PRUPAC Lowered

S&P lowered its counterparty credit and financial strength ratings on Prudential Property & Casualty Insurance Co. of Indiana (PRUPAC) to “A” from “A+.” The outlook is stable.

The rating action reflects S&P’s belief that PRUPAC, based on its current and medium-term expected operating performance, may become less integral to the Prudential group of companies given S&P’s expectation of the group’s focus on absolute levels of ROE following demutualization.

However, the Group’s management maintains its commitment to PRUPAC, and the rating accounts for this implicit support. S&P further believes PRUPAC has the ability to generate improved operating results and has therefore assigned a stable outlook to this new rating.

Major rating factors include extremely strong capitalization.

Management and corporate strategy is another rating factor. In the past two years, PRUPAC has embarked on an ambitious strategy to broaden its distributional capabilities and geographic diversity. Although this increased the company’s expense ratio to 39.9 percent in 2000 from 29.5 percent in 1998, PRUPAC is making prospective strategic decisions under a new management team with the expectation of achieving greater profitability in this business.

Another rating factor is business position. Prospectively, PRUPAC will be augmenting its basic captive agency force with alternate distribution channels, where it believes it can achieve profitability.

Operating performance is also important. PRUPAC’s five-year weighted-average ROR has been very low, although in recent years it has improved as a result of significant reserve releases. Prospectively, management’s recent aggressive cost-cutting steps are expected to result in substantial annualized cost savings, favorably influencing operating results in the future.

Capitalization, as measured by Standard & Poor’s capital adequacy model, will remain extremely strong, in excess of 175 percent. Senior management’s current expense and underwriting initiatives are expected within 24-36 months to produce a break-even underwriting profit.