S&P’s Cuts Attorneys Liability Protection Soc. RRG Ratings; Off Negative Watch

April 14, 2003

Standard & Poor’s has lowered its counterparty credit and financial
strength ratings on Attorneys Liability Protection Society Inc., A Risk
Retention Group (ALPS) to ‘BBB’ from ‘A-‘ and removed the company from CreditWatch, where it was placed on March 17, 2003. The outlook is negative.

“The ratings action reflects the $7.3 million reserve strengthening taken by ALPS as of year-end 2002–primarily allocated to accident years 1998 through 2001,” said Standard & Poor’s credit analyst Donovan Fraser. “Further reserve strengthening is expected after a full analysis of the 2002 accident year.”

The reserve increases follow an extensive claims, rate, and reserve
review process undertaken by the company in the past 15 months. The statutory combined ratios of 108.2 percent and 104.3 percent for calendar years 2002 and 2001, respectively, marked the first consecutive years of underwriting losses for the company since its inception in 1987.

After reflection of the aforementioned reserve increases, the company would have operated at an underwriting loss in four of the past five years on an accident year basis. The ‘BBB’ rating reflects the company’s demonstrated ability to increase rates in the current environment, strong but diminished capitalization as measured
by a Standard & Poor’s capital adequacy ratio of 166 percent, and a good niche servicing small to midsize law practices.

The negative outlook reflects Standard & Poor’s belief that the company faces challenges as it will need a period of sustained rate increases and effective underwriting controls, in addition to renewed reserve and claims discipline to return ALPS to an underwriting profit.

Standard & Poor’s will continue to monitor the company’s comprehensive strategic plan and will review the outlook following full-year 2003 statutory results.

Standard & Poor’s expects that, given the company’s new holding company structure, the expense ratio will be less than 26 percent in 2003 and 2004, and the calendar-year loss ratio is expected to decrease to 77 percent and 74 percent in 2003 and 2004, respectively, given the aggressive rate increases taken by the company in 2002. The company is expected to return to underwriting profitability by year-end 2004, otherwise there may be further downward pressure on the rating.

In addition, the capitalization is expected to remain more than 150 percent as measured by Standard & Poor’s capital adequacy model.

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