Ratings Recap: Calif. Auto/Mercury, Arrowhead, Louisiana Farm, Chubb, Triad

May 8, 2008

Standard & Poor’s Ratings Services has raised its counterparty credit and financial strength ratings on California Automobile Insurance Co. (California Auto) to ‘A+’ from ‘A’. S&P also affirmed its ‘AA-‘ counterparty credit and financial strength ratings on Mercury Casualty Co. and Mercury Insurance Co. and its ‘AA-‘ financial strength rating on Mercury Insurance Co. of Florida (collectively referred to as Mercury). In addition, S&P affirmed its ‘A-‘ counterparty credit and senior debt ratings on Mercury General Corp. California Auto is a strategically important entity to Mercury General. The outlook on all these companies is stable. “These rating actions reflect our view of California Auto’s substantially improved level of capitalization,” explained S&P credit analyst Tracy Dolin. “In 2007, California Auto organically increased surplus by 14 percent, mostly through $13 million of net income, and achieved a healthy 95.2 percent combined ratio. In addition, Mercury contributed $10 million of capital to California Auto in 2007.” S&P also indicated that the “insurer financial strength ratings on Mercury and the issuer credit rating on Mercury General Corp. reflect the group’s very strong and steady operating history, very strong capital position, effective strategy in California, very strong

Standard & Poor’s Ratings Services has lowered its counterparty credit rating on San Diego-based Arrowhead General Insurance Agency Inc. to ‘B-‘ from ‘B’. S&P also assigned the rating a negative outlook. “This rating action reflects our view that the company is unable to sustain the financial-performance goals that were established when we initially assigned the ratings in 2006,” explained S&P credit analyst Michael Gross. S&P noted: “These metrics include sustained adjusted EBITDA fixed-charge coverage of 2.4x, annual net income of about $10 million, and the maintenance of larger bank loan covenant cushions relative to actual recent experience. Declining property/casualty premium rates and some carrier disruption have hurt Arrowhead. For full-year 2007, Arrowhead had net income of $0.4 million and adjusted EBITDA coverage of 1.5x. For the quarter ending March 31, 2008, the company reported a net loss of $3.2 million and adjusted EBITDA fixed-charge coverage of 1.0x.” S&P indicated that it “expects that the company will continue to pursue expense savings aggressively in the face of ongoing soft market conditions.”

A.M. Best Co. has affirmed the financial strength rating of ‘B+’ (Good) and issuer credit rating (ICR) of “bbb-” of Louisiana Farm Bureau Mutual Insurance Company (LFB), and has revised its outlook on both ratings to stable from negative. “The ratings reflect LFB’s consistent investment income, efficient cost structure and strong local market presence,” said Best. “The ratings also recognize LFB’s sponsorship by the Louisiana Farm Bureau Federation, which facilitates marketing efforts and enhances customer loyalty and affinity. The stable outlook is based on LFB’s recently improved risk-adjusted capitalization, post hurricanes Katrina and Rita, as well as recent catastrophe mitigation efforts.” However, Best also noted: “The company’s negative rating attributes include its geographic concentration and exposure to catastrophic storm losses, which is evident in the historical volatility of its underwriting performance and subsequent fluctuations in operating results. This was particularly evident in 2005, as hurricanes Katrina and Rita made landfall in Louisiana as major hurricanes, resulting in the largest underwriting loss and decline in surplus in the company’s history.”

Standard & Poor’s Ratings Services has assigned its ‘A’ rating to Chubb Corp.’s $600 million 30-year 6.5 percent senior debt and $600 million 10-year 5.75 percent senior debt issuances. S&P said it “believes Chubb will use these proceeds to repay its $460 million debt maturing on Aug. 16, 2008, replace cash used earlier this year to repay its $225 million debt that matured on April 1, 2008, and for other general corporate purposes. S&P credit analyst Tracy Dolin indicated: “The rating reflects Chubb’s outstanding reputation globally for product innovation and service, disciplined underwriting, strong underwriting profit, and very strong capitalization,” said Standard & Poor’s. “In addition, we view the insurer’s enterprise risk management framework and practices as strong and supportive of the group rating structure.”

Standard & Poor’s Ratings Services said today that all of its ratings on Triad Guaranty Inc. (TGIC) – currently ‘BB’/Watch Neg/- and TGIC’s mortgage insurance subsidiary, Triad Guaranty Insurance Corp.(Triad) – currently ‘BBB’/Watch Neg/- remain on CreditWatch with negative implications. “This follows TGIC’s announcement that it has entered into an exclusive agreement with Lightyear Capital LLC (Lightyear), a private equity firm, to negotiate agreements that will facilitate the formation of a new mortgage insurer to be owned by Lightyear,” S&P explained. “Lightyear would purchase some of TGIC’s assets, and some employees of TGIC would join the new company. TGIC would not have any ownership in the new company.” S&P also noted that it had lowered its ratings on TGIC and Triad on April 3, 2008, “because we believed operating losses would deplete a significant portion of Triad’s capital base and make it difficult for Triad to write new business.”

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