S&P Lowers Medical Protective’s Ratings to ‘A;’ Off CreditWatch

December 22, 2003

Standard & Poor’s Ratings Services announced that it has lowered its counterparty credit and financial strength ratings on Medical Protective Co. (MedPro), a subsidiary of GE Global Insurance Holdings that it rates on a “stand-alone” basis, to ‘A’ from ‘AA-,’ has removed them from CreditWatch and assigned a stable outlook.

S&P said “this rating action stemmed from the decline in MedPro’s capital adequacy and earnings adequacy and Standard & Poor’s belief that the company’s reserves are 8 percent-12 percent deficient as of September 2003.” It added that the new rating is supported by the company’s “leading market position and effective distribution as well as the expected return to strong earnings and capitalization.”

Commenting on the outlook S&P said that it “expects MedPro’s pretax ROR to be 13 percent-15 percent in 2003, with the capital adequacy ratio–adversely affected by Standard & Poor’s projected reserve deficiency and premium growth exceeding 50 percent–to decline to about 119 percent, which is considered good.” It expects 2004 pretax income to exceed 15 percent “as a continued price hardening and the pruning of less-profitable business drive improved results.”

S&P also expects that MedPro’s capitalization will be “enhanced by strong earnings, stabilized premium volume, and other capital-enhancement measures,” and expects it “to improve to a strong level.”

The report listed the following “Major Rating Factors:”
— Leading market position. MedPro is the oldest medical malpractice company in the U.S. It ranks among the top three companies in the country based on direct premiums written of $535 million in 2002 and projected at more than $700 million in 2003. MedPro has a policyholder base of more than 75,000 physicians and dentists, with a high policy-retention rate of nearly 90%. MedPro produces nearly one-third of its premiums from two states: Ohio and Texas. However, it is well diversified, with no other state constituting more than 9% of premiums.

— Reserve deficiency. Though acknowledging MedPro’s disciplined underwriting and reserving methodologies, Standard & Poor’s is concerned that continued adverse development in MedPro’s prior-year reserves ($90 million and $20 million were booked in 2002 and 2003, respectively) could further affect earnings and capitalization. Standard & Poor’s rating reflects the belief that reserves are deficient.

— Reduced capital profile. MedPro’s projected capital adequacy ratio of 119% for year-end 2003 is considerably less than the 188% and 272% at the end of 2002 and 2001, respectively. This trend is the result of 2002 and 2003 reserve strengthening and premium growth fueled by significant rate increases. Standard & Poor’s capital model incorporates the assumption that reserves are deficient.

— Return of strong earnings. MedPro’s risk-based earnings, based on Standard & Poor’s model, dropped to a marginal 90% in 2002 because of the $90 million reserve strengthening. This result is markedly reduced from the very strong result of 237.3% for 2001. MedPro’s strong earnings through Sept. 30, 2003 (including a $20 million reserve strengthening), the continuation of strong market conditions, and MedPro’s historical earnings profile fuel Standard & Poor’s expectation that earnings will rebound to a strong level.

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