Best Rating Updates Property/Casualty—Janurary—April 2004 MA Status Codes: D=State of domicile L=Licensed R=Licensed for Reinsurance A=Approved for Reinsurance O=Reinsurance (Other) S=Surplus Lines Writer F=Authorized under the Risk Retention Act Rating Action codes: (+) or (-) Rating upgraded or downgraded (New) Assigned initial rating (U) Rating placed under review (*) Rating was downgraded to E from C– on March 22. Current rating effective 3/25. Secure Best’s Ratings A++ and A+ = Superior A and A- = Excellent B++ and B+ = Very Good Vulnerable Best’s Ratings B and B- = Fair C++ and C+ = Marginal C and C- = Week D = Poor E + Under Regulatory Supervision F= In Liquidation S= Rating Suspended Effective Date-Represents effective date of Rating Action Rating Modifiers u - Under Review Affiliation codes q - Qualified g - Group p– Pool r - Reinsured Not Rated Categories (NR) NR-1 Insufficient Data NR-2– Insufficient Size and/or Operating Experience NR-3 Rating Procedure Inapplicable NR-4 Company Request NR-5 Not formally Followed Rating Action + + + + NEW NEW + - Company Allmerica Financial Alliance Ins Co Allmerica Financial Benefit Ins Co Allmerica Fin’l Property & Casualty Co American Compensation Ins. Co American Equity Insurance Company American Fuji F & M Ins. Co. Arkwright Insurance Company Atlantic Preferred Insurance Co Automobile Ins Co of Hartford CT Berkshire Mutual Insurance Company Blue Ridge Insurance Company Centre Insurance Company Citizens Insurance Co of America Charter Oak Fire Insurance Company Cumberland Casualty & Surety Co AMB# 11746 11212 04861 11419 11134 02755 03589 12202 04046 00212 02420 12237 00264 02516 10601 Current Rating AAAB+ A B++ NR-5 B+ A+ NR-5 AB+u AA+ E Eff. Date 2/2/04 2/2/04 2/2/04 3/15/04 2/9/04 3/22/04 2/23/04 4/26/04 4/12/04 3/22/04 3/22/04 3/22/04 2/2/04 4/12/04 3/8/04 Prior Rating B++ B++ B++ B A+u NR-3 NR-3 NR-2 A++u NR-3 Au A-u B++ A++u B+ MA Status L L D L S R D L L D L L L L L Rating Action U U U + + U + + U U U Company AMB# Fairmont Insurance Company 04293 Farmington Casualty Company 01744 Fremont Indemnity Company 02255 General Casualty Company of WI 02416 Gulf Insurance Company 02451 Greenwich Insurance Company 11095 Guarantee Co of No. America USA 11014 Hanover American Ins Co 10784 Hanover Insurance Company 02225 Harleysville Insurance Co of NJ 01921 Harleysville Insurance Company 00643 Harleysville Mutual Insurance Co 00462 Harleysville Preferred Insurance Co 11087 Harleysville Worcester Insurance Co 02483 Harleysville-Atlantic Insurance Co 00176 Indian Harbor Insurance Company 11340 Lawrenceville P&C Co., Inc. 11865 Massachusetts Bay Insurance Company 02226 MassWest Insurance Company, Inc. 10755 National Service Control Ins. Co RRG 11820 New Jersey Re-Insurance Company 03750 Northland Casualty Company 04025 Northland Insurance Company 00712 Phoenix Insurance Company 02518 Providence Washington Ins Co of NY 03784 Providence Washington Ins Co 02411 Providence Washington Ins Cos 00786 Regent Insurance Company 02418 Regis Insurance Company 02676 Shelby Casualty Insurance Company 02277 Standard Fire Insurance Company 02002 TIG Premier Insurance Company 02504 Travelers Casualty and Surety Co 02001 Travelers Casualty and Surety of Amer 03609 Travelers Casualty Company of CT 11024 Travelers Casualty Ins Co of Amer 04465 Travelers Commercial Casualty Co 11767 Travelers Commercial Insurance Co 11025 Travelers Excess and Surplus Lines Co 00241 Travelers Indemnity Co of America 04003 Travelers Indemnity Company 02520 Travelers Indemnity Co of CT 02517 Travelers Personal Security Ins Co 11026 Travelers Property Casualty Co of Amer 04461 Vesta Fire Insurance Corporation 04407 Current Rating B+u A+ F AAu B+u NR-5 AAAAAAAAA+u NR-5 AANR-4 A++ A A A+ B+u B+u B+u AB Bu A+ B+u A+ A+ A+ A+ A+ A+ A+ A+ A+ A+ A+ A+ Bu Eff. Date 1/26/04 4/12/04 3/22/04 3/22/04 2/9/04 1/26/04 2/2/04 2/2/04 2/2/04 2/23/04 2/23/04 2/23/04 2/23/04 2/23/04 2/23/04 1/26/04 3/22/04 2/2/04 3/22/04 4/12/04 4/12/04 2/9/04 2/9/04 4/12/04 4/5/04 4/5/04 4/5/04 3/22/04 3/22/04 3/22/04 4/12/04 1/26/04 4/12/04 4/12/04 4/12/04 4/12/04 4/12/04 4/12/04 4/12/04 4/12/04 4/12/04 4/12/04 4/12/04 4/12/04 3/22/04 Prior Rating B+ A++u E Au A A+ AB++ B++ A A A A A A A+ NR-4 B++ Au B++u A+ A+u A+u A++u AAAAu B+ B A++u B+ A++u A++u A++u A++u A++u A++u A++u A++u A++u A++u A++u A++u B MA Status L L L L L L L L L L L L L D L S L L D F A L S L L L L L L L L L L L L L L L S L L L L L Rating Action U U U U U U - Company Vesta Insurance Corporationi West Newbury Mutual Fire Ins Co XL Insurance America, Inc. XL Insurance Co. of New York Inc. XL Reinsurance America, Inc. XL Select Insurance Company XL Specialty Insurance Company York Insurance Company ZC Specialty Insurance Company AMB# 01813 02368 02423 12182 02104 02424 00779 02409 11880 Current Rating Bu NR-5 A+u A+u A+u A+u A+u B+u B+u Eff. Date 3/22/04 3/1/04 1/26/104 1/26/04 1/26/04 1/26/04 1/26/04 4/5/04 3/22/04 Allmerica Financial Alliance Ins Co (A.M. Best #: 11746 NAIC #: 10212) Allmerica Financial Benefit Insurance Co (A.M. Best #: 11212 NAIC #: 41840) Citizens Insurance Company of America (A.M. Best #: 00264 NAIC #: 31534) Hanover American Insurance Company (A.M. Best #: 10784 NAIC #: 36064) Hanover Insurance Company (A.M. Best #: 02225 NAIC #: 22292) Massachusetts Bay Insurance Company (A.M. Best #: 02226 NAIC #: 22306) RATING RATIONALE The following text is derived from the report of Allmerica Financial Property and Casualty Companies. Rating Rationale: The rating reflects Allmerica's improved capitalization, the elimination of dividends to support the life affiliate and satisfactory historical operating results. Partially offsetting these factors is the group's high underwriting leverage and adverse loss reserve development in recent years. Nevertheless, based on improved earnings prospects and expected continued strengthening of capitalization in 2004, A.M. Best views the rating outlook as stable. Allmerica's capital position improved in 2003 stemming from the elimination of dividends paid to the parent, Allmerica Financial Corporation (AFC), to support life operations, adequate operating earnings and strong regional market presence. Additionally, the rating recognizes the group's well balanced business composition and geographic diversification, while benefiting from having two well established regional organizations with long-standing agency relationships. The rating also reflects the group's moderate financial leverage with sufficient assets at the holding company and the recent dividend from the life companies to fund fixed obligations in the near term. However, the property/casualty operations will be the primary source to fund holding company obligations in the long-term as life business is run-off. Negative factors include the high underwriting leverage in recent years primarily attributable to $650 million in dividends paid to AFC between 1999 and 2002. In addition, the group has reported adverse loss reserve development in recent years and increased weather related losses in 2003 which has compressed profit margins. However, A.M. Best anticipates the group will produce solid operating earnings reflective of continued firm market conditions and management's corrective actions that include agency management programs, pursuing rate adequacy in all territories, improving work processes and shifting the business mix to more attractive markets. Given management's operating plan for 2004 and concurrent with the expectation that no dividends will be paid to the parent, A.M. Best believes the group's underwriting leverage measures and capitalization will improve. Prior Rating B A A+ A+ A+ A+ A+ AA-u MA Status L D L A L S L L S The rating applies to The Hanover Insurance Company and its six reinsured affiliates, as well as Citizens Insurance Company of America and its two reinsured affiliates, which A.M. Best considers core and integral to the group. American Compensation Insurance Company (A.M. Best #: 11419 NAIC #: 45934) Rating Rationale: The rating