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150 Federal St., Boston,

Mass. 02110; 617-526-7600;

fax: 617-526-0600;

1997 1996

Gross premiums $290,994,413 $296,042,074

Non-admitted $193,078,990 $196,632,048

Commercial risks 95% 95%

Net premiums $98,070,026 $97,553,420

Paid-in capital $7,200,000 $7,200,000

Capital & surplus $318,770,009 $292,054,079

Employees 225 227

Combined ratio 101.8% 117.3%

Rating agency NA 118.1%

Net income $23,233,900 $10,162,425

Best's rating A+ A+

S&P rating AA AA

Still facing the pressure of a buyer's insurance market, Pacific Insurance Co. Ltd. is zeroing in on profitable lines such as professional liability and property catastrophe while eliminating products whose performance has been marginal.

Pacific, a surplus lines unit of Hartford Financial Services Group Inc., has seen tremendous growth in products like employment practices liability and architects and engineers errors and omissions liability insurance, and is still doing well writing cat coverages despite softening market conditions, says President Ralph J. Palmieri.

On the flip side, Pacific has stopped writing potentially money-losing liability coverage for residential building contractors, and its exclusive underwriting manager -- First State Management Group Inc. -- sold off an underperforming unit that specialized in trucking coverages, Mr. Palmieri reported.

Overall, Pacific's gross non-admitted premiums fell 1.8% to $193.1 million last year compared with 1996, moving the company down one notch to the No. 8 spot among the nation's largest surplus lines insurers.

"I would characterize it as a modest decrease pretty much driven by the market itself," noted Mr. Palmieri, who also is president of First State Management. A profile of First State appears on page 55.

The market for catastrophe-exposed property risks, one of Pacific's largest sources of business, is not nearly as attractive for insurers as it was a few years ago. After another year of relatively good loss experience, rates for California earthquake coverage have slipped 10% to 15% this year and Florida windstorm rates have fallen by about 5%, he said.

While pricing may be sliding, though, "I would have to say (it is not declining) as much as we originally thought and not enough to discourage us from continuing to write it," Mr. Palmieri said. "Even at this stage in 1998, we are still making a pretty good living writing cat business."

First State this year bought additional catastrophe reinsurance protection for its underwriting units -- which include Trumbull Insurance Co., Pacific's admitted market counterpart -- allowing them to increase property volume "somewhat," he said.

About $50 million of First State's total of $238.3 million in 1997 gross written premiums placed consisted of cat risks, with Pacific writing the majority of this business, Mr. Palmieri said.

Pacific writes an average $5 million limit on property business, though it can raise this limit to $20 million to $25 million with facultative reinsurance support.

The insurer typically provides a larger limit when property coverage is part of a larger program, he explained, noting for instance that Pacific might provide higher property limits to a health care facility for which the insurer also writes liability coverages.

On the casualty side, Pacific continues to focus on its rapidly growing professional liability sector, which includes employment practices liability coverage and programs for architects and engineers, real estate brokers and lawyers. It also writes miscellaneous E&O coverage that spans dozens of classes of professional risk.

Professional liability lines including lawyers professional liability grew to represent 29% of Pacific's casualty book last year from 15% of casualty writings in 1996, according to Mr. Palmieri.

"It's growing very nicely for us and we continue to add staff," he observed.

First State last year began "regionalizing" its professional liability underwriting operations, moving underwriting responsibility to branch offices after having centralized the underwriting function in Boston. Field underwriters are now located in Atlanta; Kansas City, Mo.; Los Angeles; and San Francisco, he said.

"We're bringing our professional liability production closer to the source and eliminating any time zone problems we might have had," Mr. Palmieri noted.

Pacific also is continuing to expand its lawyers malpractice program from Massachusetts to Connecticut and New Hampshire. First State also formed an alliance with an affinity group unit of Aon Corp. to market the lawyers program, Mr. Palmieri said.

Other sources of business for Pacific include:

* Primary casualty lines, where Pacific will write up to $1 million per occurrence and $2 million annual aggregate. This book consists mainly of manufacturers and contractors liability, product liability and owners, landlords and tenants liability risks.

* A liquor liability program providing $1 million primary and $5 million umbrella limits that draws most of its business from Massachusetts but is available in five other states.

* Several property and/or liability programs for health care providers, including nursing homes and home health care services. These programs offer $1 million in primary liability limits, and the nursing home program provides up to $10 million in umbrella limits.

Premium volume in health care programs slid about 10% in 1997, partly because Pacific cut back its writings in Texas, where it judged the legal climate too unfriendly.

While Pacific has focused on what it perceives as growth opportunities, it has also seen volume drop in other areas, including highly competitive excess general liability lines.

"The price erosion has continued through 1997 and even into 1998. We certainly do not feel at this point that excess and umbrella (liability) is an opportunity for any surplus lines company," Mr. Palmieri said. "Our volume of that business is continuing to decline, and we are looking to take up the slack with other lines of business."

Meanwhile, Pacific has stopped writing liability coverage for residential construction contractors, a loss-prone line the insurer wrote mainly in California. Pacific continues to write commercial contractors on a risk-by-risk basis, he said.

"That is a position that has certainly cost us some premium volume, but there's no question in our minds that it's not the place to be," Mr. Palmieri said.

In January, First State also sold its Burlington, N.C.-based trucking

insurance division to Lancer Financial Group Inc. of Long Beach, N.Y. First State decided that the operation, which produced $14 million in gross written premiums for physical damage and bodily injury risks, was not profitable enough to maintain, he said.

Pacific itself, buoyed in part by favorable catastrophe experience, had a good year in 1997, and First State overall recorded a combined ratio "very comfortably under 100%," according to Mr. Palmieri.

Assessing Pacific's performance based on its financial statements is difficult, though, because they largely reflect the results of Hartford's intercompany reinsurance pool, of which Pacific is a member.

In 1997, for example, Pacific reported gross written premiums of $291 million, including $192.7 million of its own direct written business and $98.1 million in reinsurance assumed from the Hartford pool. Pacific then ceded all of its direct business to the pool, leaving it with net volume consisting entirely of the pool premiums it assumed, which include several lines of coverage Pacific does not write on a direct basis.

The $192.7 million in direct premiums written represented $193.1 million in non-admitted business partially offset by $154,588 reported for Connecticut and Hawaii, the only two states in which Pacific is licensed as an admitted insurer.

For 1997, Pacific reported virtually flat earned premiums of $96.9 million, again consisting of pool business.

Losses and underwriting expenses fell, though, narrowing Pacific's underwriting loss to $2.1 million last year from $16.9 million in 1996. Its statutory combined ratio on this business was 101.8%, higher than the experience Mr. Palmieri reported on the insurer's own direct business.

Pacific more than doubled its net income to $23.2 million from $10.2 million in 1996. Policyholder surplus expanded 9.1% to $318.8 million at the end of last year, compared with year-end 1996.

For the first six months of 1998, Pacific reported earned premiums of $48.3 million, down 1% from the same period last year. The underwriting loss expanded to $1.9 million from $1 million in the first six months of 1997.

After investment income and other gains and losses, Pacific reported net income of $12.9 million, up 11.2% from 1997's first half.

In addition to Mr. Palmieri, Pacific officials include Ramani Ayer, chairman; Joseph Gareau, executive vp and chief investment officer; Peter Coghlan, senior vp; and Michael O'Halloran, vp and secretary.

Pacific carries Hartford's pooled rating of A+ from A.M. Best Co. and the Hartford pool's AA claims-paying ability rating from Standard & Poor's Corp.