S&P Lowers Hermitage Ins. Co FSR to 'Bpi' from 'BBpi'.

Business Editors

NEW YORK--(BUSINESS WIRE)--(Standard & Poor's)--Jan. 16, 2001

Standard & Poor's today lowered its financial strength rating on The Hermitage Insurance Co. (Hermitage) to single-'Bpi' from double-'Bpi'.

The rating action reflects Hermitage's ultimate parent's recent default on debt payment.

Based in White Plains, N.Y., Hermitage writes mainly commercial multi-peril insurance and general liability insurance and is an authorized surplus lines writer in 28 states. Business in the company's major states of operations--New York, Florida, Massachusetts, Connecticut, and New Jersey--constitutes more than 83% of its total revenue. Its products are distributed primarily through brokers.

Hermitage (NAIC: 18376), which began business in 1985, is fully licensed in Georgia, New Jersey, New York, Pennsylvania, and Rhode Island. All common and convertible preferred shares are owned by Queensway Holdings Inc., a Delaware corporation that is owned by Queensway Financial Holdings Ltd. (Queensway) of Toronto, Canada. Queensway is a specialty insurance group operating through a number of subsidiaries in the U.S. and Canada, providing a range of individual and commercial insurance coverages. It is publicly traded on the Toronto Stock Exchange under the symbol QFH.

Major Rating Factors:

-- The rating is constrained to single-'Bpi' as a consequence of Queensway's December 2000 default on debt payments. The parent holding company has been in the process of divesting itself of some of its subsidiaries (Atlantic Alliance Fidelity & Surety Co.) and selling blocks of business (International Indemnity Co.'s non-standard auto business) in an effort to reduce its debt load.

-- The company is somewhat geographically concentrated, with moderate exposure to catastrophes. At year-end 1999, approximately 54% of the company's net premiums written are in New York.

-- At year-end 1999, capitalization was more than adequate, as indicated by Standard & Poor's capital adequacy ratio of 196.2%. However, the company has interest-rate risk, with more than 37% of its invested assets in interest-rate-sensitive, loan-backed bonds. It also has some market risk, with unaffiliated common stocks constituting more than 33% of surplus.

-- Operating performance has been good, with a time-weighted ROR from 1996 to 1999 at 7.7% and a five-year average ROR of 10.6%. The gain in net income of $200,000 in 1999 compared with the prior year was composed primarily of $1.2 million in net realized capital gains offset by a decline of $700,000 in net underwriting income, an increase of $200,000 in Federal Income Tax provision, and a decline of $100,000 in net investment income earned.

-- Surplus was $22.3 million at year-end 1999, and total 1999 net premiums written amounted to $17.5 million. The gain in surplus of $1.0 million from 1998 was composed mainly of a gain of $1.3 million in net income, a favorable $300,000 in net unrealized capital gains, $700,000 in dividends to stockholders, and a positive $100,000 change in the company's provision for reinsurance.

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.

Copyright 2001, Standard & Poor's Ratings Services