reflects ACIC's improved capitalization and profitability over the last two years. After returning an experienced executive management team in 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 principal negative rating factor is the company's poor operating performance prior to 2002. Significant reserve charges led to net losses and surplus declines in 1998, 2000, and 2001. Given management's business plan, however, A.M. Best expects ACIC's capitalization and profitability to improve further in 2004. The rating outlook is stable at this time. After the change in management in December 2001, the company revised its business strategy and produced a modest underwriting profit in both 2002 and 2003, leading to much stronger pretax and net returns on premium and surplus. The company's surplus also improved considerably in 2002 and 2003, driven by underwriting and investment income, favorable tax refunds, and realized capital gains - offset by a change to deposit accounting in 2002 for a quota share treaty which resulted in a charge to surplus. Using its proprietary claims and case management system, ACIC continues to close claims more quickly and at a lower average cost per claim than its competitors in the workers' compensation industry. ACIC's poor operating performance prior to 2002 is largely the result of its expansion 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. American Equity Insurance Company (A.M. Best #: 11134 NAIC #: 43117) Northland Casualty Company (A.M. Best #: 04025 NAIC #: 24031) Northland Insurance Company (A.M. Best #: 00712 NAIC #: 24015) RATING RATIONALE The following text is derived from the report of TNC Insurance Group. Rating Rationale: The rating applies to the seven members of the TNC Insurance Group, which operate under an inter-company pooling arrangement. The rating reflects the group's solid capitalization, niche business strategy, and the operational and financial benefits derived from its affiliation with Travelers Property Casualty Group. Offsetting these strengths is the poor underwriting performance of its two pool members -- American Equity Insurance Company and American Equity Specialty Insurance Company, the adverse loss reserve development reported in 2002 and again in 2003, and the substantial deterioration in overall profitability. Notwithstanding, in view of TNC's capitalization and the corrective actions taken by Travelers, A.M. Best views TNC's rating outlook as stable. These positive rating factors are supported by the capital contribution provided to TNC in 2002, TNC's strategic role within Travelers P&C Group, as well as its inherent underwriting expertise in the transportation business. The rating also acknowledges TNC's diversification, operating in 50 states and the District of Columbia, writing both fleet and non-fleet commercial automobile coverage, as well as specialty personal and commercial lines. Lastly, the rating takes into consideration the implicit and explicit parental commitment afforded by Travelers Property Casualty Corp. Unfortunately for TNC, rapid growth by American Equity has required TNC to strengthen reserves nearly $115 million in both 2002 and 2003, which accounts for TNC's net after-tax operating loss reported in those years. Best still recognizes the potential for continued reserve development at the American Equity companies. In an effort to stem losses at American Equity, Travelers commenced an orderly withdrawal of its business in 2002, which included non-renewing in-force policies, a cessation from writing new business and the termination of all agency contracts as allowed by state laws. At the same time, Travelers contributed $226 million of additional capital to TNC in 2002. In 2003, TNC's surplus declined modestly to $467 million. American Fuji F & M Ins Co (A.M. Best #: 02755 NAIC #: 40398) Rating Rationale: The rating reflects American Fuji Fire and Marine Insurance Company's (American Fuji) low underwriting leverage, conservative operating strategy, and good overall earnings. Offsetting factors include persistent underwriting losses driven by an above-average expense ratio and low premium volume. Based on management's commitment to maintaining the company's sound capital position, a stable rating outlook has been assigned. American Fuji maintains very strong capitalization and has produced consistent surplus growth through the retention of earnings. Given its low premium volume in relation to its surplus, American Fuji is poised to organically grow its business while still maintaining an excellent level of risk-based capital. American Fuji has generated consistent after-tax profits over the past five years. Investment results continued to mitigate above-average underwriting losses that arose as a result of the company's high fixed-cost structure and low premium volume. A.M. Best believes American Fuji's underwriting will likely improve over the near-term, as the company lowers its fixed expense ratio through premium expansion. Atlantic Preferred Insurance Co (A.M. Best #: 12202 NAIC #: 10902) Rating Rationale: This rating reflects the company's adequate capitalization, favorable operating performance and in-depth knowledge of the Florida property market. These factors are offset by the company's narrow product focus, high reinsurance dependence and geographic concentration with subsequent exposure to potential catastrophe losses as well as regulatory and competitive market pressures. Due to Atlantic Preferred's adequate capitalization, favorable operating results and management's local market knowledge, A.M. Best views the rating outlook as stable. Atlantic Preferred has consistently produced an operating profit with corresponding gains in surplus. Although partially attributed to the lack of significant storm activity, the loss experience also reflects the company's strict underwriting guidelines and overall emphasis on profitability. In addition, the company has implemented a geographic risk mitigation strategy to minimize its catastrophe exposure in the coastal and southern regions of the state. Due to the robust direct premium growth in recent years, management entered into a quota share reinsurance agreement and sought capital infusions from the parent. These actions resulted in a net premium leverage position that compares favorable to the industry composite. However, this premium growth led to an elevated gross leverage position, that reflects its significant dependence on reinsurance, with business retention of less than 20%. As a result, any change in the company's quota share reinsurance program could potentially have a significant impact on overall operating performance and correspondingly on capitalization. As a property only writer in the Florida market, the company has significant exposure to catastrophe losses with potential gross catastrophe losses equating to multiples of its capital base. Automobile Ins Co of Hartford, CT (A.M. Best #: 04046 NAIC #: 19062) Charter Oak Fire Insurance Company (A.M. Best #: 02516 NAIC #: 25615) Farmington Casualty Company (A.M. Best #: 01744 NAIC #: 41483) Phoenix Insurance Company (A.M. Best #: 02518 NAIC #: 25623) Standard Fire Insurance Company (A.M. Best #: 02002 NAIC #: 19070) Travelers Casualty and Surety Company (A.M. Best #: 02001 NAIC #: 19038) Travelers Casualty Company of CT (A.M. Best #: 11024 NAIC #: 36170) Travelers Casualty Insurance Co of Amer (A.M. Best #: 04465 NAIC #: 19046) Travelers Commercial Casualty Company (A.M. Best #: 11767 NAIC #: 40282) Travelers Commercial Insurance Company (A.M. Best #: 11025 NAIC #: 36137) Travelers Excess and Surplus Lines Co (A.M. Best #: 00241 NAIC #: 29696) Travelers Indemnity Co of America (A.M. Best #: 04003 NAIC #: 25666) Travelers Indemnity Company (A.M. Best #: 02520 NAIC #: 25658) Travelers Indemnity Company of CT (A.M. Best #: 02517 NAIC #: 25682) Travelers Personal Security Insurance Co (A.M. Best #: 11026 NAIC #: 36145) Travelers Property Casualty Co of Amer (A.M. Best #: 04461 NAIC #: 