Best Downgrades Gulf Group Ratings

June 30, 2004

A.M. Best Co. announced that it has downgraded the financial strength rating of Gulf Insurance Group (Gulf) to “A-” (Excellent) from “A” (Excellent). At the same time Best upgraded the financial strength rating to “A+” (Superior) from “A” (Excellent) of Travelers Casualty and Surety of Europe, Limited (See related article in “International”).

Both companies are units of The St. Paul Travelers Companies, Inc. Best also noted that it had removed the ratings on the companies from under review with developing implications and assigned stable rating outlooks.

“These rating actions contemplate the finalization of an unlimited financial guaranty provided by The Travelers Indemnity Company (Travelers Indemnity), the lead company of the Travelers Property Casualty Pool, to Gulf Insurance Company (Gulf Insurance), the lead company of Gulf,” said Best. “At the same time, an amendment to the Gulf inter-company pooling agreement is expected, eliminating Gulf Insurance’s retrocession to other pool affiliates.

“In conjunction with this, all prior liabilities and obligations of Gulf’s pooled affiliates will be ceded to Gulf Insurance and thereby will provide all existing policyholders of Gulf the benefits of the guaranty.”

Best indicated that “the guaranty to be provided by Travelers Indemnity is designed to alleviate any potential business disruption and policyholder concerns while in the process of transitioning Gulf’s business to other St. Paul Travelers’ affiliates during the balance of 2004 and in 2005. In addition to the guaranty, Travelers Indemnity’s intent is to continue to fully support the liabilities of Gulf, which is further corroborated by its recent buyout of outside preferred shareholders (Trident II L.P.) and an additional $50 million capital contribution that it provided Gulf Insurance on June 25, 2004.”

Commenting on the reason for the downgrade, Best noted that, while it recognized the continued support provided by Travelers Indemnity, “the downgrade of Gulf’s rating reflects the ancillary status of Gulf within the St. Paul Travelers organization, given its planned move of business to affiliates, its underwriting deterioration and increased earnings volatility over the past several years, as well as its diminished stand-alone capitalization.”

Best also said its “view of Gulf’s stand-alone capitalization acknowledges the potential for additional reserve strengthening and the credit risk associated with recoverables due from third party reinsurers, including those considered to be of low credit quality by A.M. Best.”

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