S&P Lowers Frontier Insurance Group Rating

February 4, 2000

Standard & Poor’s lowered its counterparty credit rating on Frontier Insurance Group Inc. to “BB+” from “BBB.” S&P also lowered its preferred stock rating to “B+” from “BB+.” The ratings were removed from CreditWatch, where they were placed on Nov. 16, 1999, with negative implications. The outlook is negative.

At the same time, S&P lowered its counterparty credit and financial strength ratings on Frontier’s operating subsidiaries and removed the ratings from CreditWatch, where they were placed on Nov. 16, 1999, with negative implications.

The ratings actions follow the resolution of S&P’s concerns regarding ongoing capitalization and financial leverage at the holding and operating companies. The actions reflect the group’s weakened capitalization, coupled with weak earning levels and challenges to the group’s competitive position. These weaknesses are mitigated by the franchise value that Frontier continues to enjoy as a leading writer of specialty programs.

Major rating factors include a weakened capital base. Standard & Poor’s views capitalization as good. However, it has been weakened from past levels by a $136-million reserve strengthening in November 1999. Historical operating performance has been weak, driven by three large consecutive reserve strengthenings, as indicated by an average return on revenue of -0.3 percent from 1994 through 1998.

S&P believes the Frontier companies are facing challenges to their competitive positions because of the need to use fronting on a portion of the business.

Its roots as an agency company have given Frontier a strong understanding of the needs of independent agents and contributed to strong loyalty among the independent agency and managing general agency communities, as evidenced by persistency rates of 95 percent. This has been instrumental in Frontier’s strong growth record.

Overall, the outlook is considered negative.

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