We faced a new world order in 2002. The year began amid fears of terrorism and ever growing concern over the state of the economy. Americans have begun to adapt to the new order and to the struggle to find peace and prosperity. The vulnerability which we felt following 9/11 has been replaced by a sense of caution and watchfulness. This new vigilance has been seen in the transportation industry and is exemplified by the creation of the American Transportation Army, an organization of truckers under the auspices of the American Trucking Associations. Its Anti-Terrorism Action Plan is an effort to calm fears over the use of the nation's trucks as terrorist weapons.

With over 6 million ocean containers arriving every year, and over 2 million tractor trailers operating on a daily basis, the eyes of the public and the government focused on ways to secure the transportation industry from terrorist attack. Many of the new procedures implemented by motor carriers over the last year to tighten security are expected to have the additional effect of reducing cargo theft. With cargo theft reported to range from $3.5 to $12 billion a year, any reduction will be welcomed.

The economic impact of the Enron and WorldCom bankruptcies and the reevaluation of accounting procedures for all companies sent the stock market into a rapid downward spiral. The transportation industry, already reeling from increasing insurance costs and higher diesel fuel prices, faced reductions in tonnage, greater operating expenses and loss of investment opportunities. The insurance industry, which previously relied heavily on investment returns in order to maintain profitability, has been forced to offset substantial losses in the stock market with increased premium rates and more selective underwriting, making the market for insurance even more costly for trucking companies.

As we close out the year, the threat of war with Iraq looms and there is no general consensus on whether the economic recovery, which may be bumpy, will be sufficient to allow the transportation or insurance industry to avoid further major trauma. Although rates for both freight and insurance premiums continue to rise, both insurers and motor carriers continue to struggle to maintain profitability.

In last year's resumé we were pleased to report that the Federal Motor Carrier Safety Administration had its first permanent head. However, Joseph Clapp, who took the reins just last year, has already tendered his resignation to the U.S. Department of Transportation. At year's end Roger Nober was named chairman of the Surface Transportation Board, replacing Linda Morgan.

During 2002, government agencies focused on increasing security for all aspects of the transportation industry. While there was much political maneuvering to implement the Department of Homeland Security and the Port Security Act, many federal agencies looked for ways to increase security through existing regulations. For example, the FMCSA began enforcing requirements that placards and placard holders be used only to identify hazardous materials. The Food and Drug Administration released safety guidelines for food transporters. The Transportation Security Administration advised that early this year it will file a proposed rulemaking requiring trailers to be locked at all times.

Although the North American Free Trade Agreement required that Mexican-U.S. borders be opened by January 1, 2000, they remain closed to this day. Target dates were repeatedly set and then extended. In early May, a coalition of environmental, public advocate, trucking and labor groups sought to enjoin the opening of the border on the basis that an environmental impact study had not yet been completed. The court refused to issue an injunction, although the case continues. In accordance with the directives of DOT Secretary Mineta, various draft rules were finally presented to the Office of Management and Budget setting forth the protocol for the certification of Mexican carriers. In early November, Mr. Mineta certified the borders for opening. On November 27, 2002 President Bush authorized the DOT to proceed with the necessary final actions to end the moratorium on Mexican truck access. On December 2, 2002, the coalition applied for an emergency court order to stop the opening. The court rejected the request.

At the other border of the country, the U.S. and Canada began the implementation of various programs contained in the Smart Border Program signed in December of 2001. The program seeks to create express lanes at border crossings and clear up delays through pre-certification of shippers and motor carriers. A similar agreement was signed with Mexico in April of last year.

The modification of the 1939 Hours of Service rules continues to remain unresolved. Mr. Clapp has advised that he anticipates that new hours of service rules will go to the White House for review before he departs the FMCSA. Despite the fact that the proposed rules have not yet been released for review by the public, various trade organizations are already positioning themselves for the anticipated fight over the new rules. This is expected to be a contentious issue in the coming year.