25674) RATING RATIONALE The following text is derived from the report of Travelers Property Casualty Pool. Rating Rationale: The rating applies to the 20 member pool, led by the Travelers Indemnity Company, and two reinsured affiliates. The rating also applies to Travelers Casualty and Surety Company of America and Travelers Casualty and Surety Company of Canada, which A.M. Best considers to be core and integral members of the Travelers Property Casualty Group. The rating reflects Travelers' dominant market profile, superior earnings power and strong capitalization. The rating also acknowledges the group's strategic focus on profitability, emphasizing both underwriting and financial discipline. The success of this approach is exemplified by the group's exceptionally strong earnings performance in recent years, with returns on both revenue and equity surpassing industry norms by a wide margin. These ratios underscore Travelers' effective expense management, catastrophe mitigation strategies and adherence to strict underwriting and reserving discipline. These favorable considerations are tempered somewhat by Travelers' ongoing, albeit substantially reduced, exposure to emerging asbestos and environmental (A&E) claims, as well as by the substantial prior year loss reserve development that occurred at its Gulf and American Equities subsidiaries in 2002 and 2003. While A.M. Best believes there is potential for continued modest reserve development at Travelers in the near term, the group's operating returns are expected remain superior and its capitalization strong. Accordingly, the group's rating is stable. The rating also takes into consideration the Travelers Property Casualty Corp's merger with The St. Paul Companies, which formed The St. Paul Travelers Companies, Inc., on April 1, 2004 and the benefits to be derived by integrating their respective operations. The combined organization possesses significant market share, ranking second in the U.S. in commercial lines as well as in personal lines agency companies, with 7.6% and 6.8% market shares, respectively. A.M. Best expects the combined companies to benefit from cross-selling opportunities through the ability to offer complementary products, with Travelers being particularly strong in general commercial lines and St. Paul in specialty commercial lines. The merger also results in greater geographic spread and diversification of business, with Travelers' presence being particularly strong in the Northeast and East Coast and St. Paul in the Midwest and South. Furthermore, the merger should afford significant expense savings potential through integration. Offsetting these positive factors are the challenges and risks of integrating the groups in terms of operations, systems and personnel. However, the management of both organizations has significant experience in this regard having previously been involved in the successful merger of several other large insurance organizations. Moreover, concentrations of Travelers and St. Paul business within agencies may be a concern to those agencies preferring to produce business for a more diversified group of carriers. In light of the group's $2.7 billion of A&E reserve strengthening in 2002 -- primarily asbestos reserves, A.M Best believes this bolstering of A&E reserves should lessen future earnings drag, as well as narrow the gap between Travelers' carried reserves and Best's view of A&E reserves. While A.M. Best is reasonably comfortable with the adequacy of Travelers' A&E reserves, further development appears probable, particularly relating to environmental reserves in the near term. Being among the largest commercial insurers, Travelers also has exposure to potential terrorist-related losses, although it has an extensive exposure management program in place to manage its spread of risk and reduce its exposure to a single event. Notwithstanding, as a recognized market leader, A.M. Best expects Travelers to benefit from the current favorable property/casualty market environment and achieve profitable growth. Blue Ridge Insurance Company (A.M. Best #: 02420 NAIC #: 24503) General Casualty Company of Wisconsin (A.M. Best #: 02416 NAIC #: 24414) MassWest Insurance Company, Inc (A.M. Best #: 10755 NAIC #: 34100) Regent Insurance Company (A.M. Best #: 02418 NAIC #: 24449) RATING RATIONALE The following text is derived from the report of General Casualty Companies. Rating Rationale: The rating reflects General Casualty Companies' excellent capital position, strong Midwest regional market presence and the group's position as a strategic subsidiary of its ultimate parent, Winterthur Swiss Insurance Company (WSIC). Partially offsetting these positive rating factors is the group's negative impact of significant storm losses in its predominant Midwest homeowners book of business and adverse loss reserve development in recent years. A.M. Best views the rating outlook as stable due to General Casualty's excellent capital position and improved operating results in recent years. The rating considers the group's position as a strategic subsidiary of its ultimate parent, Winterthur Swiss Insurance Company (WSIC). WSIC conducts its North American insurance operations through General Casualty and two other regional property and casualty writers, all of which are considered strategic investments by WSIC. The General Casualty rating also reflects the group's strong Midwest regional market presence, historically disciplined underwriting approach, strong agency franchise and stable management team. To restore operating performance to historical levels, management has implemented several initiatives aimed at improving underwriting performance, including implementation of rate increases in both its personal and commercial lines, non-renewal or withdrawal of some under-performing business closer monitoring of aggregate exposures and terminating relationships with unprofitable agencies. Further, the group has successfully reduced its coastal exposure through agency management actions, re-underwriting efforts, and the addition of windstorm deductibles. Negative rating factors include the recent challenges General Casualty has faced over the past several years in maintaining its historical level of operating performance given the negative impact of significant storm losses in its predominant Midwest homeowners book of business and loss reserve strengthening, primarily related to workers compensation. Additionally, the group has experienced an earnings drag from the integration of its affiliate, the Blue Ridge companies, and the sale of the Winterthur International operations. While the group's overall level of capital is excellent, it has been strained by these recent operating developments compounded by annual dividend payments to its immediate parent and capital losses as a result of the recently unfavorable equity markets. The rating applies to the group's seven pool members, led by General Casualty Company of Wisconsin. Centre Insurance Company (A.M. Best #: 12237 NAIC #: 34649) ZC Specialty Insurance Company (A.M. Best #: 11880 NAIC #: 24317) RATING RATIONALE The following text is derived from the report of Centre Solutions (Bermuda) Limited. Under Review Rationale: A.M. Best has changed the under review implications to negative from developing for the ratings of Centre Solutions (Bermuda) Limited (Centre) and all affiliated companies based on A. M. Best's opinion that little if any additional capital will be provided to Centre over the near term. In addition, A. M. Best is of the opinon that additional reserve strengthening may further diminished the company's overall capitalization. Reserve charges have already been taken following Centre's announced exit from credit enhancement and life & health lines of business. The transactions written in these discontinued lines will continue to be fully supported until run-off is completed. Centre's parent company, Zurich Financial Services (ZFS), previously announced its intention to