Ratings: Willis, Erie, Farmers-Flemington, Am. Resources, Am. General, Stnd. Mutual, Wisconsin County

June 12, 2008

Fitch Ratings has placed its ratings on Willis North America Inc. (WNA) and Willis Group Holdings Ltd. (Willis) on its rating watch negative list. Fitch said its rating action follows the announcement that Willis has agreed to purchase all outstanding common shares of Hilb Rogal & Hobbs company (See IJ web site – https://www.insurancejournal.com/news/national/2008/06/09/90764.htm). The difference between the two figures is due to Willis’ assumption of $400 million of HRH’s debt. Fitch said it “expects to downgrade Willis and WNA’s ratings at least one but not more than two notches following the transaction’s expected closing during the fourth quarter of 2008.” The rating action “reflects an expectation of significantly increased leverage at Willis following the transaction’s completion,” Fitch explained. It also cited Willis management’s assertion at the conference call that it expected the combined entity’s debt-to-EBITDA ratio to increase to 3.2 times (x), “which is well above Fitch’s maximum comfort level of roughly 2.5x for insurance brokers at Willis’ current rating level,” the announcement noted. “Willis’ debt-to-total capital ratio, already high relative to other insurance brokers that Fitch rates, is expected to increase from current levels in the high 40 percent’s.” Fitch also said it “believes that Willis may be challenged to realize the expected synergies from this transaction due to the softening insurance cycle that depresses growth opportunities and crimps profit margins for insurance brokers. Moreover, the rating action reflects concerns about increases in the combined entity’s exposure to intangible assets.”

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A+’ (Superior) and issuer credit ratings (ICR) of “aa-” of Erie Insurance Group and its P/C affiliates. Best also affirmed the ICR of “a+” of Erie Indemnity Company (Erie Indemnity), Erie’s publicly-traded management company, as well as the FSR of ‘A’ (Excellent) and ICR of “a” of Erie’s life affiliate, Erie Family Life Insurance Company. The outlook for all ratings is stable. “The rating affirmations reflect Erie’s superior risk-adjusted capitalization, solid operating performance and well-established regional market presence.” said Best. The rating agency also noted that “Erie maintains a competitive advantage through its excellent level of service combined with its agency partnering approach, which helps to strengthen agency loyalty. Despite the soft pricing environment, robust surplus growth in recent years has been attributed to disciplined underwriting, increased pricing sophistication and technology advancements. Additional factors, which have contributed to the group’s strong earnings, include solid investment income and its low operating cost structure. Offsetting rating factors include Erie’s geographic business concentration, which subjects its earnings to natural and man-made catastrophe losses. Also, increased competition and margin compression driven by continued premium declines could dampen operating profitability in 2008.”

A.M. Best Co. has downgraded the financial strength rating (FSR) to ‘B+’ (Good) from ‘B++’ (Good) and issuer credit rating (ICR) to “bbb-” from “bbb” of Farmers Insurance Company of Flemington. Best also revised its outlook on both ratings to negative from stable. “The ratings reflect Farmers’ adequate risk-adjusted capitalization, generally favorable operating performance and local market expertise, which are offset by the company’s elevated investment leverage, unfavorable loss reserve development trends and geographic concentration of risks in New Jersey,” Best explained. “The negative outlook reflects the potential for further declines in risk-adjusted capitalization, particularly those arising from Farmers’ significant holdings of common stock. Farmers recently reported unfavorable operating results, which were driven by its elevated underwriting expense structure, losses associated with underground oil storage tanks and increase in the severity of large losses reported in 2007.

