A.M. Best Co. has affirmed the financial strength rating (FSR) of A (Excellent) and issuer credit ratings (ICR) of “a” of United Fire & Casualty Group (United Fire) and its members, including the publicly traded company, United Fire & Casualty Company (UFCS) [NASDAQ: UFCS]. The outlook for these ratings is negative.

Concurrently, A.M. Best has removed from under review with negative implications, assigned a negative outlook and affirmed the FSR of A (Excellent) and ICR of “a” of Mercer Insurance Group (Mercer) (headquartered in Pennington, NJ) and its members. Mercer’s parent, Mercer Insurance Group, Inc. (MIG), was acquired by UFCS on March 28, 2011. In conjunction with these actions, A.M. Best also has withdrawn the ICR of “bbb” of MIG.

At the same time, A.M. Best has affirmed the FSR of A- (Excellent) and ICR of “a-” of United Life Insurance Company, (United Life) a subsidiary of UFCS. The outlook for these ratings is stable. All companies are domiciled in Cedar Rapids, IA, except where specified. (See below for a detailed listing of the companies and ratings.)

The ratings of United Fire reflect its solid risk-adjusted capitalization and improved underwriting and operating results in 2010. The ratings consider United Fire’s diversified commercial product offerings, historically favorable core reserve levels and the financial flexibility afforded by UFCS. At March 31, 2011, UFCS maintained modest consolidated debt-to-total capital and solid interest coverage ratios that were well within A.M. Best’s guidelines for its given ratings.

These positive rating factors are partially offset by United Fire’s underwriting and operating losses in 2008 and 2009, which were driven by adverse reserve development of Katrina-related claims, continued exposure to hurricane and other weather-related catastrophe losses, areas of modest adverse reserve development and continuing challenging conditions in its key target markets.

Mercer’s ratings recognize its favorable levels of risk-adjusted capitalization, history of profitable operating performance and conservative risk management philosophy. Mercer’s positive rating factors are partially offset by its elevated expense structure and the adverse development related to construction defect exposures in its California contractors book of business.

The outlooks for United Fire and Mercer acknowledge the potential negative impact on their ratings should consolidated underwriting and operating performance remain at a level that is below historical norms, as well as the challenges associated with the integration of the two groups.

The ratings of United Life reflect its sufficient level of risk-adjusted capitalization, consistently positive operating results and improved growth trends in life insurance premium. The ratings also recognize the five-year growth in capital, despite paying $31 million in dividends over this period to the parent, UFCS.

United Life continues to have exposure to interest rate volatility as a majority of its product reserves are still concentrated in interest-sensitive annuity and life products. In addition, the company has a regional concentration of its business in five states, despite being broadly licensed. A.M. Best will continue to monitor the company’s ability to improve profitability along with growth in the ordinary life market and geographic expansion.

The FSR of A (Excellent) and ICR of “a” have been affirmed for United Fire & Casualty Group and its following members:
  • United Fire & Casualty Company
  • Lafayette Insurance Company
  • Addison Insurance Company
  • United Fire & Indemnity Company
  • United Fire Lloyds

The FSR of A (Excellent) and ICR of “a” have been affirmed for Mercer Insurance Group and its following members:
  • Mercer Insurance Company
  • Financial Pacific Insurance Company
  • Mercer Insurance Company of New Jersey, Inc.
  • Franklin Insurance Company

The principal methodology used in determining these ratings is Best’s Credit Rating Methodology -- Global Life and Non-Life Insurance Edition , which provides a comprehensive explanation of A.M. Best’s rating process and highlights the different rating criteria employed. Additional key criteria utilized include: “Risk Management and the Rating Process for Insurance Companies”; “Understanding BCAR for Property/Casualty Insurers”; “Understanding BCAR for Life and Health Insurers”; “Rating Members of Insurance Groups”; “The Treatment of Terrorism Risk in the Rating Evaluation”; “Natural Catastrophe Stress Test Methodology”; “Catastrophe Risk Management Incorporated Within the Rating Analysis”; “Catastrophe Analysis in A.M. Best Ratings”; and “A.M. Best’s Ratings & the Treatment of Debt.” Methodologies can be found at www.ambest.com/ratings/methodology.

Founded in 1899, A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

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