PAULA Financial Assesses Impact on Its Operations After World Trade Center Events

Business Wire, Oct 11, 2001

Business Editors

PASADENA, Calif.--(BUSINESS WIRE)--Oct. 11, 2001

The following remarks are excerpted from a recent presentation made by Jeffrey Snider, chairman and chief executive officer of PAULA Financial (Nasdaq:PFCO), at a meeting of independent agents and brokers in California:

"As you may be aware, PAULA Insurance Company had no direct exposure to any World Trade Center (WTC) risk. I can also report to you that PAULA had no assumed or indirect exposure related to the WTC. The company has never participated in any pools or retrocession agreements that include the WTC nor has PAULA participated in any aviation risk underwriting.

"PAULA does maintain ongoing reinsurance relationships related to its core workers' compensation insurance business. Our reinsurers have assured us that they are in good shape. GeneralCologne Re has been our excess of loss treaty reinsurer since 1975. The security of GeneralCologne Re paper has never been at issue. PAULA and GeneralCologne Re renewed the treaty between the two companies on July 1, 2001.

"The industry for some time has been watching an expansion of claim severity on a national level. The July renewal reflected this analysis, and a significant increase in pricing was presented and accepted by PAULA. PAULA's primary pricing to its customers has reflected this adjustment beginning with the July 2001 renewal cycle.

"We have two other reinsurance partners, Insurance Corporation of Hannover (ICH is the U.S. domestic affiliate of Hannover Re, Germany) and Everest Re. Both ICH and Everest Re currently provide quota share support to PAULA. I have had lengthy discussions with senior officers at each company. ICH and Everest Re have reported losses associated with the WTC. In both instances, I have been assured that, based on information available, neither company believes they have material exposure to the events of September 11, 2001.

"In the first weeks after September 11, 2001, the equity and bond markets reacted with measured selling that took the Dow index to the low 8000 range before the close of the third quarter. In addition to mammoth claims costs, many insurance companies are also reeling from investment risk associated with the equity markets as another pressure point on surplus.

"I am pleased to report that PAULA's entire investment exposure to the equity market represents only 1 percent of total invested assets. For many years we have relied almost exclusively on fixed income securities with very short duration (less than 3 years), and over 98 percent of these instruments carry investment grade ratings of 'A' or better. The interest rate risk we all live with should actually benefit our investment strategy in the near term.

"Our underwriters have already performed a careful review of policyholder inventories to identify employer risks located near perceived target sites such as Los Angeles International Airport. Our California agribusiness clients are generally located in non-urban areas throughout the farming areas of the Central Valley, Central Coast and Southern deserts of the state. Virtually all our agribusiness risks operate out-of-doors, so we have nominal exposure associated with large single location concentration of employees. Our limited exposure to agribusiness with indoor operations (dairies and fruit and vegetable packing houses) are also located in rural areas, and in practically no instance are we providing coverage to agribusiness employees working in permanent buildings taller than two stories.

"Prior to September 11, 2001, PAULA's underwriting portfolio was regarded as having nominal Maximum Foreseeable Loss (MFL) related to earthquake risk; we believe that new thinking about MFL related to terrorism should also benefit PAULA given the demographics of its core agribusiness employer specialization. To the extent that our larger farm risks are exposed to commercial aviation risk, most directors and officers in the PAULA book are excluded from workers' compensation coverage. Also, the routine air travel for our insureds is usually limited to commuter and small aircraft routes between locations such as Monterey, Fresno and Yuma.

"The economic forces that are placing huge negative pressure on many industries do not appear to be impacting agriculture. The availability of adequate supplies of farm labor have not been hindered, nor are there concerns about the ongoing availability of water supplies to meet the needs of California farmers where most crops are irrigated by aquifer and other artificial irrigation methods. In the area of crop dusting, even a wholesale grounding of all fixed wing and helicopter field applicators will not harm farm management practices as virtually all crops are capable of being treated by tractor-driven ground spray methods.

"In summary, PAULA is pleased to report that the quality of its reinsurance security is sound, the company's investment strategy requires no adjustment, our insurance risk associated with urban-based payrolls is almost non-existent, our exposure to large concentrations of insured employees in a single location is not an issue, and our core industry focus, agribusiness, is nearly impervious to the forces of recession.