exit from non-core businesses. Resolution of the under-review status will be predicated on the completion of further due diligence on the companies loss reserves to be conducted by A. M. Best. Rating Rationale: The rating applies to Centre Solutions (Bermuda) Limited and its affiliates including Centre Reinsurance Limited, Centre Solutions (U.S.) Limited, Centre Reinsurance International Company, Centre Insurance International Company, CentreLine Reinsurance Limited, Centre Insurance Company, ZC Specialty Insurance Company, Centre Solutions (Asia) Limited, Centre Life Insurance Company and includes subsidiary operations of the named companies. The downgrade of the financial strength rating to B+ (Very Good) from A- (Excellent) reflects the lack of adequate and timely capital support to maintain Centre's previous A- (Excellent) rating by parent company ZFS. As a result, A.M. Best believes there is increased uncertainty regarding Centre's future as a viable underwriting entity within ZFS. In A.M. Best's opinion, Centre's operations are now ancillary to ZFS and views the company to be essentially in run-off. Previously, on November 24, 2003, A. M. Best had lowered the financial strength rating on Centre to A- (Excellent) from A (Excellent) and maintained rating as under review. At that time A. M. Best had expressed concerns with regard to the adequacy and nature of capital support to be provided to Centre from its parent company. Subsequently, ZFS did provide an additional $250 million of capital to Centre, increasing its overall capitalization to approximately $900 million as of February 29, 2004. However, in A.M. Best's opinion, the additional capital provided for only a marginal improvement to Centre's risk adjusted capitalization, given the company's continued exposure to further adverse loss reserve development from discontinued classes of business. A. M. Best had expected ZFS to provide additional capital support, not only to insulate Centre from its historical business exposures, but to also support Centre's planned new focus on structured risk business. Cumberland Casualty & Surety Company (A.M. Best #: 10601 NAIC #: 24660) RATING RATIONALE Rating Rationale: Effective February 26, 2004, Cumberland Casualty & Surety Company was issued a consent order and placed into rehabilitation by the Florida Department of Financial Services. Fairmont Insurance Company (A.M. Best #: 04293 NAIC #: 18864) RATING RATIONALE Under Review Rationale: Fairmont Insurance Co. has been removed from the TIG Insurance Group in order for this entity to be included in the newly formed three member pool - Fairmont Specialty Group. In order to provide a stabilized balance sheet for the group to begin business, all prior liabilities of this company were sold to nSpire, the runoff/reinsurance entity owned by Fairfax. In addition, the 100% quota share between Fairmont Insurance Company and TIG was commuted. The remaining clean shell will be used as one of three pool members of Fairmont Specialty Group for ongoing business. A.M. Best will review the documentation and analysis of the newly formed pool, Fairmont Specialty Group. The historical performance of the ongoing books of business, the capitalization, and the business plan will form the foundation of the new group rating for Fairmont. Upon conclusion, the under review status will be removed and a rating assigned to the group. Rating Rationale: The rating applies to the TIG Insurance Company and its reinsured primary company subsidiaries. The rating reflects the group's ultimate run-off status and adequate level of stand-alone capitalization. In December 2002, TIG discontinued its MGA-controlled program business in Dallas and restructured the remainder of its operations. The more profitable books of business of TIG will be continued but moved to other ongoing Fairfax operating subsidiaries. The MGA business, which represented approximately half of 2002 net premiums written, was placed in run-off under the management of TRG/Riverstone, an affiliate of the group's ultimate parent, Fairfax Financial Holdings Limited (Fairfax). In the restructuring Fairfax strengthened TIG's reserves by $200 million and took a restructuring charge of approximately $64 million. In addition, ORC Re (Dublin), a Fairfax affiliate, provided TIG with a $300 million adverse development cover. At the same time, Fairfax acquired the remaining 72.5% economic ownership of TRG (the parent company of International Insurance Company (IIC)) in exchange for payments over the next 15 years. Fairfax then merged IIC and TIG, effective December 16th, 2002. During the first quarter of 2003, with the approval of the California State Insurance Department, TIG distributed to Fairfax Cdn$1.25 billion of assets, including 33.2 million shares of OdysseyRe Holdings, all of the shares of Ranger Insurance and all of the shares of Commonwealth Insurance. These assets are to initially be held in trust for the benefit of TIG policyholders until a series of tests, described below, are met. As a result, the statutory surplus of TIG was reduced to approximately $514 million. Upon placing the adverse development externally to the satisfaction of the California State Insurance Department, a comparable portion of the assets will be released from the trust. If at the end of 2003, TIG has $500 million of statutory surplus, a RBC ratio of 200% and a net reserves to surplus ratio of less than 3:1, the remaining assets will be released from trust. During the second quarter 2003, Fairfax announced that it had successfully placed $200 million of the $300 million cover externally and A. M. Best expects this amount, less the cost of approximately $50 million, to be released from the trust some time during the second half of 2003. TIG's has produced historically weak underwriting and operating performance, compounded by $200 million of additional gross loss reserve strengthening in the third quarter of 2001 and fourth quarter of 2002. The recent reserving actions relate to the 1999, 2000 and older accident years and follows $240 million of reserve strengthening necessary in 2000 and $200 million in 1999. As a result of these actions, the group's historical reported combined ratio has been well above the industry average. Given these results and the unprofitable nature of TIG's MGA business platform, Fairfax determined that certain core businesses of TIG were no longer viable and placed these businesses in run-off. Greenwich Insurance Company (A.M. Best #: 11095 NAIC #: 22322) Indian Harbor Insurance Company (A.M. Best #: 11340 NAIC #: 36940) XL Insurance America, Inc. (A.M. Best #: 02423 NAIC #: 24554) XL Insurance Company of New York, Inc. (A.M. Best #: 12182 NAIC #: 40193) XL Reinsurance America Inc. (A.M. Best #: 02104 NAIC #: 20583) XL Select Insurance Company (A.M. Best #: 02424 NAIC #: 19607) XL Specialty Insurance Company (A.M. Best #: 00779 NAIC #: 37885) RATING RATIONALE The following text is derived from the report of XL Capital Group. Under Review Rationale: A.M. Best has placed the financial strength ratings of XL Capital Ltd and its affiliated companies under review with negative implications. The action follows the announcement that XL Capital has recorded a pre-tax year-to-date charge of $878 million for reserve strengthening related to prior year adverse development emanating primarily from North American casualty reinsurance business, accident years 1997 to 2001, acquired as part of the NAC Reinsurance Corp merger. The charge has exceeded A.M. Best's expectation and has placed the company's risk adjusted capital below the level required for its current financial strength rating. However, XL Capital plans to raise additional capital during the first half of 2004 to replenish its capital base. XL Capital's ratings will remain under review with negative implications until additional capital has been successfully raised in sufficient amounts to place risk-adjusted capitalization well within the Superior level, supportive of