Best Downgrades Ratings for Atlantic Mutual Cos.

June 29, 2004

A.M. Best Co. has downgraded the financial strength rating to B+ (Very Good) from B++ (Very Good) of The Atlantic Mutual Companies (The Atlantic). Concurrently, A.M. Best has downgraded the debt rating to “b+” from “bb+” of Atlantic Mutual Insurance Company’s (both of New York, NY) existing $100 million 8.15 percent surplus notes. The outlook for both ratings is negative.

These rating actions follow The Atlantic’s sale of its subsidiary, Atlantic Specialty Insurance Company (New York) and the renewal rights to the majority of its commercial lines business to OneBeacon Insurance Company (Boston) on March 31, 2004. These actions also follow A.M. Best’s ongoing review of the group’s other recent restructuring and capital enhancement initiatives as well as a review of The Atlantic’s current capitalization, recent operating performance and future prospects.

The actions recognize the group’s reduced capitalization as a result of its significant reserve strengthening in the fourth quarter of 2003, the potential for continued adverse loss reserve development within its sizable commercial lines reserves and the uncertainty regarding The Atlantic’s future profitability.

In each of the past five years, adverse loss reserve development has contributed to substantial underwriting losses. While largely related to commercial lines – now in run-off – adverse reserve development in private passenger automobile lines was reported in 2003. Combined with substantial catastrophe losses, The Atlantic ended 2003 with substantial underwriting losses in its core personal lines operations.

These rating actions also consider The Atlantic’s substantially scaled down operations as a personal lines insurer focusing on the affluent market and its ability to generate future earnings and accumulate capital. This takes into account its historically weak underwriting performance and operating results in personal lines, continued earnings drag – albeit declining – associated with interest expense on funds-held reinsurance and surplus notes and the potential for continued adverse prior year loss reserve development.

These factors are partially tempered by investment income on commercial reserves, which is expected to cover interest expense on funds-held reinsurance treaties. While several of The Atlantic’s funds-held reinsurance treaties were commuted in 2003 and early 2004, an adverse development cover is being left in place due to economic reasons.

The downgrading of the debt rating reflects these ongoing concerns and the possible constraints from regulators on future interest payments.

Despite these rating actions, A.M. Best recognizes the potential benefits of management’s actions, the adequacy of The Atlantic’s capitalization and the recent accident year improvement in its core personal lines operations, excluding higher than normal catastrophe losses.

Moreover, management attributes much of the reported improvement to increased pricing and re-underwriting initiatives taken over the past several years, with The Atlantic Master Plan package policy at the core of its personal lines strategy. Price firming throughout the property/casualty markets over the past several years also has been highly beneficial in this regard. Stable reserve development, improved profitability in personal lines results and evidence in the company’s ability to accumulate capital need to be demonstrated before positive actions can take place.

The financial strength rating has been downgraded to B+ (Very Good) with a negative outlook for The Atlantic Mutual Companies and its following members:

— Atlantic Lloyd’s Insurance Company of Texas

— Atlantic Mutual Insurance Company

— Centennial Insurance Company

The following debt rating has been downgraded with a negative outlook:

Atlantic Mutual Insurance Company–

— to “b+” from “bb+” on $100 million 8.15 percent surplus notes, due 2028

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