Underwriting Losses Earn Warranty Insurer Lowered Rating

March 11, 2003

Nebraska-based auto warranty and service contract insurer National Warranty Insurance Co. has been downgraded to “B++” (Very Good) from “A-” (Excellent) by A.M. Best & Co.

The rating action follows NWIC’s decline in policyholder surplus through year-end 2002, which was driven by deterioration in operating results and unrealized losses on its investment portfolio.

NWIC’s operating results have been plagued by substantial underwriting losses stemming from significant loss development on a program that issued service contracts on vehicles with over 80,000 miles.

While the company had historically reported modest net operating gains, the level of operating results has been declining annually, with the company reporting losses in 2002. In an effort to improve operating performance, management has implemented a number of corrective actions, including re-underwriting the “over 80” program at higher rates and on an excess-of-loss basis.

In March 2003, shareholders infused $4 million of additional capital into NWIC, a risk retention group headquartered in Lincoln, Neb. Further, management anticipates a 20 percent reduction in net written premiums during 2003. Due to these actions, projected capital would support the “Very Good” rating, an A.M. Best statement said.

A.M. Best remains concerned, however, with adequacy of loss reserves and believes NWIC could still encounter more difficulties in the near term, particularly following the loss in 2002 of a profitable program that was purchased by a third-party administrator.

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