Fitch Ratings Downgrades Atlantic Mutual; Places On Rtg Watch Neg.

Business Editors

CHICAGO--(BUSINESS WIRE)--April 4, 2003

Fitch Ratings has lowered the insurer financial strength ratings of the Atlantic Mutual Companies (AMC) to 'BBB' from 'BBB+'. The individual companies affected are listed below. Fitch also downgraded the Atlantic Mutual Insurance Company surplus note rating to 'BB' from 'BB+'. All ratings have been placed on Rating Watch Negative.

In order to resolve the Rating Watch, Fitch plans to meet with AMC in the coming weeks to review AMC's current reserve adequacy, use of reinsurance and capital plans. Upon completion of the review the insurance and surplus note ratings will be either affirmed at the current levels or reduced. However, Fitch does not expect that the insurance or surplus note ratings would be moved down by more than one additional notch (i.e., to no less than 'BBB-' and 'BB-', respectively).

The rating actions follow AMC's announcement of its 2002 earnings, and reflect Fitch's belief that AMC's balance sheet quality deteriorated during the year. Although AMC reported statutory net income of $17.7 million and an increase in surplus of $35 million in 2002, results continue to reflect adverse loss reserve development offset by increased use of financial reinsurance arrangements and realized gains to produce current income.

AMC reported adverse reserve development of $99.7 million, or 23% of prior year surplus in 2002, which followed significant adverse development in 2001, 2000, and 1999. Fitch notes that AMC chose to release reserves in 2002 from the 2001 accident year, which raises some concerns given that the 2001 accident year is still relatively immature.

In addition, Fitch calculates AMC's three-year net asbestos survival ratio to be just 3.2 times (x), which falls far short of the 16x survival ratio Fitch considers to be adequate for the industry.

AMC's 2002 earnings and surplus were again affected by the company entering into significant financial reinsurance arrangements, which Fitch views as forms of borrowed capital. These arrangements provide benefits to surplus and/or earnings in the current year (in the form of ceding commissions paid to AMC or when AMC's ceded losses exceed its ceded premiums resulting in an underwriting gain). However, these arrangements obligate AMC to credit reinsurance funds withheld accounts for investment income in subsequent years, thus reducing AMC's future income.

AMC has increased its reliance on such reinsurance over the past four years and, as a result, has increasingly encumbered its future earnings. Fitch notes that the interest credited to reinsurance funds withheld accounts consumed approximately half of AMC's investment income in 2002. Fitch also estimates that approximately one-half of AMC's surplus is comprised of 'borrowed' amounts, including both estimated financial reinsurance balances and surplus notes of $100 million.

Fitch also notes that AMC reported $12.9 million of realized gains in 2002, which were primarily generated through the sale of bonds. Interest rates are at historically low levels, which suggests that funds generated from such sales will be reinvested at lower rates. Thus, while such sales generate current income, Fitch believes such income comes at the detriment of future investment income.

Positively, Fitch notes that AMC continues to benefit from higher insurance prices and lower insured exposures. AMC has also continued to exit unprofitable lines and improve its business processes to lower expenses. However, Fitch believes there is some risk that AMC will be challenged in a competitive insurance marketplace and may not benefit as much from the current hard market conditions as other companies.

    Entity/Issue/Type                         Action         Rating

    Atlantic Mutual Insurance Company
    -- Insurer financial strength             Downgrade      'BBB';
    -- Surplus note                           Downgrade      'BB';
    -- Rating Watch                           Place on Negative.

    Centennial Insurance Company
    Atlantic Lloyd's Insurance Company of Texas
    Atlantic Specialty Insurance Company
    -- Insurer financial strength             Downgrade      'BBB';
    -- Rating Watch                           Place on Negative.

NOTE: The noted ratings were initiated by Fitch as a service to users of Fitch ratings. The ratings are based primarily on public information.