Ratings Recap: CAPCO, Farmers Mutual

February 13, 2009

Standard & Poor’s Ratings Services has lowered its counterparty credit and financial strength ratings on Customer Asset Protection Co. (CAPCO) to ‘B-‘ from ‘BB’. S&P has also removed the ratings from CreditWatch, where they had been placed with negative implications on Sept. 16, 2008. The outlook is negative. Subsequently, S&P said it will “withdraw the ratings at the company’s request.” Credit analyst James Brender explained: “The downgrade reflects our assessment of CAPCO’s potential liability to clients of Lehman Brothers International (Europe), or LBIE. Although there is still tremendous uncertainty surrounding the administration of LBIE, we believe the situation could create a liability for CAPCO that exceeds the insurer’s resources.” S&P added: “Our primary concern regarding CAPCO clearly is the potential for a claim related to the clients of LBIE that opted to rehypothecate their assets to LBIE. Rehypothecation is the practice of a client allowing its broker/dealer to pledge the client’s assets as collateral for the broker/dealer’s loans. The administrator in the liquidation of LBIE has stated that most of the clients who rehypothecated their assets will rank pari passu with the broker/dealer’s general creditor. If LBIE’s liabilities exceed its assets, the administrator will assign a percentage of that loss to the pool, and this loss will be allocated by account size. The pool will also bear the broker/dealer’s cost of distributing the remaining assets to the pool.”

A.M. Best Co. has commented that the financial strength rating (FSR) of ‘B-‘ (Fair) and issuer credit rating (ICR) of “bb-” of The Farmers’ Mutual Fire Insurance Company of Dug Hill, which is located in Manchester, MD, are unchanged at this time. The outlook for both ratings is stable. Best said its “commentary follows the recent announcement that Dug Hill has entered into a definitive merger agreement with Windsor-Mount Joy Mutual Insurance Company (Windsor-Mount Joy) (Ephrata, PA). Subject to the terms of the agreement, Dug Hill shall merge into Windsor-Mount Joy with Windsor-Mount Joy being the surviving company. This transaction is subject to regulatory and policyholder approval and is expected to close by second quarter 2009.” Best added that upon closing of the transaction it anticipates the ratings of Dug Hill to be withdrawn, assigning a category NR-5 (Not Formally Followed) to the FSR and an “nr” to the ICR.”

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