PMA Capital Ratings Lowered

Standard & Poor's Ratings Services lowered its counterparty credit rating on PMA Capital Corp. to "CC" from "B" and removed it from CreditWatch, where it had been placed on Nov. 4, 2003. The outlook on PMACA is developing. S&P also revised its counterparty credit and financial strength ratings on PMACA's reinsurance subsidiary, PMA Capital Insurance Co. (PMACIC), to "R" from "BB" and removed them from CreditWatch.

In addition, S&P lowered its counterparty credit and financial strength ratings on PMACA's primary insurance subsidiaries, Pennsylvania Manufacturers Assoc. Insurance Co., Pennsylvania Manufacturers Indemnity Co. and Manufacturers Alliance Insurance Co., collectively referred to as PMAIG, to "BB-" from "BBB-," removed them from CreditWatch and assigned a negative outlook.

These rating actions follow PMACA's recent 8-K filing, which indicated that PMACIC had entered into a letter agreement, dated Dec. 22, 2003, with the Pennsylvania Insurance Department, in which PMACIC agreed to request prior regulatory approval for a number of actions. PMACIC also agreed to engage an independent actuary to review the group's reserves, as well as to provide the regulator with monthly statutory financial reports. S&P's interpretation of this agreement is that PMACIC has experienced a regulatory action with regards to its solvency, which is why the ratings were revised to "R."

Given the increased regulatory control over PMACIC, which is PMACA's sole source of dividends, S&P believes there is significant risk that PMACA might not be able to obtain regulatory approval for dividends from PMACIC to service PMACA's interest and principal debt payments. This is a significant concern, particularly given PMACIC's very weak stand-alone capital adequacy. Over the medium term, S&P believes PMACA's ability to obtain any dividend payment approvals will be dependent on how the group's loss reserves develop over time and whether PMACIC will be able to successfully run-off its liabilities over the medium term. S&P believes PMACA currently has enough resources to service interest payments for about a year.

Travelers on CreditWatch

Standard & Poor's Ratings Services said its "A-" counterparty credit rating on Travelers Property Casualty Corp. and its "AA-" counterparty credit and financial strength ratings on members of the Travelers Property Intercompany Pool and Travelers Casualty and Surety Co. of America, collectively referred to as Travelers, remain on CreditWatch with negative implications. These ratings were placed on CreditWatch on Nov. 17, 2003, when Travelers announced it intended to merge with The St. Paul Cos.

The ratings reflect the company's continued very strong and competitive market positions in both the commercial and personal lines of the property/casualty marketplace. Travelers reported robust consolidated net operating earnings of $1.7 billion in 2003 despite relatively heavy catastrophe losses for the full year and significant reserve strengthening at its Gulf Insurance Co. subsidiary. The organization maintains a relatively conservative adjusted financial leverage and strong consolidated statutory capital.

Although the merger of the Travelers and St. Paul organizations will provide meaningful benefits related to scale and diversification, S&P maintains its overriding concerns about the adequacy of St Paul's loss reserves and the inherent volatility of St. Paul's operating results.

Gulf, Affiliates on CreditWatch Neg

S&P announced that its "A+" counterparty credit and financial strength ratings on members of the Gulf Insurance Group—Gulf Insurance Co., Atlantic Insurance Co., Gulf Underwriters Insurance Co., Gulf Group Lloyds, and Select Insurance Co.—are remaining on CreditWatch with negative implications. These ratings were placed on CreditWatch on Nov. 17, 2003, when Travelers, which owns 83 percent of Gulf, announced the merger with St. Paul.

S&P decided to keep the ratings on CreditWatch following Travelers's fourth-quarter 2003 earnings announcement, which indicated that Gulf took a substantial ($252 million pretax) reserve charge. This charge follows another substantial charge of $269 million in the first quarter of 2003. S&P considers Gulf's current business position to be much weaker than its historical position because of continued adverse reserve development on its ongoing core and residual value businesses and poor operating results.

Offsetting these negative factors is the expectation of explicit support from Travelers in the form of a reinsurance agreement, Gulf's strong capital adequacy and a continuation of strong rate increases in its ongoing specialty business.