S&P Affirms American Compensation Insurance Co.’s ‘Bpi’ Rating

November 26, 2003

Standard & Poor’s has affirmed its ‘Bpi’ counterparty credit and financial strength ratings on Minnesota-based American Compensation Insurance Co. (American Compensation). The ratings reflect its weak operating performance and liquidity, good capitalization, and high geographic and product line concentration.

Major rating factors
— Operating performance is weak with negative earnings adequacy ratio and a five-year average return on revenues of negative 8.1 percent. Moreover, the company has had significant underwriting losses over the last two years with a five-year average combined ratio of 120 percent. However, the company had a net income of $12 million in 2002 against a loss of $14 million in 2001 due to reduced loss and loss adjusted expenses as indicated by a loss ratio of 76 percent in 2002, down from 146 percent in 2001;

— The timing of payout claims is creating pressure on liquidity as indicated by American Compensation’s weak liquidity ratio of 68 percent;

— The company’s capitalization is good with a Standard & Poor’s capital adequacy ratio of 122 percent. Surplus increased 37 percent to $27 million in 2002 from $20 million in 2001. However, leverage as measured by premium and liabilities to surplus is high compared with the company’s rated peers at 5.9x;

— Geographic and product line concentration is high. Minnesota, Michigan, and Colorado comprise 93 percent of the company’s workers’ compensation insurance business.

The company is a wholly owned subsidiary of RTW Inc., a non-insurer based in Minnesota. Claims, underwriting, and administrative functions are performed by the parent for the company.

The company is rated on a stand-alone basis.

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