S&P Lowers State Auto Group’s Ratings to ‘A-‘; Outlook Stable

June 1, 2010

Standard & Poor’s Ratings Services has lowered its counterparty credit and financial strength ratings on the operating insurance companies of State Auto Group to ‘A-‘ from ‘A’. S&P also lowered its counterparty credit rating on State Auto Financial Corp. to ‘BBB-‘ from ‘BBB’. The outlook on all of the ratings is stable.

“The rating actions reflect the recent substantial decline in earnings from historical levels, the deterioration of non-catastrophe underwriting performance, and the negative impact on the overall group’s performance of some strategic decisions, including the acquisition of Rockhill Holding Co. in early 2009,” explained credit analyst John Iten. “Offsetting these factors are the group’s strong competitive position in its core Midwest region and strong capitalization.”

S&P also indicated that the group’s operating performance “has been deteriorating in relation to the property/casualty (P/C) industry (excluding mortgage and financial guaranty insurers). We do not believe that the company will be able to achieve the above-average underwriting performance that it did from 2004 to 2007 in the next two to three years.

“We expect State Auto Group’s operating performance to continue deteriorating as a result of above-average catastrophe exposure, deteriorating non-catastrophe underwriting performance, a higher-than-average expense ratio, and lower investment income. We believe that the deterioration in operating performance is, in part, a reflection of delayed pricing and underwriting actions and the implementation of a catastrophe mitigation program, coupled with the acquisition of Rockhill, which has not contributed to the group’s overall profitability.”

S&P explained that the stable outlook for the ratings assumes “an average level of catastrophe losses.” The rating agency also indicated that it expects that “underwriting and operating performance will remain weaker than its historical average over the medium term. Including an average catastrophe component. State Auto Group’s loss ratio for commercial lines likely will deteriorate somewhat because of the drop in rates in 2009 and the first half of 2010 stemming from competitive market conditions.

“On the other hand, we expect State Auto Group’s loss ratio for personal lines to improve as a result of pricing and underwriting initiatives, though it will still lag the company’s historical underwriting performance for this segment.”

Source: Standard & Poor’s

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