While security was a primary focus, other significant regulations were put into place. In 2002, the STB's household goods valuation ruling of 2001 was extended to all carriers of household goods. By mid-year, all household goods carriers were required to modify their transportation documents to reflect the changes. As an easy loss prevention tool, underwriters should request confirmation that their carriers have made the necessary changes.

The DOT also issued its final rulemaking on the standards to be employed in the protection of cargo. The new standards are based upon the American Cargo Securement Standard Model Regulations. While the rule was effective in December 2001, carriers will have until January 2004 to implement all the new requirements .

In September 2002, FMCSA began enforcement of an interim rule which allows the FMCSA to put a carrier out of service if the motor carrier is operating outside the scope of its operating authority. In addition, the FMCSA released new rules covering CDL drivers which, among other things, will allow for revocation of a CDL if a driver loses his non-commercial license as a result of DWI or DUI offenses. The FMCSA anticipates that over 26,000 truck drivers could be disqualified each year.

At midyear, FMCSA determined that it would exclude intrastate motor vehicle violations and accidents when determining safety ratings. As is often the case, however, the new policy has created more questions than answers as carriers struggle to determine exactly which violations or accidents can be disregarded in reports to the FMCSA.

In November 2002, the Truckload Carriers Association filed a petition with the DOT seeking to exempt all motor carriers of property from mandatory financial reporting requirements. The TCA had been unsuccessful in past attempts to rescind these reporting requirements, in part due to the efforts of the insurance industry and other concerned organizations. We will continue to monitor this issue and will take all steps necessary to prevent the rescinding of this requirement so that you can continue to have adequate information to properly assess each risk presented to you.

The motor carrier industry has suffered, as we all have, from the economic downturn and the increased expense of doing business. The cost of additional security procedures, along with increased insurance premiums and fuel costs, have further reduced profitability. Despite the dismal returns for some motor carriers, trucking continues to be a big business in this country. The Bureau of Labor Statistics reports that there are more than 3 million heavy-truck drivers nationwide, and over 600,000 companies involved in the industry. The ATA reports that 81.6 percent of all trucking operations operate 20 or fewer trucks. The industry employs 9.9 million Americans, paying more than $317 billion in wages, and generating revenues of $606 billion. The DOT released a study indicating that domestic inland truckers will increase freight capacity in coming years.

The strike at the West Coast ports in October was another setback to economic recovery for the transportation and marketing industries. With over $300 billion in freight moving through the port in any given year, the relatively short shutdown crippled the local transportation industry and reduced merchandise at the start of the high volume holiday season.

This year the industry saw the bankruptcy of Consolidated Freightways, one of the largest LTL carriers, and the disappearance of APA Transport, another large carrier. While these companies were front page news, and many other smaller truckers terminated operations during the year, overall bankruptcy filings slowed for motor carriers during 2002. In the final months of 2002 many carriers implemented freight rate increases as a way to offset the increased cost of doing business. The ratio of demand for shipping services to capacity is reportedly higher than ever before and shippers appear to be resigned to accepting these increased charges in order to ensure that their freight will move. Security surcharges were also being implemented by carriers by the end of the year. The cost of diesel fuel continues on a roller coaster, with more highs than lows. Although late fall saw a short drop in fuel costs, overall the price of diesel fuel rose substantially last year.

On the upside, motor carriers have made inroads on reducing safety violations. The Commercial Vehicle Safety Alliance reported that 77.9% of the trucks and buses which they inspected met safety standards. Recent drug testing statistics have also reported a reduction in the number of drivers testing positive. Random testing showed a 5% reduction in drivers found with a blood alcohol content of .02 or higher.

In the coming year we anticipate substantial movement in the effort to generate a uniform model for transportation contracts. In past years, motor carriers often routinely signed any contract given to them by the shipper. In this tight market they are beginning to evaluate the cost of accepting all responsibility for cargo, personal injury and property damage without guarantees of traffic volume. As the implementation of any uniform contract could have a profound impact on the underwriting process we will follow this issue closely.

The ATA has begun wooing back the various groups which had previously splintered from the organization. The Truckload Carriers Association has rejoined the ATA and more are expected to follow. Once the proposed new hours of service rules are released to the public, the ATA will likely lead the fight to resolve the concerns arising from them. Although the ATA was active in seeking a delay in the implementation of the new diesel emission regulations, it was unsuccessful. The rules became effective October 1, 2002.

