe losses and a decline in capital adequacy in 2001.

Preliminary indications for first-quarter 2002 are positive, with close to breakeven underwriting results and significant improvement in the investment results. Oil Insurance Ltd. is expected to generate strong average RORs, with premium income rising significantly in 2002 and prospectively to recoup 2001 losses. Liquidity requirements and cash flow are more uncertain in the short term, but are expected to catch up to losses over the next 18-36 months with portfolio liquidations supporting cash flow as necessary in the interim.

Management expects to borrow less than $250 million in 2002. Even in the wake of high catastrophe activity, Bermuda-based Oil Insurance Ltd.'s unique retrospective rating will recapture all losses over the medium term.

State Farm Downgraded

S&P removed from CreditWatch and lowered the counterparty credit and financial strength ratings on State Farm's core operating units to "AA+" from "AAA." Also removed from CreditWatch was its "A" counterparty credit and financial strength ratings on State Farm Lloyds. The outlook on all these companies is negative.

A large collective operating loss from State Farm core P/C companies and State Farm Lloyds was a factor in the ratings action. The loss includes $ 9.3 billion and is the result of aggressive rate setting nationwide, among other things. S&P considers State Farm Lloyds strategically important to State Farm Mutual Automobile Insurance Co. (SFMA), the group's parent and the largest insurance company in the U.S.

S&P believes management has taken a variety of actions that could significantly narrow the underwriting and operating losses in 2002 and produce an operating profit in 2003. Nevertheless, the underwriting and operating losses in 2002 will likely be significant. Their magnitude depends on variables such as customer acceptance of significant rate increases and the degree of reduction of loss ratios, particularly in coverages like mold and slab in Texas and automobile personal injury protection in the Northeast.

St. Paul Cos., Subs. on Watch Negative

S&P placed its ratings on The St. Paul Cos. Inc. and its insurance subsidiaries on CreditWatch with negative implications because of the uncertainty associated with St. Paul's determination to seek more aggressive early resolution of certain pending asbestos and environmental-related litigation and the resulting impact on this year's capital and earnings.

The development was disclosed in St. Paul's Form 10-Q, which was filed on May 15. S&P plans to meet with St. Paul's management to review the development.

S&P Rates Travelers P/C Pool

S&P has affirmed its single-'A'-minus counterparty credit and senior debt ratings on Travelers Property/Casualty Corp. (Travelers) and its double-'A'-minus counterparty credit and financial strength ratings on some members of the Travelers P/C Pool due to the pool's very strong and diversified business position and very strong operating results and capitalization, and the current hardening pricing trend of the commercial lines market. It also said the outlook is stable.

S&P also said it placed its single-'A'-minus counterparty credit and financial strength ratings on some of the pool's Gulf companies on CreditWatch negative following Travelers' recent announcement that Trident II LP will invest $125 million in the insurers. These companies will be removed from the Travelers pool.

The Gulf companies in question are Gulf Insurance Co., Atlantic Insurance Co., Gulf Group Lloyds, Gulf Underwriters Insurance Co., and Select Insurance Co. The affirmation of the financial strength ratings on the members of the Travelers P/C Pool are based on the pool's very strong operating results and capitalization and the current hardening pricing trend in the commercial lines market.

Citigroup Inc. is expected to dividend the majority of its remaining ownership in Travelers P/C Corp. to Citigroup shareholders by year-end 2002. S&P's expects Travelers to maintain competitive market share in the commercial and personal lines. Premium growth should increase by at least 15 percent in 2002, driven largely by significant rate increases in the commercial lines sector.

Capital strength is expected to be maintained at least at the double-'A' rating level, with consolidated debt leverage for Travelers P/C to be 25 percent or less.

XL Financial Assistance 'AAA' Ratings Affirmed

S&P has affirmed its triple-'A' counterparty credit, financial strength, and financial enhancement ratings on XL Financial Assurance Ltd. (XLFA) because of its strategic importance to parent XL Capital Ltd. (XLC) and status as core to affiliate XL Capital Assurance Inc. (XLCA).

S&'s also said that the outlook on this company is stable.

Hard capital ($299 million), a conservative investment portfolio, and capital contributions from XLC should provide XLFA with a prospective marketing tool to expand into other risk sectors. Under XLC's management, XLFA's invested assets are viewed as extremely strong based on a conservative investment strategy and good asset allocation that prospectively should produce solid operating cash flows.

Lack of XLCA's market acceptance, limited product demand, and the loss of any significant client will adversely affect XLFA's prospective earnings. In addition, S&P believes that for assumed, nonaffiliated, third-party exposures, it will take XLFA two to four years to gain credibility, solid market accessibility, and good client relationships to develop a globally diversified risk portfolio.

Expectations are that about 20 percent of XLFA's risk portfolio will consist of third-party cessions by 2005 as product diversification and strong operating performance emerges.

However, it will depend primarily on XLCA's market acceptance and XLFA's ability to confront large loss activity associated with economic stress, without support from its parent or affiliate.