rationales 2nd qurater 2003pub by Levone


									                               2003 2nd. Quarter Rating Rationales
A.I.M. Mutual Insurance Companies (A.M. Best #: 18555)
Associated Employers Insurance Company (A.M. Best #: 12463 NAIC #: 11104)
Associated Industries of MA Mut Ins Co (A.M. Best #: 11041 NAIC #: 33758)

Rating Rationale: The rating applies to A.I.M. Mutual Insurance Company and its wholly-owned,
reinsured subsidiary, Associated Employers Insurance Company. The rating reflects the group's
favorable operating performance, historically conservative reserving practices, and the inherent
benefits derived from its sponsor, Associated Industries of Massachusetts, Inc. These positive rating
factors are driven by the group's strict underwriting guidelines, and the competitive advantages of
being sponsored by the largest employer advocate association in Massachusetts. Over the past five
years, A.I.M. has reported underwriting and operating results that exceed its peers. Employer
involvement, loss control and claims administration practices have played a role in the group's
success over the years. A.I.M. ranks among the top ten writers of workers compensation coverage in
Massachusetts and as such the group's narrow product focus and local market knowledge have also
contributed to its performance.

These positive factors are offset by the group's weakened capitalization resulting from aggressive
premium growth since 2000 without a commensurate increase in surplus and adverse loss reserve
development on accident years 2000 and 2001. A.M. Best is concerned by the adverse loss reserve
development on those particular accident years as 2000 through 2002 were high growth years for
A.I.M. and reserve adequacy on those particular years is critical to the group's efforts to improve
capitalization. That said, A.M. Best acknowledges that the group has historically shown significant
reserve redundancies. However, A.M. Best believes the risk profile of the group has changed
materially due to the aforementioned growth and adverse loss reserve development in the most
recent accident years.

In an effort to improve overall capitalization, management raised $15 million through a surplus note
and has taken steps to stabilize premium volume through 2004. Despite management's efforts, the
long-term financial strength of the organization will depend upon the sustainability of operating
earnings, the maintenance of adequate capitalization and loss reserve stabilization. To that end,
A.M. Best will continue to monitor premium volume and reserve stability. Nevertheless, based upon
the completion of the capital raising and the company's history of profitability and reserve adequacy,
A.M. Best views the rating outlook as stable.

Allianz Insurance Company (A.M. Best #: 00407 NAIC #: 35300)
Allianz Underwriters Insurance Company (A.M. Best #: 02618 NAIC #: 36420)
The following text is derived from the report of Allianz Insurance Group.

Rating Rationale: The financial strength ratings of A (Excellent) apply to Allianz Insurance
Company (AIC) and its direct subsidiary, Allianz Underwriters Insurance Company. The rating out-
look for both companies is stable.

These ratings reflect the explicit parental support that AIC receives from its ultimate parent, Allianz
A.G. (Allianz), its solid business franchise and prospective earnings capabilities in its core industrial
risk market. Allianz currently provides AIC explicit support in the form of 90% quota-share
reinsurance from an off-shore affiliate and a $625 million Keep Well Agreement, directly from Allianz,
to reimburse AIC for paid losses associated with the World Trade Center tragedy.

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                               2003 2nd. Quarter Rating Rationales
Offsetting these positive factors is A.M. Best's revised opinion relating to the treatment of AIC as a
core subsidiary of Allianz A.G. due to group's protracted period of poor underwriting performance
and diminished stand-alone risk-adjusted capital position. As such, AIC no longer qualifies for the
group rating of its ultimate parent.

Historically, AIC's underwriting performance has been hampered by periodic shock losses and
competitive market conditions, which prevailed in the industrial risk segment in the late 1990s.
Consequently, its current and historical pre-tax operating returns on both revenue and equity have
consistently remained below acceptable levels. In response, AIC has exited most casualty business
classes and maintained its focus on large U.S. industrial property exposures in keeping with its
parent's global strategy to be a leader in risk management solutions for large industrial risks.
Further, AIC's 100% ownership of the Fireman's Fund Insurance companies (FFIC) is no longer
enhancing its overall financial position. Like AIC, FFIC's operating performance has also
experienced a protracted period of poor operating performance which has restricted its ability to pay
AIC shareholder dividends.

Notwithstanding the group's historically poor earnings generation and its diminished capital position,
A.M. Best believes that the continued support from Allianz along with improvement in pricing and
contract terms and conditions, which has taken hold in AIC's core businesses since September 11,
should enable it to generate a suitable level of earnings to sustain its strategic importance within the
Allianz group and allow it to maintain its current rating.

American Compensation Insurance Company (A.M. Best #: 11419 NAIC #: 45934)

Rating Rationale: The rating reflects ACIC's poor operating performance prior to 2002. Significant
reserve charges led to net losses and surplus declines in 1998, 2000, and 2001. ACIC gradually
expanded its operations into several states during the soft workers' compensation market conditions
of the late 90's, ultimately leading to adverse loss reserve development, particularly on claims from
accident years 1999 and 2000. Surplus declined over 55% in 2000 and 2001, prompting ACIC to
acquire quota share reinsurance to relieve the pressure on leverage measures. Given the adverse
loss reserve development in recent years, A.M. Best will continue to closely monitor the company's
reserves. ACIC's reserves developed favorably in 2002.

Partially offsetting these negative rating factors are ACIC's improved capitalization and profitability in
2002. With a new, experienced executive management team in place since December 2001, the
company has closed unprofitable regions, reduced premiums in force, improved pricing, and
refocused on its specific underwriting niche and intense claims and case management. The
company produced a modest underwriting profit in 2002, which led to much stronger pre-tax and net
returns on premium and surplus. Net premium increased considerably as ACIC ended its significant
quota share treaty in early 2002. However, direct premium declined almost 40% as the company
restricted its writings to focus on only a few key states. Using its proprietary claims and case
management system, ACIC consistently closes claims more quickly and at a lower average cost per
claim than the rest of the workers' compensation industry. Surplus increased considerably in 2002,
primarily due to investment income and a favorable tax refund, along with a realized capital gain and
underwriting income - offset by a change to deposit accounting for its quota share treaty which
resulted in a charge to surplus. Given management's business plan, A.M. Best expects ACIC's
capitalization and profitability to improve further in 2003. The rating outlook is stable at this time.

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                              2003 2nd. Quarter Rating Rationales
American Manufacturers Mutual Ins Co (A.M. Best #: 02273 NAIC #: 30562)
American Motorists Insurance Company (A.M. Best #: 02274 NAIC #: 22918)
American Protection Insurance Company (A.M. Best #: 02275 NAIC #: 18910)
Kemper Casualty Insurance Company (A.M. Best #: 12301 NAIC #: 27138)
Kemper Indemnity Insurance Company (A.M. Best #: 12183 NAIC #: 40991)
Lumbermens Mutual Casualty Company (A.M. Best #: 02279 NAIC #: 22977)
Specialty National Insurance Company (A.M. Best #: 12302 NAIC #: 20524)
Specialty Surplus Insurance Company (A.M. Best #: 12349 NAIC #: 11622)
The following text is derived from the report of Kemper Insurance Companies.

