Atlantic Mutual Ratings Affirmed

October 8, 2002

Moody’s Investors Service affirmed the Ba1 rating of Atlantic Mutual’s Insurance Company’s surplus notes, as well as the Baa1 financial strength rating of its pooled insurance entities.

The ratings reflect the company’s stable market position in select commercial lines markets and affluent personal lines, strong agency relationships and sound balance sheet. Offsetting these strengths is the company’s modest and volatile historic profitability, high cost structure, modest scale, and geographic concentration in the northeast.

Moody’s rating outlook for Atlantic Mutual is stable. Expanding on its rationale, Moody’s noted Atlantic Mutual’s good competitive positioning in certain commercial and personal lines segments, attained through its emphasis on customized products and risk management services. Additionally, the company’s dedication to service and profit-sharing opportunities enables it to build enduring relationships with agents and brokers. Capitalization is sound, and the company employs moderate operating and financial leverage.

These strengths, however, are attenuated by Atlantic Mutual’s high cost structure, which is due in part to its limited scale and reliance on agents and brokers to distribute its products. Furthermore, operating results have been modest and volatile, and the company has relied on realized capital gains to bolster net income. Moody’s expects the company’s operating earnings to improve, given current commercial lines market conditions. However, the degree of improvement may be attenuated by continued adverse development on prior years’ reserves.

Furthermore, increasing loss cost inflation and higher reinsurance costs will diminish the benefit of rate increases in the near term.

Finally, balance sheet strength is somewhat diminished by the high proportion of equity securities in the company’s investment portfolio, as well as catastrophe exposure due to its geographic concentration in the northeast.

The following ratings were affirmed: Atlantic Mutual Insurance Company-Surplus Notes at Ba1, Insurance Financial Strength at Baa1; Centennial Insurance Company-Insurance Financial Strength at Baa1; Atlantic Lloyd’s Insurance Company of Texas-Insurance Financial Strength at Baa1; and Atlantic Specialty Insurance Company-Insurance Financial Strength at Baa1.

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