A.M. Best Downgrades The PHICO Group

May 2, 2001

A.M. Best Company downgraded the financial strength rating of The PHICO Group of Mechanicsburg, Pennsylvania, to B (Fair) from B++ (Very Good) with a negative outlook. The PHICO Group writes professional liability, general liability and workers’ compensation coverages for hospitals and physicians. It ranks among the 20 largest writers of medical professional liability insurance in the U.S.

The rating action applies to the PHICO Group’s three pool members, led by PHICO Insurance Company. The group also includes the Bermuda affiliate, PHICO Re Ltd., which is provided reinsurance protection through a separate agreement with the lead company.

The rating action reflects PHICO’s recent poor operating performance and the resulting weak capitalization. PHICO experienced significant premium growth in prior years in a soft market by expanding into new, unfamiliar jurisdictions and underwriting new, larger and more complex types of accounts. The PHICO Group has been adversely impacted by the increase in severity of claims that has evolved in medical malpractice.

In 2000, factors contributing to unfavorable results included an increase in IBNR reserves; the reduction in accrual for contingent commissions from reinsurers; and the interest charge for funds withheld under the retroactive reinsurance agreement entered into in 1999.

Offsetting these negative factors is a strengthened reserve base and continued actions taken by management to improve overall operations, including rate increases and more stringent underwriting guidelines. Despite the recent actions taken by management, uncertainties related to future reserve adequacy, profitability and financial strength remain. As a result, PHICO’s rating outlook is negative.

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