The National Master Freight Agreement between the Teamsters and many of the large carriers expires on March 31, 2003. The existing contract covers more than 85,000 LTL employees at more than 60 companies. The parties have already begun active negotiations.

In the year following one of the largest catastrophes ever to hit the insurance industry, insurance carriers were faced with a struggle to find profitability in a market which had already been volatile before the attack. 2002 did not prove to be a year for dramatic recovery as insurance carriers faced losses in investments and equity income, high jury verdicts, loss of capital and risks of terrorism. Increasingly during the last year the focus has changed to harder underwriting as a way to offset the losses from investment income.

Despite increased premium dollars and greater emphasis on underwriting, many rating organizations have continued to maintain negative outlooks for commercial and reinsurance markets. In the post-Enron environment the issues of reserves and balance sheet integrity are being viewed carefully. Standard and Poor's reports that at year end over 40% of the commercial lines insurance companies hold either a negative outlook or are on Credit Watch Negative. Standard and Poor's reports an overall average combined ratio of 108% for 2002 with a drop to 105% expected in 2003.

Politically, much of the year was spent seeking resolution of the need for terrorism insurance. After much maneuvering between political parties, President Bush finally signed the Terrorism Risk Insurance Act on November 26. This bill allows for $100 billion in federal funds to be made available to insurance companies in the event of a terrorist attack that caused more than $5 million in losses. The new statute, which voids terrorism exclusions on current policies, contains a morass of requirements for insurers to complete before terrorism may be excluded. In the final months of 2002 most insurers scrambled to implement procedures for a smooth transition. Guidelines for implementation of the regulations were released in the final days of December and are designed to help insurers determine how to comply with the Act. Any organization that meets the program's definition of "insurer" must participate in the program, including state-licensed or admitted insurers, eligible alien surplus line carriers, and insurers that are approved by federal agencies in connection with maritime, aviation or energy activities.

On the whole, truck insurers reported that they continued to raise rates over this past year. Rate increases of up to 30% have been requested by some insurers who had not yet begun to increase rates prior to 9/11. As many insurance companies evaluate what markets they intend to focus on in the coming year, we continue to see a decline in the number of insurance carriers seeking to write motor carriers. However, many insurers with sophisticated underwriting processes and a knowledge of the industry report that they are operating profitability. We are pleased that CAB is an integral part of these insurers informed underwriting procedures.

A year has passed since we last reported on the lack of progress in reconciling insurance and trade issues between Mexico and the United States. With much of the industry focused on terrorism insurance last year, the issues related to insuring Mexican carriers in the United States and cargo inside Mexico has fallen by the wayside. As there is a likelihood that the border will open within the next six months we anticipate that these issues will resurface. As resolution of these issues will affect your policy terms, conditions and exposures, we will keep you advised of developments in our monthly "Bits and Pieces".

This past year was exciting for Central Analysis Bureau. During the year we introduced our internet-based "clearing house", which is available at no additional charge to all our "automatic" subscribers. The reaction of our subscribers has been positive and usage of the website is high. The website contains the CAB rating and financial and operating information on the motor carrier, along with easy links to data from various DOT databases (including insurance filing information, SAFER and SafeStat). Underwriters report that the underwriting process has been streamlined through use of the website which allows them to have all of the relevant information at hand to make an informed decision on a risk. For those of you who are eligible but have not yet signed up, you can start the enrollment process by going to our web site cabfinancial.com (just click on the link for "Subscriber Area" in the upper right corner, then on the link "New User Signup" on the resulting page).

We began to include information from the FMCSA's SafeStat database on our analysis reports during 2002. SafeStat is an attempt by the FMCSA to take all the safety-related information it receives, quantify it and compare a specific motor carrier to the entire universe of motor carriers. Effective April 1, 2002 every motor carrier is now required to report biannually the size of its fleet, its mileage traveled and the number of drivers used in its operations. This information, which we make available to our subscribers along with the other information we gather on your behalf, provides further assistance in evaluating motor carrier risks.