its current financial strength ratings. Should this not be accomplished within a reasonable timeframe, it is likely that the current financial strength ratings will be downgraded to the Excellent level. Rating Rationale: The rating applies to XL Capital Group (XL) and its core insurance and reinsurance group members, which include: XL Insurance (Bermuda) Ltd, XL Europe Limited, (Ireland), XL Re Ltd (Bermuda), XL Insurance Company Limited, as well as the U.S. insurance pool, which consists of XL Reinsurance America Inc., XL Insurance Company of New York, Inc., Greenwich Insurance Company, Indian Harbor Insurance Company, XL Specialty Insurance Company, XL Insurance America, Inc. and XL Select Insurance Company. A.M. Best considers these companies to be core subsidiaries to XL Capital Group, as they are integral to the group's strategy and critical to its success and viability. In addition, these companies--which generate most of the group's total business--are material contributors to its market profile, operating performance and financial strength and are generally well established in their individual market segments. These ratings reflect XL Capital's strong and diverse earnings base, historically solid capitalization and well-recognized position as a leading provider of specialized insurance and reinsurance coverage. These strengths are derived from the group's focused operating strategy, disciplined underwriting approach, strong risk management capabilities and experienced management team. Furthermore, XL Capital maintains a distinct competitive advantage as a Bermuda-domiciled organization given its favorable regulatory environment. A.M. Best expects XL Capital will continue to judiciously manage its capital base while maintaining financial leverage-debt plus preferred securities to total adjusted capital-in the low to mid 20% range. After several years of trending downward, fixed charge coverage is expected to be restored to the mid to upper single digits beginning in 2004. Offsetting these strengths is the group's adverse loss development in U.S. casualty lines for accident years 1997 to 2001 stemming from its acquisition of NAC Re. This adverse development has resulted in a significant charge to 2003 results. Furthermore, the group's strengths are offset by risks associated with catastrophe and specialized books, particularly those imposed by financial products, which could cause earnings variability and a significant level of goodwill associated with its acquisitions. These concerns are somewhat mitigated, however, by XL management's historically sound capital management strategies, currently favorable market rates and management's demonstrated ability to optimally manage risk. Gulf Insurance Company (A.M. Best #: 02451 NAIC #: 22217) RATING RATIONALE The following text is derived from the report of Gulf Insurance Group. Under Review Rationale: On January 29, 2004, A.M. Best placed the financial strength rating of Gulf Insurance Group under review with developing implications. The rating action followed Travelers Property Casualty Corp.'s fourth-quarter 2003 earnings announcement, which disclosed significant additional reserve strengthening required at Gulf, that resulted in substantial underwriting and operating losses for the group. The rating action reflected the substantial deterioration in Gulf's capitalization primarily resulting from $252 million in pretax charges relating to the strengthening of prior year reserves and uncollectible reinsurance recoverables. In connection with the reserve strengthening, $200 million of capital infusions were made by Travelers in the fourth quarter. The rating action also considered Travelers' intent to continue to fully support the liabilities of Gulf with certain intercompany transaction agreements, which require state regulatory approval that was anticipated to occur within 45 days. The under review status assigned to Gulf's rating reflected the pending approval and completion of such intercompany transaction. Rating Rationale: The rating applies to XL Capital Group (XL) and its core insurance and reinsurance group members, which include: XL Insurance (Bermuda) Ltd, XL Europe Limited, (Ireland), XL Re Ltd (Bermuda), XL Insurance Company Limited, as well as the U.S. insurance pool, which consists of XL Reinsurance America Inc., XL Insurance Company of New York, Inc., Greenwich Insurance Company, Indian Harbor Insurance Company, XL Specialty Insurance Company, XL Insurance America, Inc. and XL Select Insurance Company. A.M. Best considers these companies to be core subsidiaries to XL Capital Group, as they are integral to the group's strategy and critical to its success and viability. In addition, these companies--which generate most of the group's total business--are material contributors to its market profile, operating performance and financial strength and are generally well established in their individual market segments. These ratings reflect XL Capital's strong and diverse earnings base, historically solid capitalization and well-recognized position as a leading provider of specialized insurance and reinsurance coverage. These strengths are derived from the group's focused operating strategy, disciplined underwriting approach, strong risk management capabilities and experienced management team. Furthermore, XL Capital maintains a distinct competitive advantage as a Bermuda-domiciled organization given its favorable regulatory environment. A.M. Best expects XL Capital will continue to judiciously manage its capital base while maintaining financial leverage-debt plus preferred securities to total adjusted capital-in the low to mid 20% range. After several years of trending downward, fixed charge coverage is expected to be restored to the mid to upper single digits beginning in 2004. Offsetting these strengths is the group's adverse loss development in U.S. casualty lines for accident years 1997 to 2001 stemming from its acquisition of NAC Re. This adverse development has resulted in a significant charge to 2003 results. Furthermore, the group's strengths are offset by risks associated with catastrophe and specialized books, particularly those imposed by financial products, which could cause earnings variability and a significant level of goodwill associated with its acquisitions. These concerns are somewhat mitigated, however, by XL management's historically sound capital management strategies, currently favorable market rates and management's demonstrated ability to optimally manage risk. Gulf Insurance Company (A.M. Best #: 02451 NAIC #: 22217) RATING RATIONALE The following text is derived from the report of Gulf Insurance Group. Under Review Rationale: On January 29, 2004, A.M. Best placed the financial strength rating of Gulf Insurance Group under review with developing implications. The rating action followed Travelers Property Casualty Corp.'s fourth-quarter 2003 earnings announcement, which disclosed significant additional reserve strengthening required at Gulf, that resulted in substantial underwriting and operating losses for the group. The rating action reflected the substantial deterioration in Gulf's capitalization primarily resulting from $252 million in pretax charges relating to the strengthening of prior year reserves and uncollectible reinsurance recoverables. In connection with the reserve strengthening, $200 million of capital infusions were made by Travelers in the fourth quarter. The rating action also considered Travelers' intent to continue to fully support the liabilities of Gulf with certain intercompany transaction agreements, which require state regulatory approval that was anticipated to occur within 45 days. The under review status assigned to Gulf's rating reflected the pending approval and completion of such intercompany transaction agreements are not successfully approved and completed, Gulf's current ratings are likely to be downgraded. Conversely, if the agreements are approved and completed, Gulf's