Ratings: Allstate, Arrowhead, Nat’l. Lloyd’s/Summit, ISMIE Mutual, Greenville Casualty, Un. Farm Indiana

May 13, 2009

Standard & Poor’s Ratings Services has assigned its ‘A-‘ senior debt rating on Allstate Corp.’s (ALL) recently priced senior debt issue. S&P also affirmed its ‘A-‘ counterparty credit rating on ALL and its ‘AA-‘ counterparty credit and financial strength ratings on ALL’s property/casualty and life insurance operating companies. The outlook on all of these companies, however, remains negative. S&P said it “expects ALL to use the net proceeds to retire its $750 million aggregate principal amount 7.20 percent senior notes due 2009 at their scheduled maturity on Dec. 1, 2009.” Credit analyst Neil Stein added: “This debt issue will result in a temporary increase in financial leverage and a decrease in interest coverage until the December notes are repaid. But, we believe these credit measures will remain within our expectations.” Additionally, we expect that the proceeds will be held at the holding company and will be invested in short-term, highly liquid securities.

Standard & Poor’s Ratings Services has affirmed its ‘B-‘ counterparty credit rating on San Diego, Calif.-based Arrowhead General Insurance Agency. S&P also said it has removed the rating from CreditWatch with negative implications, but has assigned a negative outlook. S&P has also revised its “recovery rating on Arrowhead’s senior secured credit facilities to ‘3’, indicating our expectation of meaningful (50 percent-70 percent) recovery for lenders in the event of a payment default, from ‘2’. S&P also said: “We lowered our issue-level rating on these loans to ‘B-‘ (the same level as the ‘B-‘ counterparty credit rating on the company) from ‘B’, in accordance with our notching criteria for a recovery rating of ‘3’. The revised recovery rating reflects our expectation for a more significant decline in cash flow in our simulated default scenario than that used in our previous analysis.” Credit analyst Michael Gross added: “Today’s rating actions reflect the receipt of Arrowhead’s 2008 financial information, the receipt of amended credit agreements and covenants, discussions with Arrowhead’s management and its primary private equity investor, and our updated analysis.” S&P explained that Arrowhead delayed its 2008 financial filing with S&P, “because of noncompliance with some of its restrictive bank loan covenants at year-end 2008 and ongoing discussions to amend its credit agreements with its lenders. Although there has been no interruption in the company’s scheduled debt and interest payments, the company–and compliance with its loan covenants–has been adversely affected by declining premium rates in the property/casualty industry and some carrier disruption.” Gross said the “negative outlook reflects our concerns about the recessionary impact on insurance purchasing and the company’s ability to manage through the trough of the premium rate cycle.” The company’s liquidity profile in particular is weaker than in prior years, as its reduced operating cash flow and reduced cash balance demonstrate. The outlook also reflects the company’s lack of progress in replacing its former CFO, who resigned in July 2008.”

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and issuer credit rating (ICR) of “a+”of National Lloyds Insurance Company, both with stable outlooks. Best also affirmed the FSR of ‘A-‘ (Excellent) and ICR of “a-” of American Summit Insurance Company, an affiliate of National Lloyds, with a positive outlook. Best noted that both companies are subsidiaries of NLASCO, Inc., which is owned by Hilltop Holdings, Inc., headquartered in Dallas, Texas. “The rating actions on National Lloyds reflect its continued solid risk-adjusted capitalization, favorable operating performance in recent years and local market expertise within its niche of the personal property insurance market,” said Best. “These positive rating factors are somewhat offset by National Lloyds’ geographic concentration of risk primarily in the Texas marketplace, with susceptibility to frequent and severe weather related events. As a result, the company produced an underwriting loss in 2008, due to multiple hurricane and tornado/hail events.” In addition Best noted that the “rating actions on American Summit recognize its favorable risk-adjusted capitalization, geographic spread of risk in moderately catastrophe prone areas and profitable underwriting performance.”

