A.M. Best Downgrades Ratings for Legion Insurance Group and IPC Group

February 21, 2002

A.M. Best Co. has downgraded the “A-” financial strength rating of Legion Insurance Group to “B” with a negative outlook. In addition, the “A-” rating of the IPC Group was downgraded to “B+” with a negative outlook.

The rating action follows today’s announcement by the group’s ultimate parent, Mutual Risk Management Ltd. (MRM), that the Legion Insurance Group increased its fourth quarter 2001 reserve charge to $61.5 million (both pre- and after-tax) from the previously announced $45.0 million pre-tax and $30.0 million after-tax. In addition, MRM has established a $63 million valuation reserve to offset its deferred tax asset. The majority of the deferred tax asset was generated by losses at Legion Insurance Company. Combined, these charges caused the group to record an $18 million reduction to statutory surplus since year-end 2000, despite an infusion of $80 million in the second quarter. These charges have caused the group’s capitalization to fall below A.M. Best’s standards for a Secure rating. While MRM recently filed an S-1 to raise additional equity for the purpose of contributing capital to the Legion Insurance Group, the current rating reflects the increased difficulty that the group may experience in raising capital given its recent earnings announcement.

In addition to insufficient capital, these charges further heighten A.M. Best’s concerns regarding Legion’s operating controls, data quality, cash flow, reinsurance recoverables that represent multiples of its statutory surplus and ongoing reserve adequacy.

The most recent results and latest charges have caused MRM to violate certain financial covenants of its bank and debenture loan agreements, creating a destabilizing effect on the organization. A.M. Best remains concerned that, despite capital raising efforts, funds may be insufficient to cover both appropriate debt reduction and capital infusions to Legion.

The rating action on IPC Group reflects A.M. Best’s concerns regarding the loss of its quality fronting company for almost all of its business. In addition, A.M. best expects continued pressure on IPC Group as capital needs at Legion dominate MRM’s focus. The rating remains Secure due to the collateralized nature of loss reserves under the rent-a-captive programs written.

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