Rating Rationale: The rating applies to Kemper Insurance Companies inter-company pool, led by
Lumbermens Mutual Casualty Company (LMC), eight reinsured affiliates and one domestic affiliate.
The rating reflects Kemper Insurance Companies announcement that upon completion of the year-
end 2002 independent financial audit, Lumbermens Mutual Casualty Company expects its year-end
2002 statutory surplus as reflected in its annual statement, to be substantially lower than currently
stated. And though the total amount of the adjustments, resulting from events related to the decision
to enter into voluntary run-off and terminate the surplus notes tender offer in 2003, has not been
disclosed, management has indicated that if reflected in its year-end 2002 statutory filing, total
risk-adjusted capital would fall within the Mandatory Control Level of the risk-based capital
calculation required by the Illinois Department of Insurance. Additionally, the rating acknowledges
Kemper's marginal capitalization, weak cash flows and reduced overall liquidity position. Kemper's
surplus deteriorated by more than 60 percent driven by poor operating results, significant capital
losses and minimum pension liability charges as well as cumulative effect of changes in accounting
principles, correction of accounting errors and non-admittance of assets related to deferred income
taxes. Kemper has substantially ceased its underwriting operations and entered into a voluntary
run-off plan with the Illinois Department of Insurance. A component of Kemper's strategic plan for
run-off includes the sale of three subsidiary companies at a price of $61.2 million and renewal rights
to its middle market business in exchange for a renewal rights commission equal to 2 percent of
such gross premiums written for a period of one year as well as a shared services agreement. In
March 2003, Kemper received a letter of intent from third-party investors to purchase the
subsidiaries and renewal rights, but subsequently announced on April 24, 2003 that the parties
involved have discontinued negotiations towards a definitive agreement. The sale of the renewal
rights to various other lines of business, the discounted cash tender offer of the $700 million
outstanding surplus notes at LMC and the repurchase of Berkshire Hathaway's minority equity
investment in Kemper Insurance Group, Inc., (KIG) for $125 million have further weakened Kemper's
cash flow and overall liquidity positions. Finally, the group has continued exposure to potential
adverse loss reserve development, ability to collect reinsurance recoverables from reinsurance
providers in a customary manner following its announced run-off, and capitalization further weakens
when considering identified additional capital commitments of LMC. Further, the company has
indicated that it anticipates its independent auditor will issue a "going concern" opinion in their 2002
Independent Auditor's report on LMC. The financial leverage at LMC is significant with surplus notes
representing more than 100 percent of year-end 2002 policyholders' surplus and technically LMC
has defaulted on the interest payments of the surplus notes. The Illinois Department of Insurance
denied LMC's request to make the interest payment on the surplus notes due in June and July of

Partially offsetting these negative rating factors is the group's focused efforts on reducing operating
expenses and improving its overall liquidity through the merger or shut down a number of LMC's
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                              2003 2nd. Quarter Rating Rationales
wholly-owned subsidiary stock insurance companies, the exploration of the sale of Eagle Pacific and
Pacific Eagle as well as other non-insurance company related operations. Kemper has also taken
steps to change its investment portfolio by moving its investments more into high quality investment
grade securities which are readily marketable. Kemper is also evaluating the possible commutation
of ceded reinsurance arrangements, all with the goal of ensuring a proper run-off of its obligations.
However, given that the Illinois Department of Insurance has not yet advised LMC as to whether the
RBC plan as submitted is acceptable and the limited financial flexibility of the group, as it has been
required to satisfy additional collateral requirements subsequent to year-end 2002, as well as
provides capital commitments in connection with various venture capital partnership agreements and
is legally required to further provide funds into its qualified pension plan and various guarantees on
behalf of subsidiary companies, A.M. Best views the rating outlook as negative.

Andover Companies (A.M. Best #: 00166)
Bay State Insurance Company (A.M. Best #: 02053 NAIC #: 19763)
Cambridge Mutual Fire Insurance Company (A.M. Best #: 02054 NAIC #: 19771)
Merrimack Mutual Fire Insurance Company (A.M. Best #: 02055 NAIC #: 19798)

Rating Rationale: The rating reflects the group's outstanding capitalization, strong operating
performance and long standing market presence as the leading homeowners writer in
Massachusetts. In addition, the group maintains conservative underwriting leverage, strong balance
sheet liquidity and favorable reserve development patterns. These positive factors are a result of its
stable market presence, disciplined underwriting approach and quality customer service practices,
as well as long-standing relationships with its independent agency force. As a result, the group
experienced sustained growth in assets and surplus during the past five years. The group's
favorable loss experience and consistent growth in investment income generated five year returns
on revenue and equity that outperformed its property industry peer composite. The rating applies to
the three inter-company pool members of the Andover Group, led by Merrimack Mutual Fire
Insurance Company.

These factors are slightly tempered by the group's susceptibility to severe weather related events
due to its geographic concentration in the Northeast, as well as high expense structure and
participation in certain assumed reinsurance pools. However, management's conservative operating
philosophy and disciplined underwriting approach, as well as comprehensive reinsurance program
mitigate the impact catastrophic losses have on the group's financial strength. The group's expense
structure is mainly due to elevated commission expenses. Although the group's commission
structure is elevated it has materialized in a higher quality book of business as reflected in its loss
and LAE ratio that outperformed its peer composite. The group's participation in various reinsurance
pools impacted its operating performance during the past several years. This was evident in 2001 as
assumed losses from the 9/11 tragedy slightly impacted its operating performance. Due to its
outstanding capitalization, strong operating performance and conservative operating posture the
Andover Companies have been assigned a stable rating outlook.

Atlantic Mutual Insurance Company (A.M. Best #: 02063 NAIC #: 19895)
Centennial Insurance Company (A.M. Best #: 02064 NAIC #: 19909)
The following text is derived from the report of The Atlantic Mutual Companies.

Under Review Rationale: On June 6, 2003, A.M. Best placed the A- rating of the Atlantic Mutual

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                              2003 2nd. Quarter Rating Rationales
Companies under review with negative implications. This action reflects A.M. Best's heightened
concerns regarding The Atlantic's capitalization and the quality of earnings and surplus, in view of its
weak underwriting and operating performance and its use of reinsurance transactions to bolster
surplus. Furthermore, the group has somewhat limited financial flexibility and the potential for
continued adverse prior year loss reserve development. Management is pursuing various capital
raising alternatives designed to replace soft capital with permanent funds and enhance the quality of
surplus and earnings. A.M. Best views the timely execution of this plan as critical. In the event that
The Atlantic is unsuccessful, the rating is likely to be downgraded.

In 2002, The Atlantic purchased an adverse development cover, which allowed the group to
increase prior year loss reserves by $86 million and take the benefit of $68.5 million in discounted
workers' compensation and general liability reserves. The Atlantic also utilizes quota share and
aggregate stop loss reinsurance, which has enabled it to effectively reduce net premium in 2002 and
enhance net underwriting results in 1999 and 2000. However, all of these reinsurance agreements
included funds held interest expenses and aggregate liability limits. While A.M. Best recognizes the
immediate visual benefits gained from these reinsurance transactions, in A.M. Best's opinion, these
reinsurance covers provide temporary surplus relief and will ultimately lessen future earnings.

Despite these issues, the rating is supported by The Atlantic's adequate capitalization, strong
franchise and improved accident year underwriting margins as reported in 2002.

Rating Rationale: The rating applies to The Atlantic Mutual Companies' four members, led by The
Atlantic Mutual Insurance Company. The rating reflects the group's adequate capitalization, strong
franchise, and the anticipated benefits to be derived from management's restructuring, re-
underwriting and increased pricing initiatives over the past several years. The Atlantic's franchise is
enhanced by its well-regarded service reputation and strong client relationships. Its business
strategy is highly focused on targeting industries in the middle market commercial, up-scale personal
and marine business segments, where it offers tailored, value-added coverages through its
independent agents. The group is also expanding into strategic non-catastrophe-prone geographic
areas. Emphasis is being placed on the use of technology to improve processes and services for
agents and customers, as well as to enable more efficient growth. In addition, The Atlantic has
eliminated less attractive and unprofitable accounts, business segments and territories, re-
engineered its commercial book, re-underwritten its personal lines book, restructured its mono-line
inland marine business, and reduced its exposures in states with high involuntary market burdens,
adverse regulatory environments and high exposure to natural catastrophes. The Atlantic has
demonstrated its operating and financial flexibility over the past several years by taking advantage of
opportunities in its key market segments through strategic alliances and new product introductions,
by entering into a $150 million all-lines quota share agreement in 2001 to enhance its capacity to
write business, and by accessing the capital markets with the issuance of a $100 million surplus note
in 1998. The Atlantic's current debt to total capitalization ratio of approximately 23% is moderate.

