S&P Affirms FSR on Cumberland Mutual Fire

October 27, 2004

Standard & Poor’s has affirmed its ‘BBBpi’ counterparty credit and financial strength ratings on Cumberland Mutual Fire Insurance Co. (Cumberland Mutual) and its subsidiary, Cumberland Insurance Co. Inc. (Cumberland).

The rating affirmation is based on the group’s extremely strong capitalization, good operating performance, and well-diversified product line offset by very high geographic concentration.

Cumberland Mutual Fire Insurance writes homeowners’ and commercial multiple perils. Cumberland Insurance writes workers’ compensation, commercial automobile liability, general liability, and physical damage. Both are members of the Bridgeton, New Jersey based Cumberland Group, which commenced operations in 1844.

Major rating factors

— At year-end 2003, Cumberland Mutual’s capitalization was extremely strong with a surplus of $127 million and a liability to surplus ratio of 71%. As measured by Standard & Poor’s model, Cumberland Mutual’s capital adequacy ratio (CAR) was 346%, which is considered extremely strong.

— Cumberland Mutual’s operating performance is good with a five-year (1999-2003) average ROR of 8%; however, the company’s performance was lackluster in 2003, garnering a net loss $4.5 million compared with net income of $6.2 million in 2002. It has done well historically, sustaining net income exceeding $5 million annually during the 2002-1999 period. The loss in 2003 was primarily due to an increase in underwriting losses from several weather catastrophes related to Cumberland Mutual’s homeowners’/commercial multiple peril lines. Standard & Poor’s earnings adequacy ratio (EAR) was 75%.

— The group is relatively diversified in its product lines, having direct premiums written of more than $10 million in homeowners’ multiple peril, commercial multiple peril, and workers’ comp.

— Cumberland Mutual has very high geographic concentration. The company’s top four states constitute its entire book of business; New Jersey alone constitutes 82%.

— At year-end 2003, Cumberland had steadily increasing surplus of $22.3 and a relatively low liabilities-to-surplus ratio of 153%. As measured by Standard & Poor’s model, Cumberland had a CAR of 305%, which is extremely strong.

— Cumberland’s operating performance is very good with a five-year (1999-2003) average ROR of 19%. Cumberland performed significantly better than its parent, with $1.6 million in net income in 2003 compared with $1 million in 2002, because it was unaffected by the underwriting losses from weather catastrophes that affected its parent. Cumberland’s Standard & Poor’s EAR was 193% in 2003.

— Cumberland also has very high geographic concentration, with three states comprising its entire book of business and New Jersey alone constituting 78%. The company has intentions to expand into Delaware in 2004.

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