A.M. Best Co. has removed the financial strength rating (FSR) of ‘B’ (Fair) from under review with negative implications and assigned a negative outlook to American Resources Insurance Company Inc. (ARIC) of Mobile, Ala. Best also affirmed the FSR and assigned an issuer credit rating (ICR) of “bb” to ARIC. The outlook assigned to the ICR is negative. Best said: “ARIC’s FSR was placed under review with negative implications in June 2007 following the announcement that Hermitage Insurance Company (HIC) (White Plains, NY) had reached a definitive purchase agreement to acquire ARIC. Although the purchase of ARIC has subsequently fallen through, these rating actions reflect ARIC’s quota share reinsurance agreement with HIC for new and renewal business effective fourth quarter 2007. ARIC expects that all premiums will be written directly by HIC and its wholly owned subsidiary, Kodiak Insurance Company (West Trenton, NJ), by year-end 2008, at which point ARIC will largely be in run off. The ratings reflect ARIC’s poor underwriting and operating performance in 2006 and 2007, driven largely by significant charges taken on its auto warranty book of business entered into by an investor group that purchased the company in late 2005. While this investor group was subsequently replaced, the ultimate result was a weakening in ARIC’s risk-adjusted capital to a vulnerable level and increased uncertainty surrounding the run off of liabilities.” Best added that the negative outlook “reflects the uncertainties and execution risk surrounding ARIC’s run off of liabilities and the negative impact this can have on risk-adjusted capitalization over the near to intermediate term.”

A.M. Best Co. has downgraded the financial strength rating (FSR) to ‘C++’ (Marginal) from ‘B’ (Fair) and issuer credit ratings (ICR) to “b” from “bb” for American General Holdings Group and its member, Apollo Casualty Company. Best also downgraded the FSR to ‘C++’ (Marginal) from ‘B-‘ (Fair) and ICR to “b” from “bb-” of American General’s separately rated affiliate, Delphi Casualty Company. All companies are domiciled in Des Plaines, Ill. In addition Best has revised the outlook for all ratings to negative from stable. “These rating actions reflect American General’s deteriorated capital position, elevated underwriting leverage, significant debt servicing requirements and limited business profile,” Best explained. “As a result of large dividend payments to its holding company, American General Holdings, Inc. and deteriorated operating results, American General’s surplus has declined significantly since 2007. The rating outlook reflects the ongoing challenges faced by management based on its need to balance American General’s underwriting plans and debt servicing against its risk-adjusted capital requirements. The downgrading of Delphi Casualty’s ratings recognizes its reduced capital position, limited business profile and operating experience, combined with aggressive premium growth in recent years.”

A.M. Best Co. has revised the outlook to stable from positive and affirmed the financial strength rating of ‘B++’ (Good) and issuer credit rating of “bbb+” of Standard Mutual Insurance Company. Best said the “revised outlook is based on the deterioration in Standard Mutual’s underwriting results in recent years, which is a result of significant storm activity and unusual frequency of large losses. The affirmation of the ratings reflects the company’s improving trends in its core book of business, its long standing market presence and favorable capitalization.”

A.M. Best Co. has downgraded the financial strength rating (FSR) to ‘B++’ (Good) from ‘A-‘ (Excellent) and issuer credit rating (ICR) to “bbb” from “a-” of Wisconsin County Mutual Insurance Company (WCM). In addition the ratings outlook is negative. Best also affirmed the FSR of ‘B+’ (Good) and ICR of “bbb-” of WCM’s wholly owned subsidiary, Community Insurance Corporation (CIC), both domiciled in Madison, Wis., but has revised the outlook for both ratings to negative from stable. “These rating actions reflect WCM’s weakened capitalization, historically negative operating results, particularly for 2006 and 2007,” said Best. “WCM’s insured base is constrained to a relatively small number of Wisconsin municipalities. As such, the ability to grow profitably is restricted. This was seen most recently by the unsuccessful effort to underwrite the property exposures of WCM’s insureds, which generated sizable losses in recent years. Although, the effort was successful in increasing competition in the property insurance market for local governments and reducing the rates that local governments were charged, it generated sizable losses in recent years for WCM. Similarly, CIC’s efforts to underwrite workers’ compensation exposures for its clients also generated significant losses. As a result, these lines have been discontinued.”

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