Ratings: Guardian, Golden Bear, ARIC, SUIC, First American, Seminole

June 5, 2009

A.M. Best Co. has upgraded the financial strength rating to ‘A-‘ (Excellent) from ‘B++’ (Good) and issuer credit rating to “a-” from “bbb+” of Guardian Insurance Company, headquartered in the U.S. Virgin Islands, both with stable outlooks. Best said the action follows Guardian’s “favorable operating results, dominant automobile market share, strong name recognition” in the Virgin Islands (USVI) market.” It also benefits from the financial support it receives from its ultimate parent, Lockhart Companies Incorporated (LCI), a major real estate developer in the USVI., which has demonstrated support by past capital contributions and its stated willingness to make further cash infusions if needed. The company is a “significant player in the automobile segment.” It has been operating in the USVI for almost 25 years, and its business growth is attributed to its extensive distribution network. Guardian Insurance has established strong brand name recognition and is the leading automobile writer with a dominant share of the local market. The company’s underwriting and operating results have improved substantially in recent years and compare favorably to its industry composite. Partially offsetting these strengths is Guardian Insurance’s elevated expense structure, high dependence on reinsurance and the geographic concentration of its business in the USVI.

A.M. Best Co. has upgraded the financial strength rating to ‘A-‘ (Excellent) from’ B++’ (Good) and issuer credit rating to “a-” from “bbb+” of Calif.-based Golden Bear Insurance Company, and has revised its outlook on the ratings to stable from positive. Best said the rating actions “reflect Golden Bear’s historic underwriting and operating profitability, supportive capital position and well established local market presence in California.” Best also cited the Company’s “disciplined underwriting approach, conservative operating strategies, niche underwriting expertise, aggregate risk management and extensive knowledge of the California earthquake market.” However, Golden Bear’s “vulnerability to reinsurance availability and pricing, given the heavy dependence upon reinsurance, geographic concentration of risk and the somewhat limited financial flexibility of its parent,” should be considered as offsetting factors. The geographic concentration exposes Golden Bear to significant shock losses and competitive, regulatory and legislative market pressures. The rating outlook is based upon Golden Bear’s cycle management capabilities, continued adherence to price discipline, prudent risk management strategies, sustained profitability and supportive risk-adjusted capitalization.

A.M. Best Co. has downgraded the financial strength rating to ‘B-‘ (Fair) from ‘B’ (Fair) and issuer credit rating to “bb-” from “bb” of Alabama-based American Resources Insurance Company Incorporated (ARIC), and has assigned a negative outlook to all of the ratings. Best said the “rating actions reflect ARIC’s vulnerable risk-adjusted capital, which continued to weaken in 2008, its poor operating and underwriting results in recent years and the uncertainties associated with the run off of its liabilities. The negative factors are driven by significant charges taken on ARIC’s auto warranty book of business, entered into by an investor group that purchased the company in late 2005 and replaced shortly thereafter, accompanied by a break-down in corporate governance and internal controls.” Best acknowledged that “ARIC has largely been in run off since late 2007 when it entered into quota share reinsurance agreements with Hermitage Insurance Company (White Plains, NY) and its wholly owned subsidiary, Kodiak Insurance Company (Kodiak) (West Trenton, NJ), which effectively led to ARIC ceding off its earned premiums and associated losses and underwriting expenses as of October 1, 2007.” Kodiak hired a majority of ARIC’s staff and provides accounting, underwriting and claims services to ARIC for a multi-year period. Partially offsetting the negative rating factors are the corrective actions management has implemented to address the run off of its auto warranty book of business. The 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 assigned a financial strength rating of A- (Excellent) and an issuer credit rating of “a-” to Wisconsin’s SU Insurance Company (SUIC) both with stable outlooks. The ratings are based on SUIC’s “strong capitalization, long history of stable, profitable underwriting results through its affiliates within the privately held SU Group LLC (SU Group) and niche market expertise within the equipment break-down service contract segment,” said Best. Somewhat offsetting these positive rating factors is SUIC’s limited market profile as a single product writer and weak investment earnings as a result of its conservative investment strategy, which has resulted in modest overall total return measures. Best said the rating outlook reflects its “expectation that SUIC will continue to generate consistent and profitable underwriting results while prudently growing its business.” SUIC writes equipment break-down service contracts for governmental bodies, educational institutions, financial institutions, health care facilities, pharmaceutical companies and the office automation equipment operations of other commercial entities. All insured items are classified as low-voltage equipment (i.e., computers, copiers and select medical equipment). The company does not insure the replacement of equipment, only the cost to repair. Historically, equipment maintenance policies were issued through SU Group affiliates via a fronting relationship or as a managing general agent. Beginning in 2005, SUIC was formed to directly insure policies in states where it held licenses and to reinsure equipment maintenance risks in other states. Positive factors are supported by the company’s very low underwriting leverage and negligible credit risk as all risks are retained by SUIC. The company does not utilize reinsurance as loss exposures are very low and fluctuate within a narrow band. Furthermore, while SUIC is a relatively new company, the business has been underwritten through its non-insurance sister companies within the SU Group since the 1980s with very stable and profitable loss ratios. SUIC’s management and infrastructure is the same as that of SU Group, and SU Group has demonstrated the ability to produce a long history of positive results.

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A-‘ (Excellent) and issuer credit ratings (ICR) of “a-” of Calif.-based First American Corporation Property Casualty Companies and its member companies, First American Property & Casualty Insurance Company and First American Specialty Insurance Company. The outlook for all of the ratings is negative. Best said the rating actions are “due to First American P&C Group’s continued favorable underwriting performance despite a generally softening underwriting cycle characterized by increased competition as well as continued wildfire activity in California, its predominant market. However, Best also indicated that on a stand-alone basis “First American P&C Group continues to exhibit favorable operating performance due in part to strong underwriting discipline. The negative outlook reflects the continuing pressures on First American P&C Group’s capitalization as a result of the reduced financial flexibility of its parent holding company, The First American Corporation, Inc.” This is evidenced by continuing dividend payments by First American P&C Group to First American, totaling $37 million since 2007. These payments, while supported by First American P&C Group’s operating results, have hindered growth in policyholders’ surplus and risk-adjusted capitalization over the past two years.”

A.M. Best Co. has downgraded the financial strength rating (FSR) to ‘B-‘ (Fair) from ‘B’ (Fair) and issuer credit rating (ICR) to “bb-” from “bb” of Florida’s Seminole Casualty Insurance Company, and has revised its outlook on the ratings to negative from stable. Best said the “ratings reflect the significant decline in Seminole’s level of risk-adjusted capitalization. Seminole has reported underwriting losses over the past several years and in first quarter 2009. In addition, substantial unrealized capital losses were reported in 2008. These results caused a reduction in surplus and accompanying decline in risk-adjusted capitalization. The negative outlook recognizes the potential for further declines in capitalization based on the company’s recent history of unfavorable operating performance and the uncertainty regarding the stability of its current capital structure.” Seminole principally writes minimum limit, private passenger non-standard automobile liability and physical damage coverages in Florida and Maryland.

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