S&P Announces: Medical Protective Co. 'A' Ratings Affirmed; Outlook Stable

Business Wire, Sept 20, 2004

NEW YORK -- On Sept. 20, 2004, Standard & Poor's Ratings Services affirmed its 'A' counterparty credit and financial strength ratings on Medical Protective Co. (MedPro), a subsidiary of GE Insurance Solutions Corp. (formerly known as GE Global Insurance Holdings) that is rated on a stand-alone basis. The outlook remains stable.

The ratings on MedPro reflect its leading market position, effective distribution, disciplined underwriting and pricing, and prospectively strong earnings. Offsetting these positive factors are the decline in capital and earnings adequacy and Standard & Poor's belief that reserves were 5%-9% deficient as of Dec. 31, 2003.

MedPro is the oldest medical malpractice company in the U.S. It ranks among the top three companies in the country based on direct premiums written of $849 million in 2003. MedPro has a policyholder base of more than 78,000 physicians and dentists, with a high policy retention rate of 86%. MedPro produced 29% of its 2003 premiums from two states--Ohio and Texas--but it is well diversified, with no other state constituting more than 9% of premiums.

Strong premium growth in the past three years has improved MedPro's liquidity. Underwriting cash flows have been positive in the past three years, with the underwriting cash flow ratio improving to 167% in 2003 from 137% in 2002 and 116% in 2001. Operating cash flow has been consistently positive. Standard & Poor's believes the company's relationship with its affiliate, Employers Reinsurance Corp., combined with a liquid bond portfolio, further enhances liquidity.

MedPro's risk-based earnings, based on Standard & Poor's five-year weighted average model, was 84% as of Dec. 31, 2003, which is considered marginal. Reserve strengthening from prior accident years of $90 million in 2002 and $43 million in 2003 was primarily responsible for the decline in earnings adequacy from a very strong level (237%) in 2001. The continuation of favorable market conditions and MedPro's very strong historical earnings profile support Standard & Poor's expectations that earnings will rebound to a strong level.

Although acknowledging MedPro's disciplined underwriting and reserving methodologies, Standard & Poor's is concerned that continued adverse development in MedPro's prior-year reserves could further affect earnings and capitalization.

MedPro's estimated capital adequacy ratio of 146% as of year-end 2003 is diminished from 188% and 272% at the end of 2002 and 2001, respectively. This trend is the result of 2002 and 2003 reserve strengthening and premium growth fueled by significant rate increases. Standard & Poor's capital model incorporates the assumption that reserves are deficient.

Outlook

Standard & Poor's expects MedPro's pretax ROR, before any prior-year reserve developments currently incorporated into the rating, to exceed 15% in 2004 and 2005, as continued price hardening and the pruning of less-profitable business drive improved results. Capitalization--enhanced by strong earnings, stabilized premium volume, and other capital-enhancement measures--is expected to improve to a stronger level by year-end 2004.

Ratings List
                                    TO              FROM
Medical Protective Co.
    Counterparty credit rating      A/Stable/--     A/Stable/--
    Financial strength rating       A/Stable        A/Stable

Complete ratings information is available to subscribers of RatingsDirect, Standard & Poor's Web-based credit analysis system, at www.ratingsdirect.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com; under Credit Ratings in the left navigation bar, select Find a Rating, then Credit Ratings Search.