ratings are likely to be aligned with Travelers Property Casualty Pool. Rating Rationale: The rating applies to the four pool members of the Gulf Insurance Group along with two reinsured affiliates. The rating takes into consideration Gulf's highly specialized and diversified product offerings, historically excellent profitability in its core lines and the benefits derived from being part of Travelers Property Casualty Corp. The rating also considers the recent challenges associated with Gulf's residual value insurance (RVI) business, the related reserve strengthening actions taken in this line in 2002 and 2003, and the financial support provided to Gulf and its immediate parent, Commercial Insurance Resources, Inc. (CIRI), by Travelers. The rating also recognizes the $132 million capital investment in CIRI by Trident II LP (private equity fund) and senior employees of Gulf Insurance Company on August 1, 2002, as well as the re-establishment of the Gulf Insurance Group pool (retroactive to January 1, 2002). Capital investments made by investors included $82 million of mandatory convertible preferred stock, $48 million of convertible notes and $2 million of common equity. If these securities were converted, Travelers Indemnity would maintain 76% majority ownership of CIRI while 21% would be held by Trident II, L.P. -- a venture capital investment fund managed by MMC Capital -- and 3% by management. Although ownership has changed somewhat, A.M. Best believes Gulf's market position and core competencies remain intact. Gulf also benefits from its highly focused underwriting strategies, generally small to middle market orientation and the group's leadership position in many of its specialty markets. The rating acknowledges Gulf's affiliation with Travelers, the strategic role it plays and operating support provided by Travelers. Offsetting these positive factors are Gulf's underwriting deterioration and increased earnings volatility over the past several years and level of stand-alone capitalization which falls short of supporting its current rating. These factors stem from Gulf's weaker than expected operating results in recent years, the challenges associated with its RVI business, while taking into account the adverse prior year loss reserve development reported by the group in 2002 and 2003. In 2002 and the first quarter 2003, Gulf's prior year loss reserves for RVI business were significantly strengthened, including an additional $239 million in the first quarter 2003. Also in the first quarter 2003, reserves for some of Gulf's core businesses were strengthened by $30 million. Core reserves affected by this strengthening include management / professional liability, entertainment and fidelity / surety lines. Concurrent with this reserve strengthening, Travelers also made a $130 million loan to CIRI, which in turn contributed the funds to Gulf. A.M. Best believes there is potential for additional reserve development at Gulf, particularly as it relates to professional liability lines where litigation and loss cost trends have been rapidly rising. Management continues to closely monitor reserve levels. Notwithstanding, since 2001, Gulf management has been implementing aggressive increased pricing and re-underwriting initiatives. At the same time, hard market conditions in the group's core markets are proving highly beneficial in this regard. Lastly, over the years, Gulf's business strategy has remained significantly dependent on its reinsurers, which are an integral part of its success. Notwithstanding, Gulf is susceptible to changes in reinsurance pricing and capacity, particularly in certain product lines that require large limit capacity. In addition to increased leverage and reserve uncertainty, Gulf's weakened standalone capitalization also is reflective of its above-average reinsurance dependence 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. Once again, Travelers intends to lend financial support by providing Gulf with a $170 million standby line of credit that is to be utilized if Gulf's surplus falls below certain thresholds. Given this and other demonstrated financial support provided by Travelers, the group's rating outlook is stable. Harleysville Insurance Co of NJ (A.M. Best #: 01921 NAIC #: 42900) Harleysville Insurance Company (A.M. Best #: 00643 NAIC #: 23582) Harleysville Mutual Insurance Company (A.M. Best #: 00462 NAIC #: 14168) Harleysville Preferred Insurance Company (A.M. Best #: 03779 NAIC #: 35696) Harleysville Worcester Insurance Company (A.M. Best #: 02483 NAIC #: 26182) Harleysville-Atlantic Insurance Company (A.M. Best #: 00176 NAIC #: 13382) RATING RATIONALE The following text is derived from the report of Harleysville Insurance. Rating Rationale: The rating applies to the group's 11 member inter-company pool, led by Harleysville Mutual Insurance Company. The rating is based on the consolidated operating performance and financial condition of these pool participants, as well as one affiliate and two subsidiary property / casualty companies that are separately rated. The rating reflects Harleysville's strong capitalization and regional market franchise offset by the emergence of significant prior year loss reserve development and substantial operating losses in 2003, diminished (albeit adequate) capitalization and A.M. Best's cautious view of the group's earnings prospects over the near term. Despite these offsetting factors, A.M. Best views the rating outlook as stable. Harleysville's positive attributes are largely derived from its long-term profitability and wellestablished agency relationships. As a regional insurer, Harleysville benefits from its strong name recognition, extensive local market knowledge and stable market presence. The rating also acknowledges the benefits derived from management's corrective actions over the years and the general price firming throughout the industry. Harleysville also is afforded additional financial flexibility through its publicly traded holding company, Harleysville Group Inc. (HGIC), which has access to the public markets. HGIC maintains moderate financial leverage, which is enhanced by good available cash coverage. Despite these positive factors, A.M. Best is concerned with the level of reserve strengthening taken in 2003, the substantial net operating loss reported in the year, and the potential for continued adverse loss reserve development going forward. According to management, this stems from increased loss severity and different loss patterns since the recent reorganization of the group's claims operations. In addition, it is apparent that Harleysville has lagged its peers in terms of implementing more stringent underwriting standards, particularly in personal lines, which could result in continued unfavorable accident year underwriting performance relative to its competitors. Moreover, there is some additional uncertainty as respects to Harleysville's leadership and future direction due to the retirement of Harleysville's chairman and chief executive officer at year-end 2003. A.M. Best is encouraged by Harleysville's election of Michael L. Brown as chief executive officer and William W. Scranton as non-executive chairman in early 2004, which should alleviate some of this uncertainty. Harleysville Insurance ranks among the top-60 property / casualty insurance organizations in the United States. Harleysville emphasizes small "main street" commercial accounts as well as personal lines. Over the past several years, the group has exited the Massachusetts and New Jersey private passenger automobile markets through the transfer of renewal rights and has managed to depopulate its personal lines exposures in some Midwest and Mid-Atlantic states. Notwithstanding, underwriting results remain susceptible to catastrophes and local weather patterns. Exposure to weather conditions and cats is directly correlated to Harleysville's East Coast and Midwest business concentration, as evidenced by winter storms and Hurricane Isabel