S&P Affirms Arrowhead General Ratings; Lowers Outlook to Negative

January 7, 2008

Standard & Poor’s Ratings Services has revised its outlook on San Diego, Calif.-based Arrowhead General Insurance Agency Inc. to negative from stable. At the same time S&P affirmed its ‘B’ counterparty credit rating on Arrowhead as well as its ‘B’ first-lien senior secured bank loan and first-lien revolving credit facility ratings and its ‘CCC+’ second-lien junior secured bank loan rating on Arrowhead’s outstanding issues. S&P also affirmed its recovery rating of ‘3’ on Arrowhead’s first-lien secured bank loan and revolving credit facility and its recovery rating of ‘6’ on Arrowhead’s second-lien junior secured bank loan.

S&P credit analyst Michael Gross said the outlook change reflects S&P’s “concerns about the ongoing impact of softer-than-anticipated market conditions on Arrowhead’s financial performance, including the company’s prospective ability to meet its bank loan covenants.”

Gross indicated that the bank covenants “become more restrictive during 2008, even as it is becoming more difficult for the company to maintain its commission and revenue growth in the face of declining insurance premium rates.”

S&P also noted that for the “first nine months of 2007, Arrowhead reported a net loss of $2.9 million. The company reported total revenue of $85 million for the period, which was relatively unchanged compared with the same period in 2006. Because of a leveraged majority investment in 2006, the company maintains a weaker capital position, and cash flow is more strained.” S&P added, however, that the “company is expected to meet all of its bank covenants.”

Nonetheless the rating agency warned that if Arrowhead “remains challenged” in meeting S&P’s “original performance expectations for the current rating level, which include fixed-charge coverage of 2.0x and adjusted EBITDA of 2.4x, the ratings could be lowered by at least one notch in 2008. If management were to produce meaningful expense efficiencies and improved and sustainable earnings, the outlook could be revised to stable.”

Source: Standard & Poor’s – www.standardandpoors.com

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