A.M. Best Downgrades Frontier Insurance Group to B++, Places Rating Under Review With Developing Implications.

OLDWICK, N.J.--(BUSINESS WIRE)--Nov. 15, 1999--

A.M. Best Co. today downgraded the A- (Excellent) rating of the Frontier Insurance Group, Rock Hill, N.Y., to B++ (Very Good) and placed it under review with developing implications.

The action follows a third-quarter pre-tax reserve charge of $136 million, which resulted in a 50% decline in surplus at Frontier Insurance Co. and increased financial leverage at the holding company. The large reserve addition is supported by revised loss estimates by both Frontier's external actuary and an internal review by its relatively new actuarial unit.

While Frontier's reserving issue has been largely contained to its extremely unprofitable physician's medical malpractice business, this protracted issue has weakened the financial strength of the enterprise. The downgrade reflects the group's diminished capital strength, poor reported underwriting performance for the past two years, ongoing volatility in reserve trends and the reduced financial flexibility at the holding company. A.M. Best will continue to closely monitor Frontier's results and the success of its redefined business strategies to ensure profitability, capitalization and stability of operations remain commensurate with its current rating level.

The ratings will remain under review pending the close of the previously announced sale of the Lyndon Insurance Group to Protective Life, which is expected in the first quarter of 2000. A.M. Best expects that Frontier will deploy a significant portion of sale proceeds towards the reduction of financial and operating leverage, both historical concerns of A.M. Best.

The group's recurring loss development problems in its medical malpractice book of business--reserve strengthenings of $174 million plus the current $81 million, in recent years --have dampened underwriting results. Frontier Insurance Group Inc. has reported net losses for the past two years, eliminating earnings coverage for the holding company interest and preferred stock obligations. In addition, management's commitment to maintaining a strong reserve base, coupled with the market's continued pricing pressure, may affect future margins.

The Secure rating does reflect the operating profitability generated by the group's core specialty program book of business and the underwriting action that has been taken on the physician business in problematic states. Frontier's remaining program and surety books of business, which include approximately 150 specialty programs, have generated solid operating returns. Additionally, the group has bolstered its financial and actuarial management, increased its use of internal tracking reports and committed to maintaining reserves at the actuarial best estimate and performing more rigorous reserve reviews. Rate increases and tighter selection criteria have pared down the group's medical malpractice insured base and reduced its exposure to future unprofitable business.

This rating action applies to Frontier Insurance Co., Rock Hill, N.Y., and its insurance subsidiaries and affiliates, Frontier Pacific Insurance Co., La Jolla, Calif.; United Capitol Insurance Co., Chicago; Western Indemnity Insurance Co., Houston; and Regency Insurance Co., Charlotte, N.C. The ratings of the Lyndon Insurance Group are unaffected and remain under review with developing implications as of October 21, 1999, following the announcement of the planned sale to Protective Life Corp.

Frontier Insurance Group operates in various specialty markets nationally through its various subsidiaries. Coverages include professional liability insurance for part-time and nonsurgical physicians, specialty workers' compensation, surety, other liability, difference-in-conditions, nonstandard automobile and mobile homeowners lines distributed through a network of independent general agents and retail brokers. It also offers surplus-lines business, such as asbestos abatement, difficult-to-place directors' and officers' insurance, California contractors liability and hospital professional liability coverages.

A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com.