Travelers Downgraded; St. Paul Affirmed

A.M. Best Co. downgraded the financial strength rating to "A+" (superior) from "A++" (superior) of Travelers Property Casualty Pool based in Hartford, Conn. The rating has been removed from under review and assigned a stable outlook. Concurrently, Best affirmed the financial strength rating of "A" (excellent) of the St. Paul Companies headquartered in St. Paul, Minn. This rating has been removed from under review and assigned a positive outlook.

These rating actions follow the close of the merger of Travelers and St. Paul, now known as The St. Paul Travelers Companies Inc., and Best's review of the operating and financial impacts this merger will have on the Travelers PC Pool, St. Paul Companies and the combined holding companies.

The rating action on the Travelers PC Pool reflects its parent's merging with a lower-rated and more financially leveraged organization. Despite Travelers' strengths, the merger creates an organization with an overall increased risk profile with greater uncertainty as compared with Travelers, particularly with regard to reserve adequacy and earnings stability. Although Travelers' rating has been downgraded, its highly disciplined underwriting and risk management and conservative investment management should result in continued superior operating performance and capitalization.

The affirmation of the St. Paul Companies' rating with a positive outlook recognizes its merging with a higher-rated and less financially leveraged organization. While Best continues to be concerned by the size and uncertainty associated with St. Paul's run-off businesses, as well as the adverse prior year loss reserve development reported from several of its core business segments, management's proactive and effective strategic actions undertaken since late 2001 have substantially improved the group's underwriting and operating performance on continuing lines of business and its prospects going forward.

American Modern Affirmed

A.M. Best Co. affirmed the financial strength rating of "A+" (superior) of American Modern Insurance Group and its property/casualty affiliates. Best also affirmed the financial strength rating of "A-" (excellent) of American Modern Life Insurance Co. and Modern Life Insurance Company of Arizona Inc. based in Phoenix, Ariz.

The ratings reflect American Modern's superior capitalization, favorable operating profitability and niche strategy in providing insurance products for manufactured housing, as well as motor sport products. The group's disciplined underwriting and focused operating strategies have resulted in strong five-year pre-tax returns on revenue and equity. In addition, American Modern benefits from its short-tail property focus and low volatility in loss reserves.

With approximately 50 percent of its premium writings in the manufactured housing segment, the group is exposed to catastrophe losses. However, strict adherence to underwriting guidelines, improvements in the quality of pre-fabricated homes and the group's broad geographic spread has reduced the potential exposure to these severe shock losses. The ratings also acknowledge the modest financial leverage of the parent with total debt to adjusted capitalization of 27 percent and fixed coverage ratio of approximately 8 times.

Modestly offsetting these positives are American Modern's elevated premium leverage and above average expense levels in relation to the property lines industry composite. Expenses are driven by its competitive commission structure, particularly in terms of contingency-based payments.

Cincinnati Financial Affirmed

A.M. Best Co. affirmed the financial strength ratings of the subsidiaries of Cincinnati Financial Corporation. The affirmations include "A++" (superior) for the property/casualty group of The Cincinnati Insurance Companies and "A+" (superior) for The Cincinnati Life Insurance Co., all of Fairfield, Ohio. Concurrently, although the debt to capital ratio has improved from 2002 due to realized capital gains, Best downgraded the debt rating of Cincinnati Financial Corporation's existing $420 million of 6.90 percent senior debentures to "aa-" from "aa" to bring it in line with Best's notching guidelines. All rating outlooks are stable.

The affirmation of the financial strength rating of The Cincinnati Insurance Cos., the property/casualty group, reflects its superior risk-based capitalization, favorable operating results and long-standing independent agency distribution strategy. In addition, unlike the majority of the commercial lines sector, The Cincinnati Insurance Cos. have annually reported favorable loss reserve development and appear to be reserving current accident years more conservatively, which lends considerable stability to the organization.

Partially offsetting these factors are The Cincinnati Insurance Cos.' high common stock leverage, elevated catastrophe leverage and payout of stockholder dividends, all of which have contributed to the decline in statutory surplus over the five year period. The largest factors for the five-year decline in statutory surplus are the adoption of NAIC Codification and the resulting deferred tax liabilities recorded for unrealized gains on equity investments.

The Cincinnati Insurance Cos.' statutory surplus is highly susceptible to fluctuations in equity market values as common stocks represent more than 100 percent of statutory surplus and to severe catastrophe losses given its concentration of business in the Midwest and earthquake exposure related to the New Madrid fault. This risk is somewhat mitigated by The Cincinnati Insurance Cos.' conservative underwriting leverage, solid liquidity and cash flows as well as the financial flexibility of its parent.

Going forward, Best expects the companies to maintain superior risk-adjusted capitalization as favorable operating margins generate growth in statutory surplus reducing both common stock and catastrophe leverage.

In view of the concentration of the holding company's assets in common stock equities, combined with those of the subsidiaries and the exposure of the market value fluctuations of those assets to changes in the stock market, Best has reconsidered its atypical one notch differential between Cincinnati Financial Corporation's senior debt and the insurance subsidiaries issuer credit rating. While the holding company maintains significant liquid assets that exceed its debt obligations, has demonstrated consistent earnings and good available cash flow coverage of fixed obligations, the debt rating downgrade reflects the concentration of assets and their correlation to the insurance subsidiaries exposure.