A.M. Best Downgrades Rating of Gulf Group

June 26, 2003

A.M. Best Co. has downgraded the financial strength rating to A (Excellent) from A+ (Superior) of the Gulf Insurance Group (Hartford, Conn.). The rating outlook is stable.

This rating action reflects the group’s underwriting deterioration, increased earnings volatility over the past several years and its diminished stand-alone capitalization. These factors largely stem from the magnitude of losses sustained by Gulf in its discontinued residual value insurance (RVI) business, which takes into consideration a recent settlement of a claims coverage dispute and the strengthening of reserves on all of the group’s RVI business. Furthermore, the rating recognizes Gulf’s susceptibility to credit risk, as well as dispute risk, as it relates to its substantial reinsurance dependence.

In 2002 and first quarter 2003, Gulf’s prior year loss reserves for RVI business were significantly strengthened, including an additional $239 million in first quarter 2003. In first quarter 2003, reserves for some of Gulf’s core businesses were also strengthened by $30 million. A.M. Best believes there is potential for further reserve development at Gulf, particularly as it relates to professional liability lines where litigation and loss cost trends have been rapidly rising. Management continues to closely monitor reserve levels.

Despite these negative factors, A.M. Best recognizes Gulf’s improving underwriting fundamentals in its core lines, which include current pricing conditions, its highly specialized and diversified product offerings, its market leadership position in many of its specialty product lines and the benefits derived from being part of Travelers Property Casualty Corp. (Travelers) (Conn.). The rating also acknowledges Gulf’s strategic role within Travelers and the financial and operating support provided by Travelers.

Concurrent with Gulf’s reserve strengthening in first quarter 2003, a subsidiary of Travelers made a $130 million loan to Commercial Insurance Resources, Inc. (CIRI), Gulf’s immediate parent, which in turn contributed the funds to Gulf. Moreover, Travelers Indemnity Company of Connecticut is providing Gulf with a $170 million standby line of credit that is to be utilized if Gulf’s surplus falls below certain thresholds. Given the actions taken by management and the demonstrated financial support provided by Travelers, A.M. Best views the rating outlook as stable.

The financial strength rating has been downgraded to A (Excellent) for Gulf Insurance Group and the following subsidiaries:

Gulf Insurance Company
Gulf Underwriters Insurance Company
Select Insurance Company
Atlantic Insurance Company
Gulf Group Lloyds
Gulf Insurance Company U.K. Ltd

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