American Phys. Assurance Lowered

March 22, 2004

Standard & Poor’s Ratings Services lowered its counterparty credit and financial strength ratings on American Physicians Assurance Corp. (APA) to “BBB-” from “BBB,” and removed the ratings from CreditWatch. The outlook is negative.

The rating action is the result of continued uncertainty about future adverse medical liability reserve development in the inadequately underwritten 2002 and prior accident years as demonstrated by the $43 million third-quarter 2003 reserve strengthening constituting more than 20 percent of APA’s capital base.

It also reflects the execution risk that recently implemented underwriting and pricing initiatives might be insufficient in improving historically weak underwriting performance to a good level and the potential for adverse charges in the discontinued workers’ compensation and health segments.
Highmark Ratings, Outlooks Revised

A.M. Best Co. affirmed the majority of the financial strength ratings and a senior debt rating of Pittsburgh-based Highmark Inc. However, the rating outlook was revised to negative from stable.

Best also noted it has downgraded the financial strength rating to “A-” (excellent) from “A” (excellent) of Highmark Casualty Insurance Company (HCIC), but revised the company’s rating outlook to stable from negative.

Two issues that place near-to-medium term downward pressure on Highmark’s financial strength include the Commonwealth of Pennsylvania’s upcoming regulatory review of Highmark’s, and the other three not-for-profit Blue plans’, surplus and claim reserve levels and Highmark’s health insurance business’ operating losses in Central Pennsylvania’s 21-county service area.

Best indicated that Highmark’s health insurance business continues to generate sizeable operating losses, which the company is addressing. However, it doesn’t see a return to profitability in the sector in the near term.

The rating agency explained that the assignment of a negative outlook to the financial strength rating of United Concordia, based in Harrisburg, Penn., and Highmark Life Insurance Company, based in Pittsburgh, is driven by the pressure on the parent company’s surplus. The downgrade of HCIC reflects the deterioration of the company’s operating performance over the last three years driven by adverse development of workers’ compensation and loss reserves.

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