These factors are partially offset by the group's operating losses over the past three years derived
from its expense ratio disadvantage and margin compression brought about by competitive market
conditions and rising loss costs in recent years. Reported pretax operating returns on revenue have
been depressed, averaging -1.8% over the past five years, with negative returns of -3.8%, -4.0%
and -7.0% reported in 1999, 2000 and 2001, respectively. During this five-year period, The Atlantic
was hit by catastrophe losses -- including World Trade Center losses in 2001, losses from
discontinued business segments, soft commercial lines pricing, and more recently, rising loss costs,
significant loss reserve development -- particularly in its workers' compensation book, and significant

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                              2003 2nd. Quarter Rating Rationales
deterioration in homeowners' business. To address these negative trends, the group has been
implementing significant price increases and more stringent risk selection guidelines in its
commercial book since late 1999, implemented re-underwriting and increased pricing initiatives to
improve its homeowners' book, and increased its workers' compensation reserves by nearly $90
million over the past three years. However, the group continues to support a high -- although
declining -- expense structure, is susceptible to natural catastrophes, and remains exposed to the
ongoing emergence of asbestos and environmental (A&E) claims. Although the group's mutual
structure enables it to pursue long-term growth strategies without being constrained by short-term
earnings pressures experienced by many of its stock peers, it also limits its access to capital. In
addition, the group's financial flexibility has been constrained by its weak operating results and lack
of earnings to cover its cost of capital. Despite these challenges and concerns, management
expects The Atlantic's operating results to significantly improve in 2002. Nevertheless, until this
turnaround is manifested, and reported loss reserve development abates, A.M. Best views the
group's rating outlook as negative. The Atlantic Mutual Companies rank among the top 75 property /
casualty insurance groups in the United States.

Bankers Insurance Company (A.M. Best #: 03683 NAIC #: 33162)
Bankers Security Insurance Company (A.M. Best #: 11572 NAIC #: 13990)
The following text is derived from the report of Bankers Insurance Group.

Under Review Rationale: This rating action reflects the group's continued deterioration in capital as
well as the elevated holding company financial leverage. As a result, Banker's signed a definitive
agreement with Fiserv, Inc regarding the sale of one of its majority owned affiliates, Insurance
Management Solutions Group Inc. The sale of this asset reflects Bankers' ongoing capital raising
initiatives in response to deterioration in statutory surplus. During 2002, the group also sold an
affiliated company as well as its servicing rights to the National Flood Insurance Program (NFIP).
Despite the sale and subsequent capital infusion, the group posted only a modest gain in surplus
due to its weak operating results and unrealized losses. While this most recent transaction could
potentially stabilize the capital position of the property and casualty members of Bankers Insurance
Group, uncertainty remains regarding the sustainability of the group's surplus and ultimate success
of performance improvement initiatives. The rating will remain under review pending the close of the
transaction, expected during the second quarter of 2003.

Rating Rationale: The rating applies to Bankers Insurance Co., which is evaluated on a
consolidated basis with its majority owned but separately rated subsidiary, Bankers Security
Insurance Company. The rating reflects the group's vulnerable capital position and unfavorable
operating performance trends. Over the last two years, the group's capitalization has been
pressured due primarily to poor underwriting results along with unrealized capital losses on the stock
portfolio. As a result, the group's surplus has decline substantially over the last two years. These
capital declines were despite realized capital gains of nearly $27 million over the same time period.
In response to these losses, the parent infused $10.5 million into surplus during the second quarter
of 2002. The capital was garnered by the sale of several assets at the holding company level.

Operating losses reflect the impact of several reduced or discontinued lines, including workers'
compensation, long-haul trucking and a Real Estate Appraiser E & O program. Also impacting
results over the last two years has been the group's non-standard automobile initiative in Texas
which produced a statutory operating loss of $10.3 million in 2001. Further exacerbating the group's
operating performance has been its well above average expense position that on a five year
average basis is more than 40%. This high expense position is despite significant ceding
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                               2003 2nd. Quarter Rating Rationales
commissions generated from the group's role as a servicing carrier in the National Flood Insurance
Program (NFIP). Also impacting recent results was the payment of a $1 million fine with regards to
the settlement of a complaint filed by the Florida Department of Insurance. Finally, both the
immediate and ultimate holding companies maintain financial leverage, with a portion of their debt
obligations serviced through dividends from the group. The holding companies have recorded
operating losses in each of the last three years with the ability to cover future interest payments
pressured by the on-going deterioration in operating performance of the statutory entities.

CIM Insurance Corporation (A.M. Best #: 02197 NAIC #: 22004)
Integon General Insurance Corporation (A.M. Best #: 02459 NAIC #: 22780)
Integon National Insurance Company (A.M. Best #: 02387 NAIC #: 29742)
Integon Preferred Insurance Company (A.M. Best #: 11650 NAIC #: 31488)
Motors Insurance Corporation (A.M. Best #: 00654 NAIC #: 22012)
National General Insurance Company (A.M. Best #: 03366 NAIC #: 23728)
The following text is derived from the report of GMAC Insurance Group.

Rating Rationale: This rating applies to Motors Insurance Corporation and its fourteen reinsured
subsidiaries and affiliates and is based on the consolidated financial results of these companies. The
rating reflects GMAC Insurance Group's (GMACI) strong stand alone capitalization, consistently
solid operating results, well-established market presence as one of the top 35 property/casualty
insurers in the United States and a leading provider of extended service contracts. These positive
rating attributes are derived from management's focused operating strategy, extensive product
knowledge, diversified product offerings and multiple distribution channels. Capitalization is reflective
of reasonable underwriting leverage, generally favorable loss reserve development and nominal
exposure to a catastrophic event. The group has consistently generated capital through operating
earnings reflective of disciplined underwriting, an efficient expense structure and a steady stream of
investment income.

Through the affiliation with General Motors, the group benefits from extensive penetration of GM
dealerships with its commercial automobile physical damage and core automobile extended
warranty products as well as GMAC's brand name recognition, widespread marketing network and
direct sales support. In addition, this rating reflects the group's diversification outside traditional
GM-related businesses, particularly its well established presence in the non-standard automobile
market through Integon.

These positive factors are somewhat offset by the diminished financial strength of the ultimate
parent company, General Motors Corporation, driven by significant pension costs. As a result,
GMAC Insurance Group may potentially be burdened to support the ultimate parent company
through increased dividend demands. The lack of future cash generation by the parent company to
fund the pension plan will further reduce the overall organization's financial strength.

Additional negative factors include the group's increasing underwriting leverage and high investment
leverage driven by exposure to fluctuating market values related to the equity portfolio. Surplus
losses in recent years have been driven by the unfavorable performance of the equity portfolio and
parental dividends. These losses, combined with premium growth, have resulted in gradually
increasing underwriting leverage. Further, a large portion of the group's business, extended warranty
and non-standard automobile, is exposed to downturns in economic conditions. However, due to
GMAC Insurance Group's strong stand alone capitalization, consistent operating performance and
brand name recognition, a stable outlook was assigned.

