Best Affirms American Modern

March 26, 2004

Insurer rating agency A.M. Best Co. has affirmed the financial strength rating of “A+” (superior) of Amelia, Ohio-based American Modern Insurance Group and its property/casualty affiliates. Best has also affirmed the financial strength rating of A- (Excellent) of American Modern Life Insurance Co. and Modern Life Insurance Company of Arizona Inc., based in Phoenix.

Concurrently, A.M. Best has assigned indicative ratings of “a-” senior debt, “bbb+” subordinated debt and “bbb” preferred stock to the $150 million shelf registration filed by the parent, the Midland Co. The outlook on all ratings is stable.

The ratings reflect American Modern’s superior capitalization, favorable operating profitability and niche strategy in providing insurance products for manufactured housing, as well as motor sport products. The group’s disciplined underwriting and focused operating strategies have resulted in strong five-year pre-tax returns on revenue and equity. In addition, American Modern benefits from its short-tail property focus and low volatility in loss reserves. With approximately 50 percent of its premium writings in the manufactured housing segment, the group is exposed to catastrophe losses.

However, strict adherence to underwriting guidelines, improvements in the quality of pre-fabricated homes and the group’s broad geographic spread has reduced the potential exposure to these severe shock losses. The ratings also acknowledge the modest financial leverage of the parent with total debt to adjusted capitalization of 27 percent and fixed coverage ratio of approximately eight times.

Modestly offsetting these positives are American Modern’s elevated premium leverage and above average expense levels in relation to the property lines industry composite. Expenses are driven by its competitive commission structure, particularly in terms of contingency-based payments. Elevated premium leverage is a result of increased claim frequency, modest exposure growth and dividends to the parent.

The affirmation of the life companies’ rating is based on their strategic position within American Modern and its financial support for the life companies, a positive operating earnings trend, a high credit quality investment portfolio and favorable risk-adjusted capitalization. Partially offsetting factors include the impact of economic and regulatory challenges on the future growth of the credit insurance business, a narrow product profile and geographic concentration risk with respect to premium production.

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