A.M. Best Affirms Financial Strength, Debt Ratings for United Fire & Casualty; Outlook Stable

A.M. Best Co. has affirmed the financial strength rating of A (Excellent) of the members of United Fire & Casualty Group (Cedar Rapids, IA), which operate under a business pooling arrangement.

Concurrently, A.M. Best has affirmed the debt rating of “bbb” on the $69 million 6.375 percent convertible preferred stock of United Fire & Casualty Company (Texas) due 2014. All the rating outlooks have been changed to stable from negative.

The financial strength rating affirmation is based on the group’s strong risk-adjusted capitalization, favorable underwriting results, as well as good overall liquidity position and diversified product offerings. The rating is supported by the group’s $69 million convertible preferred stock issuance of May 6, 2002, various initiatives taken by management to further improve profitability and the continued advantages to be gained from the group’s longstanding agency relationships and solid regional franchise. Corrective underwriting actions taken over the last three years include rate increases, consolidation of regional offices, as well as the elimination of unprofitable lines of business and agencies, limiting coverage for potential mold exposure under its homeowners’ policies and reducing exposure to construction defect claims in its commercial lines of business. Furthermore, the group’s business mix is shifting to more liability-related lines of business, which should lower its exposure to weather-related and catastrophe losses.

Offsetting these positive rating factors are the group’s below average operating results in earlier years, high expense structure and exposure to weather-related and catastrophe losses. The group’s operating results have been negatively impacted by the integration of American Indemnity – which historically had poor operating results – weather-related losses and catastrophes particularly in the Midwest and South and competitive market conditions, which had been prevalent throughout the commercial lines sector in prior years.

Also, growth in surplus has been influenced by the payout of shareholder dividends as well as unrealized capital losses in its equity portfolio in prior years.

Given the group’s recent improvement in operating profitability resulting from re-underwriting initiatives implemented by management, conservative loss reserve practices and adequate risk-adjusted capitalization, A.M. Best revised the rating outlook to stable. Going forward, it is A.M. Best’s expectation that the group will continue to maintain its current level of operating profitability at least through 2004.

The financial strength rating of A (Excellent) has been affirmed for the following members of United Fire & Casualty Group:

— United Fire & Casualty Company

— Lafayette Insurance Company

— Addison Insurance Company

— United Fire & Indemnity Company

— United Fire Lloyds

The following debt rating has been affirmed:

United Fire & Casualty Company–

— “bbb” on $69 million 6.375% convertible preferred stock, due 2014