in 2003. New Jersey Re-Insurance Company (A.M. Best #: 03750 NAIC #: 35432) RATING RATIONALE The following text is derived from the report of NJM Insurance Group. Rating Rationale: The rating reflects the group's superior capitalization, strong operating performance and dominant local market presence. These positive rating attributes are partially offset by the group's business concentration within New Jersey. Based on the group's superior capitalization and consistently strong earnings, A.M. Best views the rating outlook as stable. The group's positive rating attributes are derived from management's adherence to sound operating fundamentals that are reflected in its moderate underwriting leverage, conservative investment risk and prudent loss reserving practices. Its direct marketing approach and efficient cost structure have consistently produced one of the lowest underwriting expense ratios in the industry. This significant expense advantage, combined with favorable loss experience and strong investment income, has enabled the group to provide significant policyholder dividends while continuing to increase surplus each year. The group's statewide market leader position is augmented by its extensive workers' compensation managed care capabilities, its own preferred provider network, strong business persistency and reputation for providing quality service. Furthermore, the group enjoys greater operating flexibility as policyholder dividends are declared by coverage. As a result of the business concentration within New Jersey, the group is exposed to risk from market volatility, legislative changes and judicial decisions. It has been subject to a difficult operating environment, reflective of regulatory constraints and uncertainty due to the political nature of the state's insurance markets. However, the group's proven track record of consistently strong earnings, superior capital position and extensive local market knowledge outweigh the concentration and regulatory concerns. Moreover, recently passed legislation is designed to increase capacity in the New Jersey personal auto market, promote competition in the state, reduce fraud and lower the number of uninsured motorists. The group's overall underwriting results have been tempered by large discretionary policyholder dividend payments, which over the last five years, have added an average of approximately twenty points annually to the combined ratio. Nonetheless, these policyholder's dividend payments have significantly enhanced customer loyalty, resulting in superior business persistency and strong overall operating performance. The group's rating is based on the consolidation of New Jersey Manufacturers Insurance Company (NJM) and its wholly-owned subsidiaries, New Jersey Re-Insurance Company (NJRe), New Jersey Indemnity Insurance Company (NJI) and New Jersey Casualty Insurance Company (NJC). The group's rating applies to NJM and NJRe. United States. Harleysville emphasizes small "main street" commercial accounts as well as personal lines. Over the past several years, the group has exited the Massachusetts and New Jersey private passenger automobile markets through the transfer of renewal rights and has managed to depopulate its personal lines exposures in some Midwest and Mid-Atlantic states. Notwithstanding, underwriting results remain susceptible to catastrophes and local weather patterns. Exposure to weather conditions and cats is directly correlated to Harleysville's East Coast and Midwest business concentration, as evidenced by winter storms and Hurricane Isabel in 2003. New Jersey Re-Insurance Company (A.M. Best #: 03750 NAIC #: 35432) RATING RATIONALE The following text is derived from the report of NJM Insurance Group. Rating Rationale: The rating reflects the group's superior capitalization, strong operating performance and dominant local market presence. These positive rating attributes are partially offset by the group's business concentration within New Jersey. Based on the group's superior capitalization and consistently strong earnings, A.M. Best views the rating outlook as stable. The group's positive rating attributes are derived from management's adherence to sound operating fundamentals that are reflected in its moderate underwriting leverage, conservative investment risk and prudent loss reserving practices. Its direct marketing approach and efficient cost structure have consistently produced one of the lowest underwriting expense ratios in the industry. This significant expense advantage, combined with favorable loss experience and strong investment income, has enabled the group to provide significant policyholder dividends while continuing to increase surplus each year. The group's statewide market leader position is augmented by its extensive workers' compensation managed care capabilities, its own preferred provider network, strong business persistency and reputation for providing quality service. Furthermore, the group enjoys greater operating flexibility as policyholder dividends are declared by coverage. As a result of the business concentration within New Jersey, the group is exposed to risk from market volatility, legislative changes and judicial decisions. It has been subject to a difficult operating environment, reflective of regulatory constraints and uncertainty due to the political nature of the state's insurance markets. However, the group's proven track record of consistently strong earnings, superior capital position and extensive local market knowledge outweigh the concentration and regulatory concerns. Moreover, recently passed legislation is designed to increase capacity in the New Jersey personal auto market, promote competition in the state, reduce fraud and lower the number of uninsured motorists. The group's overall underwriting results have been tempered by large discretionary policyholder dividend payments, which over the last five years, have added an average of approximately twenty points annually to the combined ratio. Nonetheless, these policyholder's dividend payments have significantly enhanced customer loyalty, resulting in superior business persistency and strong overall operating performance. The group's rating is based on the consolidation of New Jersey Manufacturers Insurance Company (NJM) and its wholly-owned subsidiaries, New Jersey Re-Insurance Company (NJRe), New Jersey Indemnity Insurance Company (NJI) and New Jersey Casualty Insurance Company (NJC). The group's rating applies to NJM and NJRe. under review status will be removed and a rating assigned to the group. Rating Rationale: The rating applies to Ranger Insurance Company and its reinsured subsidiary, Ranger Lloyds. The rating reflects the ongoing commitment of the group's ultimate parent, Fairfax Financial Holdings Limited, which has continued to support the company's efforts to improve its operations as well as stabilize its balance sheet. The rating gives credit for extensive remedial actions taken thus far to improve the future underwriting performance of the group's continuing insurance programs, as well as available aggregate stop loss reinsurance protection, which helps to insulate the group from further adverse reserve development. Starting in 2000, Ranger has, with limited success, taken aggressive action to improve performance - including significant price increases, elimination of unprofitable programs and enhanced focus on underwriting in its core operations. In December 2000, Fairfax announced a reorganization of Ranger's direct parent, TIG Insurance Company. As part of this restructuring, the Ranger legal entity was contributed to a trust fund securing a stop loss reinsurance arrangement on TIG's reserves. Ranger's business operations, along with TIG's historically profitable Hawaiian branch office and specialty accident & health business unit, became part of the newly formed Fairmont Specialty Group. Going forward, Fairmont Specialty Group will consist of these three autonomous, geographically dispersed