Dallas National Insurance Company’s President Responds to A.M. Best Rating Downgrade

May 3, 2007

AM Best indicated two weeks ago that they planned to downgrade Dallas National Insurance Company to B++ with a “negative” outlook. AM Best’s primary concern is our Company’s future profitability given our growth during what they perceive to be “softening market conditions”. We appealed the initial decision and we provided data that we didn’t feel was adequately considered, including a reserve analysis completed by our outside actuaries and strong evidence that, even though the overall market may be softening, our target market has remained strong. We can counter AM Best’s contention of a soft market by noting that our Company has not reduced rates for our general liability product since 2003—And the rate change in 2003 was an increase. The only reason we haven’t increased rates more is that regulators would be reluctant to approve a rate increase when our loss ratios have remained around 30%.

We were notified that AM Best denied our appeal to change their initial downgrade to B++.

Obviously, I am very disappointed for our owner, for the employees of Dallas National as well as for our brokers, agents and customers. I believe that we have demonstrated our ability to grow our business profitably. Dallas National Insurance Company has outperformed the insurance industry in terms of profitability since the business was acquired in 2003. Dave Wood, our owner, has demonstrated his commitment to maintaining the capital necessary to keep Dallas National Insurance Company strong. Through core profitability and moderate capital contributions, we have strengthened the Company’s policyholder surplus by more than $65 Million. We anticipate that our capital and surplus will exceed $100 Million by the end of the year. Our capital adequacy ratio as measured by AM Best is in excess of 160. By AM Best’s own published standards, this places our capital adequacy ratio in the ‘A’ category. Even in AM Best’s letter to the Company they state that “…rapid growth in premium volume and associated liabilities which have led to a significant weakening in risk adjusted capital (although still supportive of its rating)“.

Therefore, we are forced to conclude that objectively we have maintained the financial numbers supportive of our A- or better rating. Subjectively, AM Best feels that our ability to grow the business beyond our own projections and definitely beyond that of a traditional insurance company requires a reduction to B++.

Defiantly, our management team will commit to the Board of Directors that we will continue to do what has made this Company strong. We will continue to improve underwriting and claims processes. We will continue to maintain strong regulatory compliance. We will continue to partner with reinsurers who are rated A or better by A.M. Best. And we will continue to grow the company profitably. I do not accept the assertion that our growth has resulted in a downgrade in our financial strength or a negative outlook for our business in general. I choose to accept the analyses as a positive affirmation that we are not a traditional insurance company in the sense that we do not accept slow growth and underwriting losses. At some point in our future, the same analysts at AM Best will be looking at our business and they will see the same well-capitalized and profitable company that has maintained a consistent strategy.

Let me conclude by reiterating our commitment to our staff, our customers, our various reinsurance partners, our brokers and our agents. Dallas National Insurance Company has not changed from the Company that was upgraded by AM Best three times in the last four years. For reasons that I cannot comprehend, AM Best has chosen to take the most punitive actions possible for our inability to control profitable growth. This downgrade will result in certain customers questioning their relationship with our Company. We can only hope that these customers go beyond the cover of Dallas National Insurance Company’s annual statement. If they do, they will see a well capitalized, growth-oriented and highly profitable company. If these customers decide to move their business, I believe that they, like our A- rating, will be back.

Chris Nehls
President and Chief Executive Officer.

CONTACT: Chris Nehls, 972-233-0178 Ext. 245, cnehls@dallasnationalins.com

Dallas National Insurance Comany

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