Fitch Upgrades Ratings for 21st Century Insurance Group

Fitch Ratings has upgraded the long-term issuer rating on California-based 21st Century Insurance Group (21st Century) and the ratings on 5.9% senior notes due 2013 to ‘BBB+’ from ‘BBB’.

Additionally, Fitch has upgraded the insurer financial strength (IFS) ratings on 21st Century Insurance Company (21st Century Insurance) and its affiliated insurers to ‘A+’ from ‘A’. Following the upgrade, the Rating Outlook is Stable.

Fitch’s upgrade of 21st Century’s ratings reflects the company’s improved underwriting results and Fitch’s increased comfort with the company’s reserve position.

Fitch’s ratings continue to reflect 21st Century’s strong competitive position in the California auto insurance market, solid capitalization, and low-cost direct distribution platform. Partially offsetting these positives is the effect of the company’s mono-line product offering and concentrated geographic focus in the competitive California auto insurance market.

21st Century reported a combined ratio of 95.4% and $3 million of favorable prior-accident-year reserve development through Sept. 30 2004. In contrast, from 2000-2003, the company’s combined ratio averaged 105.4% and included an average of $72 million of adverse prior-accident-year reserve development per year.

Fitch believes that 21st Century’s improved underwriting results are due in large part to rate increases the company implemented in its core auto insurance product beginning in 2000. Prior to 2000, 21st Century had lowered rates for four consecutive years, and Fitch believes that these rate decreases contributed to the company’s underwriting losses in subsequent years.

The improvement in 21st Century’s profitability also reflects a lack of adverse reserve development in the company’s reserves for claims in its run-off book of earthquake and homeowners’ reserves. The earthquake reserves stem from 1994 Northridge earthquake-related claims that were reopened in 2001 pursuant to a change in California legislation. Through Dec. 31, 2004, 98% of these claims had been settled, and Fitch believes that they are unlikely to materially affect earnings.

21st Century uses a moderate amount of financial leverage, at Sept. 30, 2004, the company’s debt-to-capital ratio was 16%, and its operating earnings-based interest coverage was a strong 13.4x. Fitch believes that operating earnings-based coverage could be somewhat pressured due to heightened competitive conditions but that it will remain strongly supportive of 21st Century’s current ratings.

21st Century Insurance has a strong balance sheet with limited investment and reinsurance-related risk. The company invests primarily in investment-grade fixed-income investments, and its reinsurance recoverable is small relative to the company’s surplus and is due from highly rated companies, including its majority shareholder, American International Group, Inc. (AIG). Operating leverage is comparable to that of other highly rated personal auto writers.

The company has a large market share in California where, based on 2003 direct premiums written, it ranked as the state’s seventh largest writer of personal auto insurance.

In 2003, 97% of the company’s direct premiums written were derived from California-based policyholders and, as a result, it is highly exposed to market conditions and the political climate in California.