During the past year CAB has continued to increase the specific and valuable information we provide and to tailor it to the needs of the insurance underwriter in order to reduce your risk and increase your profitability. For example, because we continue to see that many insurance carriers issue liability filings for an amount greater than the required limits, creating unnecessary exposure to the insurer, we have now begun including on our reports, and highlighting on our web "clearing house", a motor carrier's required filing limits and the limits of the currently active filing. We urge you to review these required limits and adjust your filing to minimize your exposure.

At a time when there is great focus on the underwriting process we recognize that underwriters need more than just financial information in order to fully evaluate a risk. Understanding the events that affect an individual motor carrier's operation allows an underwriter to tailor the coverage to protect both parties. For that reason we continue to notify our subscribers whenever the FMCSA issues an "out of service" order for an insured. Underwriters should be concerned whenever a motor carrier runs afoul of governmental regulations and is ordered to cease operations, even for a short period of time. We now provide this notification via e-mail for those subscribers who have provided us with their e-mail address. As an added service, we also continue to monitor releases from the transportation press and governmental regulatory agencies and will notify subscribers of any new information concerning an insured, including potential financial difficulties.

During 2002 we also began to offer to our subscribers the option of receiving analysis reports for insureds via e-mail (in Adobe Acrobat format). If you currently receive your reports via the mail but would prefer to have them sent to you via e-mail please contact Mark Schweber at mschweber@cabfinancial.com or extension 207. Since 1998 we have published a free monthly newsletter, "Bits and Pieces" on our website, which summarizes important events in the transportation and insurance industries. In 2002, we began to e-mail this newsletter to subscribers. If you do not currently receive it and would like to, please furnish your e-mail address to Mark Schweber.

For over 50 years we have been committed to assisting motor carrier insurance underwriters as much as possible. If you ever wish to discuss anything in "Bits and Pieces" in greater detail, or have any questions regarding transportation and insurance, or government regulation of these industries, please do not hesitate to contact us.

We work hard to pursue every avenue available to secure current financial information on motor carriers. We are gratified by the cooperation of our subscribers in this important effort, both in helping us to improve the effectiveness of our annual mailings to motor carriers and in obtaining and transmitting to us financial information from motor carrier insureds and prospective insureds. We continue to pledge a 24-hour turnaround to provide a rating based upon financial information faxed or e-mailed to us by our subscribers.

Our affiliate, Transportation Technical Services, Inc., is America's foremost publisher of transportation directories, both on the web and in print. Its subscription-based web directory, fleetseek.com, has information on almost 88,000 for-hire motor carriers, private fleets and owner-operators in the U.S., Canada and Mexico, and is updated continuously throughout the year. The 17^th edition of its flagship National Motor Carrier Directory, containing essential information on almost 24,000 for-hire carriers, has just been published. Financial and statistical information on over 2,900 large motor carriers can be found in its "The Blue Book of Trucking Companies". This information is also available on fleetseek.com. To order or get further information phone (888) ONLY TTS or visit their website at ttstrucks.com. The senior staff of TTS (and CAB) are recognized transportation experts with many years of experience and are available for litigation, consulting or other purposes.

The law firm of Schindel, Farman & Lipsius LLP specializes in transportation and other coverage matters. It has prepared the following pages concerning recent legal developments and you may wish to share them with your claims department staff.

As we noted last year, Andy Schindel cut back on his work load during 2002 and as a result this resumé, written primarily by Jean Gardner, is the first one in over 20 years for which he is not the primary author. Andy has now retired and we all wish him years of enjoyment in the mountains of Vermont. Jean Gardner, Ira Lipsius, Andy Schindel, Steve Schindel, Mark Schweber, Judy Silpe, Gary Bitsko, Alex Bentsen, Matthew Kirschbaum, Daniel Bong and the entire staff of CAB extend our best wishes for the coming year to all our subscribers. We will work hard to provide you with the maximum service possible and we welcome your suggestions and feedback.