Best Lowers PAULA Ratings

March 13, 2001

A.M. Best Co. has lowered the financial strength rating for PAULA Insurance Co. of Pasadena, Calif., to B- (Fair) from B (Fair) and placed the company under review with developing implications.

The rating action reflects PAULA’s increased underwriting leverage position through year-end 2000. For the third year in a row, adverse development on prior year’s loss reserves severely dampened the company’s underwriting performance, culminating in a net loss for the year.

Additionally, the company’s policyholder surplus level has dropped nearly 65 percent since year-end 1998. While PAULA has significantly cut its premium production, over this same timeframe by using stricter pricing standards and exiting certain markets, net premium leverage remains very high.

Despite the continued deterioration of PAULA’s operations in 2000, management remains focused on target business and returning to profitability. Due to the company’s revised underwriting standards and price firming in the California workers’ compensation market, recent underwriting results have improved significantly.

The company retains a strong market presence in certain agribusiness markets and has refocused its business plans for more controlled growth. Also, PAULA’s underwriting expertise and service capabilities have been enhanced by PAULA Trading Company Insurance Agents and Brokers. This firm provides additional distribution capabilities and control of a substantial book of business in the improving California workers’ compensation market.

Management is considering several strategies to significantly bolster capitalization, including use of a variable rate quota share reinsurance program already in place. A.M. Best is currently reviewing management’s strategies to improve capitalization. The rating will remain under review until there is greater certainty concerning PAULA’s recapitalization plans.

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