A.M. Best Downgrades Rating of Crusader Ins. Co.

October 4, 2002

A.M. Best Co. has downgraded the financial strength rating to B+ (Very Good) from A- (Excellent) of Crusader Insurance Company in Woodland Hills, Calif. The outlook is negative.

This rating action follows an Aug. 13, 2002, decision to place the rating under review with negative implications, pending successful capital raising and/or reinsurance initiatives that would enhance capital. At that time, A.M. Best indicated it would monitor Crusader’s progress in the near term and expected these capital enhancement initiatives to be completed by the end of the third quarter of 2002.

Also, this rating decision follows Crusader’s second quarter public earnings announcement that it incurred a reserve charge of approximately $6 million related to liquor liability and premises liability claims in 2001 and prior accident years on business outside of California. The capital raising initiatives were imperative to support the company’s eroded capital base due to numerous reserve charges in the last three years.

This rating action reflects Crusader’s failure to successfully complete capital raising and/or reinsurance initiatives by the prescribed timeframe. Furthermore, Crusader’s decline in operating performance and the negative impact on capitalization does not support an Excellent rating.

In an effort to stabilize and improve operating performance, management has taken corrective actions on problematic classes of business. While continuing its normal operations and sales, Crusader is instituting a more stringent underwriting criteria, limiting coverages offered, placing moratoriums on certain types of new business, increasing rates and non-renewing certain types of business. Moreover, Crusader will not expand into additional programs or territories until it has improved its operating performance. Nevertheless, A.M. Best remains concerned with the potential for further adverse loss reserve development and the negative impact it would have on the company’s operating performance and overall capitalization.

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