Ratings review

June 19, 2006

Safeco Outlook Positive

Standard & Poor’s Ratings Services affirmed its “A+” counterpart credit and financial strength ratings on the Safeco Intercompany Pool members. S&P also affirmed its “BBB+” counterparts credit and senior debt ratings and “A-2” commercial paper ratings on parent Safeco Corp. The outlook is positive, S&P said.

“The ratings … reflect the group’s sustained strong competitive positioning in the U.S. property/casualty marketplace, and improved operating performance in recent years,” explained S&P Credit Analyst Michael Gross. As of year-end 2005, Safeco was the 17th-largest property /casualty insurer in the United States, based on annual direct premium written. Consolidated 2005 GAAP pretax operating earnings were a healthy $925 million. As of March 31, 2005, long-term debt to capital totaled 26 percent.

As competitive pressures increase and rates potentially soften for the remainder of 2006, Safeco is expected to improve its expense ratio in 2006 and 2007 and to maintain underwriting profitability, S&P said. Net premium growth is expected to remain modest at low single-digit levels for full-year 2006. Capital adequacy is expected to remain very strong and consolidated financial leverage is expected to remain at current levels, while interest coverage is expected to be at least eight times.

Mercury Downgraded to Negative

The outlook on Mercury Casualty Co., Mercury Insurance Co. and Mercury Insurance Co. of Florida (collectively referred to as Mercury) was downgraded to negative from stable, S&P said. S&P also affirmed its “AA” counterparts credit and financial strength ratings on those companies.

S&P raised its counterparts credit and financial strength ratings on California Automobile Insurance Co. to “A” from “BBB” because of its substantially improved level of capitalization. The outlook is also negative.

“The revised outlook on Mercury reflects the increasingly difficult regulatory, legal, and competitive environment in the group’s core California market,” explained S&P Credit Analyst Polina Chernyak. “We believe that the tougher environment will force changes in Mercury’s business practice and eliminate some of its competitive structural advantage.”

Although the company does not anticipate a material financial impact from the current regulatory and legal changes, they could affect the company’s ability to attract and retain business as well as the profitability of that business, S&P said. The ratings are based on the group’s extremely strong capitalization, superior operating performance, and local market presence as California’s largest independent agency auto. Partially offsetting those positive factors are the group’s business concentration in California and increased underwriting leverage in recent years, S&P said.

For more information on Safeco or Mercury’s ratings, visit www.
standardandpoors.com; under Credit Ratings in the left navigation bar, select “Find a Rating,” then “Credit Ratings Search.”

Majestic Moved to Positive

The outlook for Majestic Insurance Co., a subsidiary of Embarcadero Insurance Holdings Inc., moved from stable to positive, according to A.M. Best, reflecting the company’s profitable operating results during the last five-year period, improving capitalization and the company’s expertise within its specialty workers’ compensation insurance product offering.

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Insurance Journal West June 19, 2006
June 19, 2006
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