Harleysville Group's Negative Outlook

Standard & Poor's Ratings Services commented on Harleysville Group Inc., (HGIC), "BBB-" and its negative outlook. As part of HGIC's fourth-quarter 2003 earnings release, it expects its underlying insurance operations to incur an additional $42 million pretax charge on top of a $76.8 million pretax reserve increase through the first three quarters of 2003. S&P is not taking any rating action on HGIC as a result of this.

The additional reserve strengthening was not a complete surprise, as S&P expected the insurance operations to continue to identify weakness in its reserves. The magnitude of the charge is within S&P's expectations and will still allow HGIC to maintain capital at a level appropriate for the rating. S&P believes the company maintains an adequate cushion to sustain further reserve increases of up to 5 percent of it is current $1.2 billion loss and loss expense reserve base. Any development on reserves beyond 5 percent of the reserve base would prompt S&P to re-evaluate the ratings.

S&P believes that the company does maintain adequate liquidity to service interest on its $100 million, 5.75 percent senior unsecured notes due July 15, 2013, by way of cash on hand and fees derived from the management of the insurance operations.

The negative outlook reflects S&P expectations that reserve adjustment to prior accident years might continue. It is expected the company will continue to be challenged in maintaining its top line and defend its market position as market rate increases begin to taper off. This could weaken the organization's retention level, as it is forced to increase rates to more than the industry average.

Bristol West Group Upgraded

A. M. Best Co. upgraded the financial strength ratings to "B+" (very good) from "B" (fair) for Coast National Insurance Co., Bristol West Insurance Co., Bristol West Casualty Insurance Co. and Security National Insurance Co., all members of the Bristol West Insurance Group based in Davie, Fla. The rating outlook is positive.

The rating reflects the group's strengthened capitalization following the initial public offering (IPO) of the parent company, Bristol West Holdings Inc., and recently improved operating results. Partially offsetting these rating factors are aggressive policy growth and unfavorable operating results in prior years driven by adverse loss reserve development. The positive outlook reflects the group's solid capitalization and expectation of sustainable favorable earnings.

The rating attributes are derived from the improved capitalization relating to the IPO of the parent company. Of the $125 million of capital raised, $110 million was contributed to the insurance subsidiaries to support future premium growth, become less dependent upon reinsurance for surplus relief and strengthen the overall capital position of the insurance operations. The rating also considers the significant investments made in technology in recent years. In addition, corrective measures have included significant rate increases, ongoing producer reviews, refined underwriting, refined producer compensation guidelines and improved claims handling. As a result, operating results improved significantly in 2003.

Despite these attributes, negative rating factors are attributable to the aggressive current and projected policy growth and unfavorable operating results prior to 2003 due to significant adverse loss reserve development and inadequate rates. With significant growth expected to continue, Bristol West maintains execution risk to adjust its infrastructure to absorb additional policies, mitigate the higher loss ratios—which are typically associated with new business—and maintain adequate loss reserves following a period of adverse development. In addition, the group maintains dependence upon reinsurance for surplus relief, although at a reduced level following the addition of new capital from the IPO.

ProAssurance Assigned

S&P assigned its preliminary "BBB-" senior debt and "BB" preferred stock ratings to ProAssurance Corp.'s recently filed $250 million shelf registration. The rating reflects the good regional niche position of group members ProNational Insurance Co. "A-" (negative) and Medical Assurance Co. "A-" (negative) within the historically volatile medical malpractice insurance business. The ratings are also based on PRA's very strong earnings performance in its Michigan-based personal lines business, which constituted 27.5 percent of premiums through September 2003, and very strong capital.

These positive factors are somewhat offset by PRA's marginal, but improving, earnings performance in the core med-mal segment, as demonstrated by a 3.4 percent pretax ROR in this segment through September 2003.

Jupiter Affirmed

A.M. Best Co. affirmed the financial strength rating of "A+" (superior) of Jupiter Insurance Limited. The outlook remains stable. The rating reflects Jupiter's superior capital strength and operating performance. An offsetting factor is the restricted business diversification driven by Jupiter's status as a single parent captive of BP plc, an integrated oil and gas company.

Jupiter has a superior capital position and follows a conservative policy of maintaining capital of at least four times its estimated maximum loss (EML). The 2004 EML is expected to increase from $375 million to $500 million, as Jupiter is to insure some of the risks currently covered directly by BP. In anticipation of this increase, Jupiter received a capital injection of $890 million in November 2003. Best believes that this discount note provides a good balance between investment security and yield.

Jupiter's current and prospective operating performance is regarded as superior. After-tax profits for 2003 are estimated at $327 million compared to $158 million at year-end 2002. The company is expected to report underwriting profits of approximately $231 million for 2003. Profitability is expected to improve further in 2004. Jupiter's business generation is solely dependent on BP, in line with single parent captives. In addition, Jupiter is further restricted because of BP's preference to insure only when required by regulatory authorities or contractual obligations. As a result, over 90 percent of Jupiter's premium originates from a single contract. There are no plans to insure third party risks.