Ratings: Am. Freedom, Columbia, Central States, Lyndon, Zurich (bonds)

April 17, 2009

A.M. Best Co. has revised the outlook to positive from stable and affirmed the financial strength rating of ‘B++’ (Good) and issuer credit rating of “bbb+” of Illinois-based American Freedom Insurance Company. Best said the “ratings reflect American Freedom’s solid risk-adjusted capitalization, modest underwriting leverage and favorable loss reserve development trends. The ratings also take into account the company’s continued operating profitability, which has benefited from favorable loss experience. The profitable performance is reflective of management’s prudent underwriting despite the highly competitive nonstandard automobile market and special compensation expense distributed to shareholders in recent years. These strengths are partially offset by American Freedom’s limited business profile. Due to its product and geographic concentration, the company remains susceptible to adverse changes in the judicial and legislative environment, as well as increased competition, which has impacted premium growth in recent years. The positive outlook is supported by the company’s risk-adjusted capital position, operating profitability and A.M. Best’s expectation that these trends will continue over the near term.”

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A-‘ (Excellent) and issuer credit ratings (ICR) of “a-“of Missouri-based Columbia Insurance Group and its members. The outlook for all ratings is stable. “The affirmations reflect Columbia’s solid risk-adjusted capitalization, underwriting discipline and its long-standing market presence,” best explained. “These strengths are further supported by management’s commitment to balance sheet integrity, conservative reserving methodology and an enhanced risk management culture. These positive rating factors are partially offset by Columbia’s business concentration in the Midwest, which exposes its earnings to catastrophe losses stemming from the New Madrid fault line as well as frequent and severe weather- related events and competitive market pressures. However, the group maintains prudent reinsurance to help mitigate the potential effects of catastrophic weather events. In 2008, deterioration in Columbia’s capital position as measured by Best Capital Adequacy Ratio (BCAR) primarily was attributed to widespread storm losses and sizable realized and unrealized capital losses due to the significant downturn of the financial markets.” In addition Best noted that it has also upgraded the FSR to ‘A-‘ (Excellent) from ‘ B+’ (Good) and ICR to “a-” from “bbb-” of Georgia Casualty & Surety Company, and has affirmed the FSR of ‘A-‘ (Excellent) and ICR of “a-” of Association Casualty Insurance Company of Austin, Texas. The outlook for these ratings is stable. These companies were acquired by their parent, Columbia Mutual Insurance Company in March 2008. Best indicated that these “rating actions reflect Georgia Casualty and Association Casualty’s addition to the Columbia inter-company pool. As these entities become fully integrated into the organization, A.M. Best believes they will benefit through greater operational support and Columbia’s experienced leadership. Georgia Casualty and Association Casualty also provide the group with greater overall product and geographic diversification.”

A.M. Best Co. has affirmed the financial strength rating of ‘A+’ (Superior) and issuer credit rating of “aa-” of Central States Indemnity Co. of Omaha, both with stable outlooks. “The ratings reflect CSI’s superior risk-adjusted capitalization, its favorable liquidity and low underwriting leverage as well as the benefits made available though its ultimate parent, Berkshire Hathaway, Inc.,” said best. “CSI is a specialty insurance company that provides payment protection programs to some of the largest financial institutions in the United States. These positive rating factors are somewhat offset by the residual effects from a continued decline in CSI’s core credit insurance book of business, as a number of its bank clients move in tandem with the credit insurance industry and continue to offer non-insurance debt protection products in lieu of traditional credit insurance. Additional offsetting factors include an historically high expense ratio, elevated common stock leverage, which led to a significant increase in unrealized capital losses in 2008 and modest decline in policyholders’ surplus, and the near-term execution risk and strain to earnings brought on by the upfront costs and investments associated with new lines of business.”

A.M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength rating (FSR) of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Missouri-based Lyndon Property Insurance Company. “Best said: “The ratings of Lyndon Property reflect its adequate capitalization, favorable operating performance in its core business of vehicle service contracts and the benefits derived from being part of Protective Life Corporation.” In addition Best noted that the “ratings recognize the $28 million capital contribution made by its immediate parent, Protective Life Insurance Company (PLIC) (Brentwood, TN) in 2006 (PLIC has a FSR of A+ (Superior) with a negative outlook), and the risk management support provided to Lyndon Property by Protective. These positive rating factors are offset by Lyndon Property’s challenges in its discontinued lines of business, now in run off. The negative outlook reflects the weakened capitalization and limitations on financial flexibility at PLIC.”

A.M. Best Co. has assigned debt ratings of “a” to the €600 million [$784.6 million] six year and six month senior notes and to the €800 million [$1.046 billion] three year senior notes issued by Zurich Finance (USA), Inc. (Wilmington, DE) and guaranteed by Zurich Insurance Company (ZIC) (Switzerland). Both notes were issued under ZIC’s Euro Medium Term Notes program. The outlook for both ratings is stable. Best also noted that the €600 million notes are due to mature on 14 October 2015 and will bear a fixed interest rate of 6.5 percent. The €800 million notes are due to mature on 14 April 2012 and will bear a fixed interest rate of 4.875 percent. Financial and debt leverage ratios remain within A.M. Best tolerance levels.”

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