W.R. Berkley Corp., Operating Companies Ratings Affirmed; Outlook Negative

December 29, 2003

Standard & Poor’s affirmed its ‘BBB+’ counterparty credit rating on W. R. Berkley Corp. At the same time, Standard & Poor’s affirmed its ‘A+’ counterparty credit and financial strength ratings on BER’s operating companies (collectively referred to as Berkley). The outlook remains negative.

The ratings are based on Berkley’s strong business position, including its well-diversified revenue profile, conservative investment portfolio that supports strong liquidity, and strong financial flexibility. In addition, operating performance has significantly improved in 2002, and 2003 is expected to be another strong year.

In contrast, capital adequacy is low for the rating, and Berkley has less flexibility than its peers to withstand underwriting and investment uncertainties. Also, BER has an aggressive corporate strategy that includes managing capital and holding company statistics to their rating limits, and this is expected to continue. Outlook

The negative outlook reflects BER’s below-rating-level capital adequacy (expected to be 130 percent at year-end 2003) and high premium growth, which is causing a capital strain. Because of very strong earnings, Standard & Poor’s is maintaining the ratings on BER at this time. However, if earnings deviate from their expected levels in 2004 (a projected combined ratio of less than 92 percent), Standard & Poor’s would review the BER ratings because of already low capital adequacy.

Major rating factors

— Strong business position. BER’s business position is viewed as strong based on its well-diversified revenue profile, long-standing relationships with producers, economies of scale, and market position. BER has a very diversified business profile, with operations in five segments of the property/casualty market: specialty lines (excess and surplus and commercial transportation), alternative markets (fee-based and workers’ compensation), reinsurance, regional (commercial property/casualty), and international. In 2002, BER was the 30th largest property/casualty insurance company in the U.S. based on net premiums written. However, with its recent substantial growth in writings, this position will likely improve in 2003. BER’s long-term relationship with brokers and agents has allowed it to compete effectively with larger peers.

— Significantly improving operating performance (GAAP). BER’s very strong operating performance has dramatically improved and is a significant strength to the rating. At year-end 2002, BER realized net income of $175 million, a significant improvement from the net loss of $92 million in 2001. In addition, in 2002, BER had an underwriting profit of $104 million, which followed underwriting losses each year from 1999 through 2001. The combined ratio also improved to 95.4 percent in 2002 from 116.5 percent in 2001 (114.4 percent in 2001 excluding World Trade Center-related losses). BER recorded a combined ratio of 91.7 percent through Sept. 30, 2003. GAAP net income for this period was $244 million, which is much improved from the $102 million through the third quarter of 2002.

— Conservative investments that support strong liquidity. Investments and liquidity are collectively viewed as strong based on high-quality bonds leading to strong liquidity. Through the third quarter of 2003, BER has allocated its investments with 69 percent in fixed-income securities, 20 percent in cash and cash equivalents, 9 percent in equities, and 2 percent in other investments. The average credit quality of the bond portfolio is ‘AA+’. Liquidity is strong, with underwriting cash flow of 132 percent in 2002 and operating cash flow of 148 percent.

— Strong but aggressive financial flexibility. BER’s financial flexibility is viewed as strong. BER is a publicly traded stock company with access to the equity markets. BER issued shares twice in 2002 to compensate for very high premium growth. In the first quarter of 2003, BER issued $200 million of 10-year, 5.875 percent senior notes and repaid $61 million of maturing debt. In addition, in the third quarter of 2003, BER raised an additional $150 million in senior notes, thereby bringing debt leverage to 27 percent (35 percent including trust preferreds), with interest coverage at 6.5x (8.0x including realized capital gains). Historically, BER has been aggressive regarding its financial flexibility, with the debt plus trust preferred to total capital ratio measuring above 45 percent, though currently this figure is within the rating range.

— Strong but below-rating-level capitalization. BER’s capital adequacy ratio is expected to be near 130 percent in 2003. Capital adequacy has declined from 164 percent in 1999 because of increased writings and net losses in 1999 and 2001. Standard & Poor’s expects that BER will continue to manage capital adequacy to the low end of the rating range.

— Reserves. Reserves were slightly deficient at year-end 2002, but management has addressed this issue, and reserves are expected to be adequate by year-end 2003. Standard & Poor’s expects that BER will address any slight deficiencies that remain in 2003 and will manage reserves conservatively in the future.

— High premium growth. BER has exhibited high net premium growth in 2001 and 2002 and is expected to maintain this high growth rate in 2003. The high premium growth rate is contributing to a capital strain, though in the hard market, this has led to very strong earnings. Net premiums written increased 23 percent in 2001 and 46 percent in 2002. In 2003, net premiums are expected to increase another 35 percent. It is important to note, that BER has discontinued its personal lines, so referencing continuing business only, BER’s growth rate would have been 30 percent in 2001 and 62 percent in 2002. Net premium growth stems from significant rate increases across all of BER’s segments, decreased reinsurance utilization in the reinsurance and specialty segments, and an increase in exposures, primarily within the reinsurance segment.

— High dividends to stockholders (statutory). Berkley has historically paid a very high stockholder dividend as a percentage of net income and surplus. From 1997-2001, dividends as a percentage of net income averaged 15 percent, and dividends as a percentage of surplus averaged 8 percent. Dividends were largely forgone in 2002 and 2003, as Berkley experienced a capital strain, but Standard & Poor’s expects this financial strategy to continue prospectively.

Ratings List W.R. Berkley Corp. Counterparty credit rating BBB+/Negative/– Senior unsecured debt rating BBB+ Preferred stock rating BBB- Berkley Insurance Co.Midwest Employers Casualty Co.Riverport Insurance Co. of CaliforniaPreferred Employers Insurance Co.Key Risk Insurance Co.Gemini Insurance Co.StarNet Insurance Co.Admiral Insurance Co.Nautilus Insurance Co.Admiral Indemnity Co.Great Divide Insurance Co.Carolina Casualty Insurance Co.Tri State Insurance Co. of MNUnion Insurance Co.Union Standard Insurance Co.Berkley Insurance Co. of the CarolinasGreat River Insurance Co.Continental Western Insurance Co.Continental Western Casualty Co.Acadia Insurance Co.Chesapeake Bay Property and Casualty Insurance Co.Firemens Insurance Co. of Washington, D.C. Berkley Regional Insurance Co. Counterparty credit rating A+/Negative/– Financial strength rating A+/Negative.

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