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                              2003 2nd. Quarter Rating Rationales
Commercial Casualty Insurance Co of NC (A.M. Best #: 11059 NAIC #: 36374)
The following text is derived from the report of Delta Insurance Services Group.

Rating Rationale: The rating is based on the consolidated operating results of Commercial Casualty
Insurance Company of North Carolina (CCIC) and its 100% reinsured affiliate, Georgia Mutual
Insurance, A Stock Company. The rating reflects the group's severely weakened capital position
engendered by very aggressive premium growth and poor underwriting results. Based on the
re-filing of CCIC's 2002 NAIC Annual Statement, its total adjusted surplus as regards policyholders
fell below the Risk Based Capital Mandatory Control Level. Over the past several years, the group
has increased its premium writings dramatically while policyholders' surplus over that same time has
fluctuated, with a 67% drop since year-end 2001. During the two most recent calendar years in
particular, the focus on growing the core artisan book of business has led to a substantial increase in
underwriting leverage measures. Management continues to pursue efforts to raise capital however,
such efforts have proven fruitless throughout the second half of 2002 and thus far in 2003. A.M. Best
continues to view the rating outlook as negative.

Doctors Company An Interinsurance Exch (A.M. Best #: 03686 NAIC #: 34495)
Professional Underwriters Liab Ins Co (A.M. Best #: 10763 NAIC #: 34487)
The following text is derived from the report of Doctors Company Insurance Group.

Rating Rationale: The rating is based on the consolidated operating performance and financial
condition of The Doctors Company, An Interinsurance Exchange and its wholly owned subsidiaries,
Professional Underwriters Liability Insurance Company and Underwriter for the Professions
Insurance Company. The rating reflects the group's adequate capitalization and leadership position
in its principal market. Over the years, management has entered into and formed strategic alliances
with other professional liability companies and reinsurance providers, which have enabled it to enter
new markets and diversify operations. Furthermore, the group has a tier pricing structure, which
allows it to better control risks. The group has also engaged in multiple distribution channels to
market its products and assist in building its brand recognition. The rating also acknowledges the
group's aggressive claims management and successful risk management programs, contributing to
its strong policyholder retention.

These positive factors are partially offset by the group's deterioration in operating profitability and
overall capitalization due primarily to the significant adverse loss reserve development compounded
by the aggressive premium growth over the last two years. These factors have been driven by the
increase in the severity of claims resulting in disruption in the medical malpractice marketplace with
the exit of various insurers offering coverage causing increased demand and rates. The group has
taken positive actions to restore favorable earnings by raising premium rates, applying more
stringent underwriting criteria and de-emphasizing coverage in unprofitable territories, lines of
business and risk classes, as well as improving claims administration. Also, the group is reviewing
alternatives including reinsurance utilization and exposure reduction, to improve its constrained
capital position. While A.M. Best remains concerned over further adverse loss reserve development,
A.M. Best views the rating outlook over the near-term as stable given expected improved profitability
and overall capitalization.

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                               2003 2nd. Quarter Rating Rationales
First Community Insurance Company (A.M. Best #: 04496 NAIC #: 16578)
The following text is derived from the report of Fidelity National Group.

Rating Rationale: The rating applies to Fidelity National Insurance Company, First Community
Insurance Company and Fidelity National Lloyds, which are evaluated on a consolidated basis. The
rating reflects the group's adequate capitalization and financial support and strategic relationship
with its parent Fidelity National Financial, Inc. the largest national provider of title insurance and real
estate services. The rating also reflects the group's experienced management team and strategy to
leverage the parent's real estate computer systems and effective title distribution networks into its
operations. Management's initiatives to use the unique distribution networks and provide enhanced
support for real estate transactions represents market synergies for product pricing and distribution.

These positive factors are somewhat offset by the group's integration and execution risk between
title and property casualty operations and significant planned growth organically and through
renewal rights acquisitions. A.M. Best believes the group will be challenged to produce favorable
operating results in the near term due to the expected significant unearned premium increases. With
a substantial portion of the book of business in California, the group remains exposed to earnings
and surplus volatility from potential market, regulatory and fire following earthquake risks. However,
management routinely monitors catastrophe exposures in order to mitigate potential losses and
maintains moderate gross and net probable maximum losses (PML) from a 250-year earthquake as
depicted in a PML analysis. Based on the group's support from the parent and the expectation of
adequate capitalization as the group executes its business plans, A.M. Best views the rating outlook
as stable.

Folksamerica Reinsurance Company (A.M. Best #: 02642 NAIC #: 38776)

Rating Rationale: The rating reflects Folksamerica Reinsurance Company's solid level of
capitalization and significant improvement in earnings during 2002. The latter reflects management's
selective underwriting during the current period of significantly stronger reinsurance market
conditions that began to emerge during 2001. In addition, buoyed by its strong capitalization, the
company's business profile has improved and has enabled the company to grow the number of
accounts where it takes the lead or co-lead position to nearly 80% of the business written in recent
years. The rating also recognizes Folksamerica's improving geographic diversification as the
company participates in business generated by the White Mountains affiliate, White Mountains
Underwriting Limited (Ireland) formed in late 2001. The quota share relationship with the newly-
formed, third-party reinsurer, Olympus Re (Bermuda) has allowed Folksamerica to take more
significant participations on property programs where pricing has improved dramatically. The rating
also reflects significant steps undertaken by management to stem underwriting and operating losses
in recent years. In 2000, the company purchased third-party reinsurance on a large block of poorly
performing discontinued, acquired casualty business as part of a loss portfolio transfer ("LPT") of
nearly $300 million in loss reserves. The reinsurance purchased was designed to protect the
company against adverse development on this ceded LPT as well as on the company's asbestos
and environmental (A&E) exposures and reserves relating to other discontinued lines. As only a
small amount of this coverage remains, the company is exposed to future adverse development on
these reserves. Somewhat offsetting the company's favorable rating attributes are the poor
operating results, driven by substantial underwriting losses, recorded during the 1999 - 2001 period.
The poor underwriting returns reflect adverse loss reserve development related to the previously
noted acquired books of business, as well as Folksamerica's own book of business as management
underestimated the effects of the prolonged soft market conditions which ended in 2001. Partially
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                             2003 2nd. Quarter Rating Rationales
mitigating the adverse development on the acquired books of business are surplus benefits realized
through favorable acquisition structures and the economic benefit of acquisition-related protections
retained by the immediate parent holding company (Folksamerica Holding Company). The holding
company benefits, had they been held by Folksamerica Re, would have reduced the combined ratio
by approximately 8 points each in 1999 and 2000. A.M. Best anticipates strong underwriting and
operating results in the medium term due to the significant tightening in pricing and terms and
conditions as well as the beneficial impact expected from the remedial actions taken by
management. As a result, Best views the rating outlook as stable.

Insurance Corporation of Hannover (A.M. Best #: 02643 NAIC #: 37257)
The following text is derived from the report of Hannover Rueckversicherungs-Atkiengesellschaft-

Under Review Rationale: The under review status reflects A.M. Best's assessment of Hannover
Re's current and prospective consolidated risk-adjusted capitalisation. Hannover Re's property/
casualty gross premiums grew by a strong 21.9% in 2002, and A.M. Best expects further growth in
2003, albeit on a smaller scale. Although consolidated shareholders equity (including minority
interest) has increased due to retained earnings at year-end 2002, A.M. Best believes that further
funds will be required to sustain risk-adjusted capital levels in 2003. Hannover Re has already made
extensive use of capital market instruments for which A.M. Best has already given its maximum
equity credit. However, in November 2002 Hannover Re's shareholders gave permission to raise
equity if necessary.

