Ratings Roundup: AIG-Equity, MBIA, Great Lakes, Country-Wide, Infinity, Allstate, Farmers Mutual (Nebr.)

May 15, 2008

Standard & Poor’s Ratings Services has assigned its ‘A’ junior subordinated debt rating to American International Group Inc.’s $5 billion of equity units. S&P also said it has “placed this rating on CreditWatch with negative implications because all other AIG ratings are on CreditWatch.” S&P explained: “Each equity unit consists of a stock-purchase contract and a beneficial interest in three series of junior subordinated debentures, due in 2041. In 2011, AIG will remarket the three tranches of junior subordinated notes on three different dates, with the proceeds used to satisfy the obligation under the share-purchase agreements. The ‘A’ rating is two notches below the ‘AA-‘ counterparty credit rating on AIG, which reflects the subordinated nature of the securities and the risk of deferral of interest payments as well as the market risk borne by investors under the share purchase contract. The capital raised through the issuance of the equity units constitutes a portion of the $12.5 billion of new capital raising announced by the company on May 8. Credit analyst Rodney Clark added: “The ratings will remain on CreditWatch pending the completion of the capital raise and our evaluation of whether the amount raised is sufficient to justify the current ratings. A higher amount would likely result in the ratings being affirmed and removed from CreditWatch, while a lower amount could result in the ratings being lowered by one notch.”

Standard & Poor’s Ratings Services has said that it is “not taking any rating action following MBIA Inc.’s announcement of a first-quarter loss of $2.4 billion, principally stemming from a $3.5 billion unrealized loss on insured credit derivatives. MBIA reported significant mark-to-market losses on its insured credit derivatives and a smaller amount of credit impairment on its housing-related insured portfolio; Ambac Financial Group Inc. recently reported similar losses and impairments.”

A.M. Best Co. has placed the financial strength ratings (FSR) of ‘B-‘ (Fair) and issuer credit rating (ICR) of “bb-” of Michigan-based Great Lakes Casualty Insurance Company (GLC) under review with positive implications. Best said the revised outlook “reflects the effects on GLC’s ratings of Main Street America Group’s (MSA) of Jacksonville, Fla. announcement that a definitive agreement to purchase GLC from its parent, Newco Financial Holdings, Inc., has been reached. Best said the “ratings will remain under review pending further discussions with the managements of GLC and MSA on GLC’s future role within MSA, as well as the conclusion of the agreement. Prior to the conclusion of the agreement, A.M. Best will continue to monitor the unfolding situation and react as necessary.”

A.M. Best Co. has upgraded the financial strength rating (FSR) to ‘B-‘ (Fair) from ‘C++’ (Marginal) and issuer credit rating to “bb-” from “b” of New York’s Country-Wide Insurance Company. The outlook for both ratings is stable. “The upgrades reflect Country-Wide’s strengthened risk-adjusted capitalization, improved operating performance and extensive local market expertise in the downstate New York automobile marketplace,” Best explained. “Recent operating profitability has been attributed to management’s focus on core underwriting results and improved internal controls. Specific corrective actions included stringent underwriting, improved rate adequacy and enhanced claim controls. Underwriting performance further benefited from management’s increased emphasis on reserve adequacy and technology advancements.”

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and issuer credit ratings (ICR) of “a” of Birmingham, Ala.-based Infinity Property & Casualty Group and its operating members. Best also affirmed the ICR of “bbb” and debt rating of “bbb” on $200 million 5.50 percent senior unsecured notes, due 2014 of Infinity Property & Casualty Corporation. The outlook on all of the ratings is stable. “The affirmation of the FSR reflects Infinity P/C’s excellent capitalization, favorable operating performance and strong non-standard automobile market presence,” said Best. “Infinity P/C ranks among the leading non-standard automobile writers in the United States. Infinity P/C’s business is heavily focused in California and Florida, which generates approximately two-thirds of direct business written.”

Fitch Ratings has affirmed the ratings of The Allstate Corporation and its P/C and life subsidiaries with a stable outlook. “Allstate’s ratings continue to be favorably influenced by its top-tier market position and national scope in the personal lines property/casualty business, moderate financial leverage at the holding company level and the diversification benefit provided by the life insurance business,” said Fitch. “Balanced against these strengths are operating pressures from first quarter 2008 catastrophe losses, a challenging investment environment and a softening property casualty business cycle. In addition, the risk-adjusted capital position for both Allstate’s life and property/casualty operations are below average for the rating category.” Fitch also mentioned the “uncertainties surrounding Allstate’s competitive position in Florida in light of the company’s disagreement with the Florida Office of Insurance Regulation.” However, the rating agency indicated that “Allstate and similar highly-rated peers are expected to consistently report better than average operating results, and managing catastrophe exposure to minimize operating volatility is a key strategy. Catastrophe losses accounted for 840 basis points of Allstate’s first quarter 2008 combined ratio of 94 percent, up significantly from 84.6 percent in the comparable period. Allstate’s catastrophe reinsurance program is focused toward the most severe catastrophic events, leaving the company’s operations exposed to losses from frequent, moderately-sized catastrophes.”

A.M. Best Co. has revised the outlook to positive from stable and affirmed the financial strength rating of ‘A ‘(Excellent) and issuer credit rating of “a+” of Farmers Mutual Insurance Company of Nebraska. Best said both the “ratings and positive outlook are based on Farmers of Nebraska’s excellent capitalization, its outstanding operating performance and long standing market presence as the leading farm writer in Nebraska. The ratings acknowledge the demonstrated effectiveness of the company’s enterprise risk management, which identified and mitigated Farmers of Nebraska’s most significant underwriting and operational risks. The mitigation strategies included underwriting actions and catastrophe management strategies that contributed to significant improvements in operating profitability and growth in policyholders’ surplus over the last several years. The ratings additionally recognize the company’s modest underwriting leverage, favorable loss reserve development and conservative investment portfolio, which are incorporated in Farmers of Nebraska’s solid risk-adjusted capitalization. Partially offsetting these positive rating factors is Farmers of Nebraska’s geographic concentration of risk in the Midwest, with 84 percent of its business concentrated in Nebraska.”

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