S&P Assigns Employers Security Ins. Co. `BBpi'.

Business Editors

NEW YORK--(BUSINESS WIRE)--Standard & Poor's

Feb. 27, 2001-- Standard & Poor's today assigned its double-'Bpi' financial strength rating on Employers Security Insurance Co. (ESIC).

The rating action reflects the company's marginal earnings and some degree of premium volatility. Partially offsetting these factors is the company's historically healthy capital growth and solid reinsurance program.

ESIC (NAIC: 32005), formed in 1992, writes primarily workers' compensation policies in Indiana, Illinois, and Kentucky. Indiana, the company's home state, accounts for almost 90% of its business. In addition, the company writes policies in Michigan and Iowa for policyholders with out-of-state operations through a fronting agreement with Continental National Indemnity Co. (single-'Bpi' financial strength rating). ESIC is responsible for every aspect of service associated with these policies. In addition to the workers' compensation business, a very small amount of miscellaneous surety and commercial umbrella policies is written. The company is a wholly owned subsidiary of Employers Security Holding Co. (ESHC). ESHC is principally owned by a group of independent insurance agents located throughout Indiana. These same agents conduct the majority of the company's marketing efforts with all appointed agencies having equity rights to the company.

Major Rating Factors:

-- For the five-year period ended Dec. 31, 1999, the company has managed to
average an annual net income of only $320,000. The five-year average return on
revenue for the same period was 8.3%. Calendar year 1999 was the first year
since 1993 in which an underwriting loss was reported, but earnings have been
relatively slim in other years as well. Company management attributes the
losses in 1999 to an increase in loss reserves for the calendar year due to
pricing pressure in the primary line of business. In addition, a high level of
business for the year was written at year-end but not earned until 2000. As the
commissions were booked in 1999, this had a negative effect on the expense
ratio for the year.

-- There has been some degree of premium volatility in recent years. Most of
the excessive growth in 1999 (an increase of 54% from year-end 1998) is
associated with an accounting policy change. Premiums are now reported written
when billed as opposed to on an annualized basis. This change caused a
significant increase in the amount of direct premiums reported in 1999 (about
an additional $2 million). However, there have still been some fluctuations in
recent years caused by expansion into new states, most notably Illinois and
Kentucky.

-- Capital, at $5.1 million for year-end 1999, is appropriate for the current
rating as indicated by Standard & Poor's model. Growth over the past five years
has been healthy, with an average annualized gain of 19% per year. Results
through the third quarter of 2000 indicate more modest increases. It should be
noted that capital growth is not keeping pace with premium growth and further
diminishment in this ratio could weaken the company's capital adequacy ratio.

-- The company participates in an excess of loss reinsurance treaty with Swiss
Reinsurance America Corp. (Swiss Re) (triple-'A' financial strength rating) for
their workers' compensation line of business. This program significantly
minimizes ESIC's exposure by limiting its net retention to $200,000. In
addition, ESIC utilizes a quota share agreement, also with Swiss Re, for its
commercial umbrella policies.

Ratings with a 'pi' subscript are insurer financial strength ratings based on an analysis of an insurer's published financial information and additional information in the public domain. They do not reflect in-depth meetings with an insurer's management and are therefore based on less comprehensive information than ratings without a 'pi' subscript. Ratings with a 'pi' subscript are reviewed annually based on a new year's financial statements, but may be reviewed on an interim basis if a major event that may affect the insurer's financial security occurs. Ratings with a 'pi' subscript are not subject to potential CreditWatch listings.

Ratings with a 'pi' subscript generally are not modified with "plus" or "minus" designations. However, such designations may be assigned when the insurer's financial strength rating is constrained by sovereign risk or the credit quality of a parent company or affiliated group, Standard & Poor's said.--CreditWire