The current rating recognises Hannover Re's significantly improved underwriting performance in
property/casualty and programme business in 2002. The in-force value of its life/health portfolio
increased by a strong 15.1% in 2002.

Rating Rationale: The rating reflects Hannover Rueckversicherungs-AG's (Hannover Re) strategic
position within the HDI group, its excellent business position, very good underwriting performance
and excellent, albeit reduced risk-adjusted capitalisation. An offsetting factor is Hannover Re's
limited financial flexibility.

Strategic importance to HDI: A.M. Best considers Hannover Re as strategically important to its
ultimate parent company Haftpflichtverband der Deutschen Industrie V.a.G (HDI).

Excellent Business Position: Through opportunistic underwriting Hannover's consolidated
property/casualty gross premiums grew by 74.3% in the first nine-months of 2002, whilst maintaining
underwriting discipline. In life reinsurance, where Hannover Re's focuses on financing new business,
gross premiums remained unchanged in the first nine months of 2002, although A.M. Best expects
an overall growth of 10% for 2002. Hannover Re is also one of the largest providers of program
business in the United States (gross premiums EUR 2bn in the first nine months of 2002) and is
seeking expand this business model in Europe. A.M. Best believes that recent withdrawals of
capacity in the reinsurance market would offer further business opportunities for Hannover Re in

Very Good Underwriting Performance: In the first nine months of 2002, Hannover Re's profit
before tax was EUR 306.9m. Controlled underwriting and substantial price increases (between 15%

                                               Page 10
                              2003 2nd. Quarter Rating Rationales
and 100% depending on lines of business) led to very good underwriting results from its property/
casualty and program book of business, where combined ratios improved to 95.1% and 92.9%, from
124.4% and 94% respectively.

Excellent Risk Adjusted Capitalisation: A.M. Best regards Hannover Re's consolidated risk-
adjusted capitalisation, strengthened by EUR150m through a rights issue at E+S Rueckversicherung
(E+S Rueck), still as commensurate with the current rating level. A.M. Best has given credit for
Hannover Re's subordinated debt issues up to 15% limit of total adjusted capital. However, further
funds may be required to sustain growth in 2003 if Hannover Re is to take full advantage of the
current hard market conditions.

Negative outlook: A.M. Best believes that Hannover Re's access to further funds is limited. In
addition, Hannover Re's financial leverage has increased to 24.6% in recent years.

- The current rating is subject to the maintenance of an A+ risk-adjusted capitalisation.
- A combined ratio around 100% for 2003 in property/casualty and program business.
• No deterioration of reserves levels, in particular for the World Trade Center (WTC) claims and
    asbestos related claims

Lumbermens Underwriting Alliance (A.M. Best #: 02296 NAIC #: 23108)

Rating Rationale: The rating reflects Lumbermen's Underwriting Alliance's (LUA) adequate
capitalization and the exchange's demonstrated expertise in providing coverages to the forest
products industry, lumber-related companies and other preferred classes of risks. Since 1999,
management has been taking corrective actions to stabilize operating results and return the
company to profitability, principally through a refocused underwriting strategy. This plan was
implemented by means of organizational changes, a reassessment of the company's underlying risk
profile, and a refocus on loss control efforts. During this time period, the company has improved its
near-term underwriting fundamentals by non-renewing loss leading accounts, reducing weather-
related exposures, adhering to tighter terms and conditions on policies and garnering substantial
rate increases on both its property and high-deductible workers' compensation businesses. Due to
these changes and favorable market conditions, LUA's operating losses were reduced by 50% in
2001 and improved significantly in 2002 as the company reported its first operating profit in four

Offsetting these positive rating factors are the company's recently experienced adverse loss reserve
development, elevated gross leverage position, and above average common stock investment
leverage. While LUA generated a pre-tax profit during 2002, sizeable underwriting losses due to
intense competition impacting the workers' compensation line, large fire losses and severe and
frequent weather-related occurrences associated with its property coverages and losses stemming
from non-forest products businesses led to considerable operating losses for years 1998-2001.
Additionally, at year-end 2002 and during the first quarter of 2003, LUA experienced considerable
adverse loss reserve development associated with its workers' compensation business, which leads
to A.M. Best's concerns regarding LUA's overall capitalization in the near-term. Further, common
stock securities represent nearly 70% of LUA's surplus, which exposes LUA's capital position to
equity market volatility as evidenced by significant unrealized capital losses incurred by the
exchange in 2001 and 2002. The culmination of several years of net underwriting losses and
significant unrealized capital losses has resulted in the deterioration of LUA's statutory surplus and
                                                Page 11
                              2003 2nd. Quarter Rating Rationales
has adversely impacted its underwriting leverage position, which is now above industry composite
norms. Due to the uncertainty associated with LUA's loss reserve development, which is somewhat
compounded by its heightened gross leverage position, A.M. Best is concerned that further loss
reserve development could stress LUA's capitalization at current rating levels. As such, A.M. Best
views the outlook as negative.

Medical Liability Mutual Insurance Co (A.M. Best #: 03667 NAIC #: 34231)
Professional Liability Ins Co of America (A.M. Best #: 11411 NAIC #: 12513)
The following text is derived from the report of The MLMIC Group.

Rating Rationale: The rating is based on the consolidated operating performance and financial
condition of Medical Liability Mutual Insurance Company and its wholly owned subsidiaries,
Princeton Insurance Company, OHIC Insurance Company and Professional Liability Insurance
Company of America. The rating reflects the group's deteriorated operating performance due to
adverse loss reserve development in its medical malpractice and workers' compensation lines of
business and lower net investment income combined with the unrealized capital loss on the group's
investment portfolio and increase in non-admitted assets to cause overall capitalization to fall short
of supporting its current rating. Strong premium growth of more than 30 percent and the
strengthening of prior years' loss reserves of $443 million in 2002 combined with a decline in
policyholders' surplus of more than 30 percent, the group generated elevated net and gross leverage
measures. Furthermore, MLMIC discounts its reserves for loss and loss adjustment expenses, as
permitted by the New York Department of Insurance. At year-end 2002, the group's discount was
$522 million, more than 50 percent of policyholders' surplus. Management has responded to the
decline in its policyholders' surplus by suspending policyholders' dividends, exiting certain lines of
business, including in large part the workers' compensation line with the sale of the renewal rights to
its Small Risk Workers' Compensation Program to AmTrust Financial Services during December
2002, exiting of certain markets and securing additional reinsurance including a loss portfolio
transfer / adverse development reinsurance coverage on its workers' compensation loss reserves
and unearned premium reserves. The group also restored capacity through third-party reinsurance
protection on its on-going medical malpractice business in New Jersey and Ohio to replace existing
inter-company quota share reinsurance arrangements.

Offsetting these negative rating factors is the group's favorable operating cash flow position and its
ranking as the largest writer of medical professional liability insurance in the United States with an
estimated 10.7 percent market share at year-end 2002, based on direct malpractice premiums
written. The group's acquisitions of Princeton Insurance Companies and The HUM Group has
allowed it to respond to evolving market issues, including medical providers whose practices expand
beyond state borders, as well as provide additional coverage to current customers. Although the
group continues to pursue premium adequacy, the group faces business risk from its concentration
in New York. As such, A.M. Best remains concerned with regards to the adequacy of loss reserves
given the reserve strengthening and continued adverse trends in the group's medical malpractice
line of business. Given this concern and the maintenance of insufficient capitalization to support its
current rating, A.M. Best views the rating outlook as negative.

                                                Page 12
                              2003 2nd. Quarter Rating Rationales
Narragansett Bay Insurance Company (A.M. Best #: 01750 NAIC #: 43001)
Pawtucket Mutual Insurance Company (A.M. Best #: 00755 NAIC #: 14931)

Rating Rationale: Effective May 1, 2003, the company was placed under rehabilitation by order of
the Rhode Island Department of Business Regulation.