business units. The corporate offices of Fairmont Specialty Group will be located in Houston, TX along with the operations of Ranger. Ranger's affiliation with Fairmont Specialty Group will help reduce Ranger's historically high fixed expense ratio. Fairmont Specialty Group management is in the process of realigning legal entities and capital to support its business plan. A.M. Best will continue to monitor the Fairmont Specialty Group formation throughout 2003 and the performance of Ranger within this new Fairfax subsidiary. Partially offsetting these positive rating factors is the group's historically weak operating performance, which previously resulted in a significant decline in policyholder surplus. Underwriting performance has repeatedly been impacted by continued adverse reserve development, which has emerged from both discontinued and inforce business segments. Ranger's earning trends have been very poor relative to industry norms, reflective of unprofitable underwriting performance, operating expense inefficiencies and declining investment yields. New management must prove their ability to run Ranger and Fairmont Specialty Group profitably. Accordingly, Ranger's rating outlook is negative and dependent on improvement in its own performance, as well as the formation and capitalization of Fairmont Specialty Group Regis Insurance Company (A.M. Best #: 02676 NAIC #: 37052) Rating Rationale: The rating reflects the company's historically weak underwriting and operating results, surplus erosion over the period, and elevated risk exposure due to a very high net retention on the company's book of business. These factors are partially offset by the company's low net underwriting leverage and overall improved underwriting and operating profitability over the last two years. The rating reflects the results reported by Regis over the past five year period and the potential exposure to loss severity as it relatives to Regis' high net retention levels (since late 2002). This is partially offset by management's continuing pursuit of profitability through sound underwriting fundamentals and expertise in the small to mid-size commercial segment. However, prior to the recent improvement, the company had posted an average combined ratio of 225% from 1999 to 2001. While considered secure, capitalization is highly exposed to loss severity trends given its high net retention relative to surplus. Also, recent exposure growth further strains capitalization. Despite these negative factors, A.M. Best views the rating outlook as stable given Regis' low underwriting leverage and much improved underwriting results in recent years. 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) RATING RATIONALE The following text is derived from the report of Vesta Insurance Group. Under Review Rationale: The under review rating action reflects Vesta's significant deterioration in capital and on-going uncertainty regarding management's capital enhancement initiatives. The reduction in capital was driven primarily by charges associated with an unfavorable arbitration decision along with the write down of a deferred tax asset. Accordingly, statutory surplus for the property/casualty operating companies at year-end 2003 declined dramatically, with this trend continuing in the first quarter of 2004. As previously announced, Vesta intends to sell a portion of its non-standard agency and underwriting business through an initial public offering. While the separation of the standard and non-standard auto business may facilitate a more efficient allocation of capital, considerable execution risk remains. The ratings will remain under review pending A.M. Best meeting with management as well as execution of the group's capital enhancement initiatives. In the absence of capital improvement, the ratings will likely be downgraded. 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 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 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 treaties on its Texas property and InsureOne non-standard auto businesses and scaled back growth initiatives. Partially offsetting these negative rating factors is the group's geographic risk dispersion as well as the remaining assets will be released from trust. During the second quarter 2003, Fairfax announced that it had successfully placed $200 million of the $300 million cover externally and A. M. Best expects this amount, less the cost of approximately $50 million, to be released from the trust some time during the second half of 2003. TIG's has produced historically weak underwriting and operating performance, compounded by $200 million of additional gross loss reserve strengthening in the third quarter of 2001 and fourth quarter of 2002. The recent reserving actions relate to the 1999, 2000 and older accident years and follows $240 million of reserve strengthening necessary in 2000 and $200 million in 1999. As a result of these actions, the group's historical reported combined ratio has been well above the industry average. Given these results and the unprofitable nature of TIG's MGA business platform, Fairfax determined that certain core businesses of TIG were no longer viable and placed these businesses in run-off. Travelers Casualty and Surety of America (A.M. Best #: 03609 NAIC #: 31194) RATING RATIONALE Rating Rationale: The rating acknowledges Travelers Casualty and Surety Company of America (TCSA) as a core and integral member of Travelers Property Casualty Group, thereby qualifying it for the Travelers Property Casualty Pool's A+ rating. The rating also reflects TCSA's superior underwriting and operating performance, strong capitalization and leadership position in the surety, fidelity and professional liability segments. These positive factors are supported by the company's specialized underwriting expertise, selective and distinct market segmentation approach, and the competitive advantages derived from being a member of Travelers Property Casualty Group. The rating also takes into consideration Travelers Property Casualty Corp.'s merger with The St. Paul Companies in April 2004 and the benefits to be derived by integrating their respective operations. Although largely autonomous, TCSA benefits from Travelers' widely recognized and distinguished brand name, cross marketing support, added financial flexibility and future growth opportunities. Despite competitive and volatile market conditions in certain segments, the company's resiliency and ability to sustain momentum is driven by its disciplined underwriting strategy and specialized market segmentation approach. Even prior to being acquired by Travelers in 1996, the company was recognized as one of the market leaders in the fidelity, surety and professional liability segments, supported by its long-standing market presence and solid market identity. The acquisition of Reliance's surety and fidelity operations in 2000 has significantly strengthened Travelers' leading market position in this specialty segment, ranking the company number one in the country in terms of market share. TCSA's strengths are partially offset by its somewhat lower underwriting and operating margins in 2001, 2002 and 2003 and acceleration in premium growth. As a result of the weaker U.S. economy since 2000, A.M. Best believes there remains the potential for continued unfavorable loss reserve development in the company's surety lines. In addition, less favorable underwriting margins in the company's professional liability lines should be anticipated given the rapid rise in litigation and loss cost trends in recent years and the more recent emergence of investigations and class action lawsuits relating to inappropriate and illegal trading in the mutual fund and life insurance industries. Despite these concerns, Travelers Casualty and Surety Company of America is an established market leader with a proven track record of building capital through retained earnings, and A.M. Best views the rating outlook as stable.