A.M. Best Co. has upgraded the financial strength rating (FSR) to ‘B++’ (Good) from ‘B+’ (Good) and issuer credit ratings to “bbb” from “bbb-” of Chicago-based ISMIE Mutual Group and its lead member, ISMIE Mutual Insurance Company (ISMIE), both with stable outlooks. Best explained that the “upgrades reflect ISMIE’s improved operating performance, strengthened risk-adjusted capitalization and its more conservative leverage position. These developments are attributable to various risk management initiatives and organizational changes that management has implemented over the last few years and the passage of tort reform in 2005. However, due to the precarious status of tort reform, which was declared unconstitutional by an Illinois Circuit Court in 2007 and is currently on appeal at the Illinois Supreme Court, management has adopted a conservative approach to recognizing the loss cost benefits in its rate and reserve making process. This approach should allow ISMIE to maintain its balance sheet strength in the event that tort reform is ruled unconstitutional. ISMIE ranks as the leading medical professional liability insurer in Illinois and continues to benefit from its high policyholder retention and aggressive claims management. Partially offsetting these positive factors is that ISMIE, a largely mono-line, mono-state writer, is exposed to inherent challenges related to price competition, legislative (tort) reform, loss cost trends and regulatory constraints. These risks are somewhat heightened in Illinois, where regulatory constraints are numerous and the permanency of tort reform is in question. In addition, ISMIE experienced earlier (2002-2005) adverse loss reserve development and continues to maintain high ceded reinsurance leverage. However, the reinsurance leverage is somewhat mitigated by ISMIE’s use of high quality reinsurers.”

A.M. Best Co. has upgraded the financial strength rating to ‘B+’ (Good) from ‘B’ (Fair) and issuer credit rating to “bbb-“from “bb+”of So. Carolina’s Greenville Casualty Insurance Company, and has revised its outlook on both ratings to stable from positive. “These rating actions reflect Greenville’s favorable risk-adjusted capitalization stemming from its low underwriting leverage and strong liquidity position, which is attributable to its conservative investment portfolio,” Best explained. “The ratings also recognize the corrective actions management has taken to boost overall profitability, including new product offerings, the termination of unprofitable agents and gradual geographic expansion. As a result, Greenville’s loss experience continued to trend favorably, and overall operating performance significantly improved. Partially offsetting these positive rating factors are Greenville’s premium volatility and historically elevated expense structure related to start-up and business development costs. In addition, Greenville historically maintained a limited business profile with product and geographic concentrations as a nonstandard auto writer in South Carolina. However, Greenville recently entered the standard and preferred auto market, while gradually expanding into North Carolina. This expansion brings with it some risks, as the diversification, coupled with an unseasoned book of business, will continue to be a factor in Greenville’s risk profile.

A.M. Best Co. has downgraded the financial strength rating (FSR) to ‘A-‘ (Excellent) from ‘A’ (Excellent) and issuer credit ratings (ICR) to “a-” from “a” of United Farm Bureau of Indiana Group and its member companies, United Farm Family Mutual Insurance Company and UFB Casualty Insurance Company. Best also affirmed the FSR of ‘A-‘ (Excellent) and ICR of “a-” of Countryway Insurance Company of Syracuse, NY, a subsidiary of United Farm Family Mutual. The outlook for all ratings is stable. Best indicated that the “downgrading of Indiana Farm Bureau’s ratings is a result of the recent deterioration in its operating performance and capitalization. In recent years, and particularly in 2008, the group’s results were negatively impacted by frequent and severe weather-related events, which resulted in significant underwriting losses, sizeable realized and unrealized capital losses due to equity market volatility and the group’s elevated common stock leverage.” However, best did noted that these “factors are partially offset by Indiana Farm Bureau’s market presence and the support from the Indiana Farm Bureau Federation, which facilitates the group’s marketing, business retention and government relations efforts. In addition, the ratings reflect Indiana Farm Bureau’s adequate risk-adjusted capitalization, despite recent deterioration, and its geographic spread of risk. The affirmation of Countryway’s ratings recognizes its adequate capital position and a conservative investment income strategy. Also reflected is the support that Countryway receives from its parent, United Farm Family Mutual. Partially offsetting these positive rating factors are the company’s unfavorable underwriting results in recent years, elevated underwriting leverage and exposure to frequent and severe weather-related events.”

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