National Continental Insurance Company (A.M. Best #: 00547 NAIC #: 10243)

Rating Rationale: The rating reflects the company's excellent capitalization and strong operating
earnings. These positive rating factors are derived from the company's focused strategy as a
servicing carrier of policies written under state-mandated involuntary Commercial Auto Insurance
Plans and Special Risk Distribution Plans, which enables the company to collect substantial fee
income that drives operating earnings. The rating also acknowledges the financial support from the
company's parent, The Progressive Corporation, and the operational synergies and business
opportunities it receives from affiliated insurance companies.

These positive rating factors are partially offset by the company's high reinsurance recoverable and
ceded reinsurance balances and exposure to asbestos and environmental (A&E) claims. However,
the reinsurance risk is mitigated since balances are due predominantly from state insurance plans.
In addition, A.M. Best believes that potential earnings drag from future A&E development would be
minimal. This risk is also lessened by an aggregate excess of loss reinsurance agreement for A&E
exposures with an affiliate, Progressive Casualty Insurance Company. Based on the company's
excellent capitalization and favorable earnings expectations, A.M. Best views the rating outlook as

National Service Contract Ins Co RRG (A.M. Best #: 11820 NAIC #: 10234)

Under Review Rationale: A.M. Best Co. has placed the financial strength rating of A- (Excellent) of
National Service Contract Insurance Company RRG (NSC) (Hawaii) under review with negative
implications. This status will remain pending the results of an independent actuarial analysis of the
Loss Reserve Fund (LRF) at Interstate National Dealers Service (INDS), the parent company.

This independent actuarial analysis, at the behest of A.M. Best, follows the reduction of
shareholder's equity after INDS' privatization in January 2003. To fund the buy-out of INDS' existing
shareholders, it liquidated 70% of its retained earnings and invoked bank debt. INDS' financial
leverage at fiscal year-end 2003 is elevated at 2.3 to 1, due to debt incurred. Management believes
leverage will decline to around 1.1 to 1 by the fiscal year-end 2006, which is a level more in line with
an Excellent rating.

NSC provides aggregate stop-loss contractual liability coverage on vehicle service contracts issued
by INDS. In the event of an overall inadequacy of the LRF at INDS for all years combined, NSC
could then incur a claim. Management believed that at fiscal year-end October 2002 the LRF was
more than sufficient. NSC remains well capitalized for its Excellent rating based on its current level
of reserves. However, the capitalization of NSC will not be apparent until the completion of
INDS'actuarial analysis.

A.M. Best will reevaluate NSC's rating at the completion of the actuarial analysis. Regardless of the
results, there remains negative pressure on the rating given INDS' decreased stockholders' equity

                                                 Page 13
                              2003 2nd. Quarter Rating Rationales
and debt burden, which increases the chance that NSC's capital may be used for either claim or
debt payments. INDS is projected to generate earnings over the next five years, which will
comfortably allow for the repayment of debt. Additionally, despite pledging assets of NSC as
collateral for the debt, management has stated it will not utilize the funds at NSC to pay either
interest or principal. In A.M. Best's opinion, management will be challenged to demonstrate
consistent, quality earnings and cash flow due to recent lower operating results, current economic
and investment conditions and a competitive auto warranty environment.

Rating Rationale: The rating reflects National Service Contract's (NSC) sound balance sheet,
favorable operating results and low cost operating structure as a direct writer of auto warranty
related coverages for new and used vehicles. Surplus grew significantly in 2001, primarily due to
changes in the NAIC Accounting and Procedures Manual adopted in January 1, 2001. These
positive rating factors are enhanced by the financial strength and commitment of the company's
originator and majority stockholder, Interstate National Dealer Services, Inc. (INDS). INDS
(NASDAQ: ISTN) is a publicly traded company which since its inception in 1980 has provided
administration of service contracts for auto dealers and vehicle contract holders. INDS has a strong
capital base, with no debt and excellent liquidity. As such, the rating acknowledges the ability of
INDS to expand the business and generate growth opportunities for NSC through established dealer
relationships and the market penetration of its agency networks. NSC results also benefit from
management's disciplined underwriting standards applied by product and by dealer. Somewhat
offsetting these positive factors is NSC's limited scope of business in a highly competitive market
and the dependence on the performance success of INDS and the volume of national auto sales.
Although NSC's management expects the company will generate consistent operating returns, A.M.
Best will closely monitor further maturation of NSC as a warranty provider. Due to the company's
balance sheet strength, favorable operating performance and strong capital position of its ultimate
parent, Best views the rating outlook as stable.

Republic Western Insurance Company (A.M. Best #: 03597 NAIC #: 31089)
The following text is derived from the report of Republic Western Insurance Group.

Rating Rationale: This rating action reflects the significant accounting adjustments reported in the
first quarter of 2003, its consequential impact on Republic Western's capitalization and the continued
financial challenges surrounding its parent, AMERCO. These factors stem from Republic Western's
first quarter accounting charges of approximately $96 million, continued adverse loss reserve
development and its adverse impact on policyholders surplus which Best currently views as
vulnerable. Accounting charges taken in the first quarter were spread across various assets held by
Republic Western but were primarily related to the non-admission of receivable balances due from
its parent partially caused by the parent's non-investment grade status. As a result, Republic
Western's surplus fell 58% from $166 million to roughly $70 million at the end of the first quarter
2003. In the quarter, Republic Western also reported approximately $8.5 million of unfavorable loss
reserve development. Over the past several years, Republic Western has become increasingly
dependent on its parent for capital support. However, given its current status, AMERCO's ability to
support its insurance subsidiaries is practically non-existent. Furthermore, Republic Western
consented to a supervision order by the Arizona Department of Insurance on May 20, 2003, in light
of the above circumstances. The order is intended to circumscribe and closely monitor the situation
while Republic Western and its affiliates engage in self-corrective efforts. AMERCO is a publicly-
traded holding company of U-Haul International, Inc. and is one of the largest moving and self
storage companies in the U.S.

                                                Page 14
                               2003 2nd. Quarter Rating Rationales
These factors are partially offset by management's initiatives to improve results and stabilize
capitalization by discontinuing significant lines of business, significantly increasing rates, various
changes in its management structure and cost reduction efforts. While concerns remain as to the
adequacy of reserves and capitalization, A.M. Best views the rating outlook as negative.

Providence Washington Insurance Co of NY (A.M. Best #: 03784 NAIC #: 35726)
Providence Washington Insurance Company (A.M. Best #: 02411 NAIC #: 24295)
The following text is derived from the report of Providence Washington Insurance Companies.

Under Review Rationale: The rating of Providence Washington Insurance Companies was placed
under review with negative implications. This rating action follows the substantial reserve
development reported by Providence Washington at year end 2002, record-high operating losses
and the deterioration in risk-adjusted capitalization. A.M. Best has been in discussions with
management as well as the group's lead investor, Securitas Capital, LLC concerning these issues,
particularly with regard to capitalization. Securitas Capital, LLC is an investor group which maintains
majority common equity ownership in the group's parent, PW Acquisition Company.

Based on these discussions, Securitas Capital LLC has agreed to invest additional capital in PW
Acquisition on or before July 15, 2003. Upon receipt of the proceeds, Providence Washington's
capitalization should fall more in line with its current rating. The negative implication signals the
possibility that additional capital from Securitas Capital does not take place, as anticipated. In such
an instance, the rating of Providence Washington is likely to be downgraded.

