S&P Lowers United Fire & Casualty’s Rating to ‘A-‘ from ‘A’

December 21, 2006

Standard & Poor’s Ratings Services has lowered its counterparty credit and financial strength ratings on United Fire & Casualty Co. and its wholly owned subsidiaries to ‘A-‘ from ‘A’.

Standard & Poor’s also said that the outlook on these companies is stable.

“The downgrade reflects our view that the companies’ risk underwritten and capital strength are mismatched,” explained Standard & Poor’s credit analyst Tom E. Thun. “United Fire is making efforts in managing its catastrophe risks in the Gulf region in light of the high frequency and severity of hurricanes in the region in 2005. However, we remain concerned that its catastrophe risk is–and will remain–more material than historically considered.” In addition, the risks underwritten could continue to affect the company’s earnings performance. These factors are offset in part by Standard & Poor’s belief that the group’s overall market position, though slightly restricted, is strong and is focused on small to midsize commercial accounts, which provide it with a sustainable market in rural and suburban communities.

The group’s three prior years of solid underwriting performance, excluding catastrophes, is strong, Standard & Poor’s noted. However, the strength in underwriting is partially attributable to the favorable pricing environment in the property casualty market and not wholly attributable to improvements in the group’s underwriting selection and enterprise risk management. Standard & Poor’s said it believes that as rates soften and competitive pressures increase, the company will find it more difficult to maintain strong earnings.

The ratings firm said it considers the group’s enterprise risk management to be weak, but developing. Standard & Poor’s will review the company’s progress in developing its risk-management program over the next six months and will assess if any outlook revision is appropriate at that time. Following Hurricane Katrina, the management team has made catastrophe risk mitigation a major focus. Because of this focus, Standard & Poor’s believes improved control structures will be in place at year-end 2006 and will allow the company to begin to improve its risk selection.

Standard & Poor’s expects that the group’s capital adequacy will continue to improve through 2007 to the lower end of the strong range. This takes into account catastrophe losses that do not exceed $180 million net of $20 million retention, the amount of the company’s total reinsurance catastrophe program. Standard & Poor’s believes that the property/casualty operation’s earnings performance based on underwriting will remain good through 2006 but taper as rate increases continue to be pressured. In addition, the group will continue to benefit from a business and earnings mix from the life company.

Source: Standard & Poor’s

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