Rating Rationale: The rating applies to the four inter-company pool members, led by Providence
Washington Insurance Company. The rating reflects the group's very good quality of capitalization,
relatively consistent underwriting results, and renewed regional agency focus. In connection with a
change in ownership in 1998, Providence Washington (PW) significantly strengthened its carried
loss reserve position and purchased additional reinsurance protection which, over the past three
years, has benefited and protected Providence Washington from adverse loss reserve development
on prior year business. In addition, the rating also acknowledges PW's purchase of quota share
reinsurance (effective December 1, 2001) and its favorable effects on capitalization. This rating also
takes into consideration the cultural changes brought on by its new owners and the significant
changes in operations, business plan and marketing strategy since the acquisition. Lastly, this rating
affirmation takes into account management's 2002 plan which incorporates the future benefits to be
derived by management's aggressive pricing initiatives, exit strategies imposed on unprofitable
markets and books of business, enhanced agency management strategies, improving expense
efficiencies, and lastly, more favorable reserve development.

While capitalization remains secure, the level of capitalization has declined in recent years due to
unfavorable loss reserve development from on-going and discontinued operations and stockholder
dividends paid to the group's ultimate parent, PW Acquisition Company, to service debt at the
parent. Going forward, however, PW will no longer benefit from its adverse development treaty
which was exhausted in 2001due to reserve strengthening associated in part with its prior
participation in the ECRA pool. The rating also considers PW's modest earnings, which are
attributable to prior soft market conditions, flat levels of investment income and the continued
adverse development on prior year reserves. Despite these issues, management is extremely
optimistic in 2002 given the actions taken. At the same time, A.M. Best is cautiously optimistic in
PW's planned turnaround in 2002 yet believes underwriting results might very well be disrupted
during the year given the unavailability of PW's adverse development treaty (exhausted in 2001) and
                                                 Page 15
                               2003 2nd. Quarter Rating Rationales
the potential for continued adverse loss reserve development in commercial auto liability. In addition,
there continues to be an element of execution risk considering the recent actions taken by
management. In light of these challenges, A.M. Best views the rating outlook as negative

Response Insurance Company of America (A.M. Best #: 12385 NAIC #: 10727)

Rating Rationale: The rating reflects the company's favorable capitalization, improving operating
performance trends and the parent's favorable balance sheet strength. The modest premium and
reserve leverage coupled with the predominate fixed income investment portfolio has resulted in a
stable capital base. Although historical operating results have been unfavorable, improvement has
been recorded over the most recent period. This improvement reflects re-underwriting initiatives
which include significant rate increases, re-tiering of risks and non-renewal programs. The capital
position is further enhanced by the balance sheet strength of the ultimate parent, Direct Response
Corporation, a holding company for a number of direct to consumer insurance operations.

Offsetting these positive rating factors is the execution risk associated with the parent's purchase of
Worldwide Insurance from American Financial Group as well as uncertainty regarding the on-going
favorable impact of the company's performance improvement initiatives. Although the parent has
demonstrated success in acquiring and integrating insurance operations, the magnitude of the most
recent transaction modestly increases the risk. While management has and will continue to
implement re-underwriting initiatives, a fair degree of uncertainty remains with regards to the ultimate
success of these programs. However, based on the company's favorable capitalization, anticipation
of on-going improvement in operating performance trends and strong holding company balance
sheet, A.M. Best views the rating outlook as stable.

Shelby Casualty Insurance Company (A.M. Best #: 02277 NAIC #: 30503)
Vesta Fire Insurance Corporation (A.M. Best #: 04407 NAIC #: 11762)
Vesta Insurance Corporation (A.M. Best #: 01813 NAIC #: 42668)
The following text is derived from the report of Vesta Insurance Group Incorporated.

Rating Rationale: This rating applies to Vesta Fire Insurance Corporation and its eight
fully-reinsured subsidiaries and is based on the consolidation of these companies. The rating reflects
the group's fair capitalization, above average expense position, volatile reserve development
patterns and affiliated investment leverage. While the company posted improved profitability in 1999
and 2000, subsequent results have been negative due to unanticipated severity on the private
passenger automobile line, adverse development in reserves on discontinued lines and continued
poor homeowner's results in the insurance portfolio acquired from Shelby in 1997. This lackluster
operating performance coupled with an unfavorable arbitration decision has led to double digit
declines in surplus. When combined with recent significant premium growth, the group's premium
leverage has increased considerably. In addition, results continue to be impacted by Vesta's above
average expense structure. Management has recently taken steps to reduce overall expenses
including revised outsourcing agreements, increased agency automation and the divestiture of a
corporate office which was not being fully utilized. Reserve development has been volatile with
adverse development recorded. During 2001, the group strengthened reserves for its now
discontinued commercial and assumed reinsurance lines by approximately $30 million and by $4
million in the personal lines segment. Affiliated investment leverage for the group has increased
significantly over the last several years, reflecting the addition of Florida Select as well as holdings in

                                                  Page 16
                              2003 2nd. Quarter Rating Rationales
bonds issued by the parent. As a result, affiliated investments as a percentage of surplus has
increased from less than 2% at year-end 1999 to nearly 70% as of year-end 2002. The group has
noted a modest improvement in its year-end 2002 combined ratio reflecting improved rate adequacy
and a modest reduction in premium leverage is anticipated given the use of a quota share treaty on
its Texas property business and scaled back growth initiatives.

Partially offsetting these negative rating factors is the group's geographic risk dispersion as well as
management's efforts in stabilizing and improving the overall financial position of the group. As a
result of a series of well-documented events during 1998, the group's financial position was
negatively impacted. Key among the events were the announcement of accounting discrepancies, a
sizeable decline in the group's stock price, several shareholder lawsuits and a significant write-off of
goodwill from a prior acquisition. However, the group's new management team has made progress
in returning the group to a more stable position. Actions taken by management include debt
restructuring, reduced overhead costs and the elimination of non-core business units with an
increased focus on offering personal lines products. During 1999 & 2000, Vesta sold its Texas
County Mutual and assumed reinsurance business as well as exited from its historically unfavorable
commercial lines products. In a further effort to increase its spread of risk and focus on personal
lines products, the company acquired Florida Select Insurance Company in mid-2001. Despite
writing property business in the catastrophe prone areas of Florida, Texas and Hawaii, the group's
net after tax probable maximum loss from a 100 year hurricane event represents approximately 10%
of surplus. Based on the group's fair capitalization, A.M. Best views the rating outlook as stable.

Stonington Insurance Company (A.M. Best #: 00175 NAIC #: 10340)
The following text is derived from the report of Glencoe Insurance Ltd.

Rating Rationale: This rating applies to Glencoe Insurance Ltd. (Glencoe) and its core affiliate,
Stonington Insurance Company (Stonington), and Stonington's two reinsured affiliates, Stonington
Lloyds Insurance Company and Lantana Insurance Ltd.

The rating reflects the Glencoe's excellent capitalization and the explicit support it provides to its
affiliates. Since its inception, Glencoe has produced favorable operating experience and maintained
strong risk management capabilities derived from the company's strategic role within the
Renaissance Re Holdings Ltd. group (Renaissance Re). Renaissance Re provides Glencoe and its
affiliates access to sophisticated pricing, underwriting, and risk modeling capabilities. In addition,
Renaissance Re has demonstrated its support through capital injections that have elevated
Glencoe's capital base to $325 million. Glencoe is strategically important to Renaissance Re in that
it represents its individual risk segment which assumes business from insurance companies or
accepts business from managing general agents on an individual risk or quota share basis. The
company primarily underwrites exposures in the United States with significant deal flow emanating
from Renaissance Re relationships. As a focused catastrophe specialist, Renaissance Re provides
significant management oversight emphasizing disciplined underwriting, conservative exposure
accumulations and optimal capital allocation. Additionally, through the aforementioned capital
infusions, Renaissance Re has demonstrated its willingness and ability to utilize its own financial
flexibility to support Glencoe's growth opportunities.

These strengths are offset by the competitive challenges associated with the company's market and
its limited operating history. However, A.M. Best believes that the company's affiliation with
Renaissance Re greatly mitigates these concerns, particularly in the favorable market that now
exists. Accordingly, A.M. Best views the company's rating outlook as stable.
                                                 Page 17
                              2003 2nd. Quarter Rating Rationales
Toyota Motor Insurance Company (A.M. Best #: 11099 NAIC #: 37621)

Rating Rationale: A.M. Best Co. has upgraded the financial strength rating to A- (Excellent) from
B++ (Very Good) of Toyota Motor Insurance Company (TMIC), Cedar Rapids, Iowa. The outlook is

The rating action reflects the stabilization of the company's capitalization, improved earnings trends
and strategic importance to its ultimate parent, Toyota Motor Company of Japan (TMCJ). These
positive rating factors are supported by the financial strength and prior capital infusion from Toyota
Motor Insurance Services, Inc. (the parent). TMIC supports the sale of vehicles and ensures that all
Toyota, Lexus and affiliated dealers throughout the United States can offer a consistent level of
benefits under vehicle service agreements (VSA) and guaranteed auto protection plans. Further,
management has instituted a number of initiatives to improve results going forward, including a
comprehensive pricing review of the VSA program.

Partially offsetting these positive rating factors are TMIC's fluctuating operating results over a
five-year period. As TMIC represents only a small portion of Toyota Motor Credit Corporation's
(TMCC) overall business, management has traditionally placed more emphasis on TMIC's role in
supporting vehicle sales relative to stand-alone profit objectives. Adverse underwriting results from
1998 to 2000 on coverage provided under the Prime Care program and increasing loss ratios under
the VSA program resulted in a decline in policyholder's surplus. TMIC withdrew from writing
coverage under the Prime Care program in 2000 and believes it is fully reserved for any residual
liability that may exist under this program. Loss ratios on VSA coverages are slightly higher than
similarly rated competitors; however, management anticipates a reduction in the loss ratio due to
rate increases on this line of business.

Capitalization has been bolstered by a $3 million infusion from the parent in 2001. Further, TMCC's
management now reviews TMIC's results on a stand-alone basis and is further committed to
maintaining TMIC's profitability going forward.

Warner Insurance Group (A.M. Best #: 18615)

Rating Rationale: The rating applies to Warner Insurance Company, which is evaluated on a
consolidated basis with its wholly owned but separately rated subsidiary, Worldwide Direct
Automobile Insurance Company. The rating reflects the group's favorable capitalization, improving
operating performance trends and the ultimate parent's favorable balance sheet strength. The
group's modest premium and reserve leverage coupled with its predominate fixed income
investment portfolio has resulted in a stable capital base. While leverage is anticipated to increase
with the acquisition of Worldwide Direct Automobile Insurance Company from American Financial
Group (AFG), it is expected to remain relatively modest. Although historical operating results have
been unfavorable, improvement has been recorded over the last several years. This improvement
reflects re-underwriting initiatives which included significant rate increases, re-tiering of risks and
non-renewal programs. The group's capital position is further enhanced by the balance sheet of the
ultimate parent, Direct Response Corporation, a holding company for a number of direct to
consumer insurance operations. While the Warner book of business has produced somewhat
volatile results over the last five years, the terms of the purchase agreement provide the new owners
with significant protection in terms of results. The transaction included a reserve guaranty as well as
stop-loss reinsurance.

                                                Page 18
                               2003 2nd. Quarter Rating Rationales
Offsetting these positive rating factors is the execution risk with regards to both the Warner
acquisition from Fireman's Fund in 2001 and the Worldwide Direct acquisition in 2003. Although the
group has demonstrated success in acquiring and integrating insurance operations, the magnitude
of the most recent transaction modestly increases the risk. While management has and will continue
to implement re-underwriting initiatives, a fair degree of uncertainty remains with regards to the
ultimate success of these programs. However, based on the group's favorable statutory
capitalization, anticipated on-going improvement in operating performance trends and strong holding
company balance sheet, A.M. Best views the rating outlook as stable

Verlan Fire Insurance Company (A.M. Best #: 11576 NAIC #: 10815)

Rating Rationale: This rating reflects the company's consistent, long-term operating profitability,
solid capitalization, and its improving market profile. These factors are supported by management's
conservative operating philosophy, engineering expertise, including strict adherence to loss control
guidelines and established inspection procedures and its disciplined and highly specialized niche
underwriting strategy. As a specialty niche underwriting company catering to the insurance needs of
paint manufacturers, chemical distributors and related product manufacturers, Verlan has
established itself as a leading provider of insurance and risk management services, especially its
engineering and loss control services. Opportunities in the hardened market have been extremely
plentiful, however, strict adherence to its established underwriting standards has led to only a small
percentage of those new accounts considered for coverage with an even smaller percentage of
them written. Verlan's grassroots as a captive company serving the needs of the paint and chemical
industry since 1970, has contributed to its reputation over the years. This is further exemplified by
Verlan's client retention ratio of approximately 85%, based on policy count. Verlan's solid
capitalization is derived from management's conservative operating and investment philosophies
and high quality group of reinsurers. Verlan's standing as an industry leader in engineering services
and its close affiliation with organizations within the paint and chemical manufacturing field have
improved its business profile. This has led to 369 submissions, since the start of 2000, from brokers
and agents that are new to the company. The activity reflects Verlan's standing as a market leader,
particularly as the market for tougher property exposures has contracted in recent years. Lack of
capacity offered by reinsurers to carriers that were formerly active competitors has helped bolster
the company's market profile as well. Going forward, A.M. Best believes the company will continue
to benefit from the exodus of competitors from its marketplace, particularly as respects to "highly
protected risk" (HPR) business. Verlan should also benefit from constrained capacity in the
marketplace, the inability of other carriers to write these classes of business profitably and lastly, the
opportunity to write accounts at the higher rates with more restrictive terms and conditions.

These factors are offset by the company's high expense structure, its narrow product scope, greater
dependence on catastrophe reinsurance and the potential earnings drag from remaining
environmental liabilities. The expense concern is somewhat mitigated by Verlan's use of extensive
engineering and loss control programs whose cost is validated by Verlan's comparatively superior
loss ratio. Verlan is somewhat insulated from many of their competitors as corroborated by their solid
persistency and the long-term nature of their client relationships. Specializing in commercial property
and allied lines, this business accounts for nearly all of Verlan's revenues, which makes it highly
susceptible to changes in the marketplace. The company is reliant on reinsurance to protect it on a
net basis from its gross catastrophe exposure relative to the windstorm and earthquake exposures
that could affect its book of business. However, the catastrophe reinsurance is provided by a highly
rated reinsurer. The company has also been adversely impacted by losses related to environmental
matters which, in some of the past several years, have been somewhat of a drag on underwriting
                                                  Page 19
                              2003 2nd. Quarter Rating Rationales
results and earnings. This exposure stems from policies written for 60 insureds between the years of
1978 and 1983. Since 1995, Verlan has been proactively managing its exposure to environmental
liabilities and has hired an outside actuary to evaluate its environmental exposure. Although the
potential for volatility from these claims remains, environmental reserves are set toward the high-end
of the actuarial range. A.M. Best views the rating outlook as stable given Verlan's established
underwriting / risk management expertise, solid standing within its broker and agency network, and
its ability to prudently manage its growth prospects.

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