Ratings: Cherokee/Oakland, Wayne Mutual, Executive, United Fire, Mercer

December 3, 2010

A.M. Best Co. has upgraded the financial strength rating to ‘A’ (Excellent) from ‘A-‘ (Excellent) and issuer credit rating (ICR) to “a” from “a-” of Cherokee Insurance Company. In addition Best has upgraded the ICR to “bbb” from “bbb-” of Cherokee’s parent company, Oakland Financial Corporation. The outlook for all of the ratings has been revised to stable from positive. Both companies are domiciled in Sterling Heights, Mich. The ratings reflect Cherokee’s “solid risk-adjusted capitalization, profitable operating earnings, despite the negative impact that recessionary pressures and ongoing competitive pressures are having on its core trucking book of business, as well as its historically conservative loss reserving practices,” Best explained. Cherokee also benefits from the financial support provided by Oakland, as evidenced by historical capital contributions and reinsurance support through an affiliated entity. The financial support demonstrated by Oakland “enabled Cherokee to grow its premium volume in the commercial auto, group accident and health and workers’ compensation lines of business in earlier years,” said Best. Oakland’s financial leverage and interest coverage measures are well within Best’s expectations at current rating levels. As offsetting factors Best cited Cherokee’s “highly elevated common stock leverage, which exposes the company to the vagaries of the equity markets, as evidenced in 2008 when it reported significant realized and unrealized capital losses, as well as its business concentration in the historically competitive commercial trucking segment.” Despite the potential for fluctuating equity market values, Best said it believes that “Cherokee’s risk-adjusted capitalization is adequate to absorb potential volatility over the near term.”

A.M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength rating of ‘B++’ (Good) and issuer credit rating of “bbb” of Ohio-based Wayne Mutual Insurance Company. Best said the affirmation of the ratings reflects Wayne Mutual’s “adequate risk-adjusted capitalization, as well as its market expertise and longtime agency relationships in the Ohio marketplace. In addition, the company continues to refine its underwriting criteria and implement rate increases where necessary.” However, Best also indicated that Wayne Mutual’s “recent variable underwriting performance as a result of frequent and severe weather events over the past several years, which continue to impact Ohio,” should be considered as offsetting factors. As a result, Best noted a “downward trend in risk-adjusted capitalization has occurred in recent years, in conjunction with elevated underwriting leverage ratios. In addition, the company’s 2009 affiliation with Washington Mutual Insurance Association (Washington) resulted in an increased risk profile and elevated leverage measures for Wayne Mutual, as it assumed 100 percent of Washington’s business via a quota share agreement.” Best added the negative outlook reflects its “concern with Wayne Mutual’s continuing deterioration in underwriting results, with an ensuing unfavorable trend in the company’s level of risk-adjusted capitalization.”

A.M. Best Co. has withdrawn the financial strength rating (FSR) of ‘B++’ (Good) and issuer credit rating (ICR) of “bbb” of New York-based Executive Insurance Company (EIC), and has assigned an NR-3 (Rating Procedure Inapplicable) to the FSR and an “nr” to the ICR. Best said it took the rating actions due to “EIC’s inactive status as it has no active business writings and holds no loss reserves, as of its September 30, 2010 third quarter statement.”

A.M. Best Co. has commented that the financial strength rating of ‘A’ (Excellent) and issuer credit ratings of “a” of United Fire & Casualty Group (UFG) and its members, led by United Fire & Casualty Company, headquartered in Cedar Rapids, Iowa, are unchanged following the announcement of a merger agreement under which UFCS will acquire all of the outstanding shares of New jersey-based Mercer Insurance Group, Inc. [See following] However, Best said the “outlook for these ratings is negative. Under the terms of the agreement, UFCS will pay $28.25 per share in cash, with an aggregate transaction value of approximately $191 million, excluding transaction costs. The acquisition is expected to close during the first quarter of 2011.” Best added that the acquisition “affords UFG an opportunity to expand geographically and increase the scale of its operations. Mercer Inc.’s underwriting expense ratio is anticipated to benefit from deployment of UFG technology. The transaction will be financed using a combination of cash available within the UFCS enterprise, use of a newly-established debt facility with the Federal Home Loan Bank of Des Moines (FHLBD) and drawing on UFCS’ established unsecured bank credit facility. The FHLBD borrowing will be secured using assets of United Life Insurance Company, a wholly-owned subsidiary of UFCS. Following the transaction, UFCS’ ratio of total unadjusted debt-to-total capital is anticipated to be 16.5 percent, including outstanding Mercer, Inc. obligations.” Best said this is well within its guidelines for the group’s ratings, as is cash coverage of fixed obligations.”

A.M. Best Co. has placed under review with negative implications the financial strength rating (FSR) of ‘A’ (Excellent) and issuer credit rating (ICR) of “a” of Mercer Insurance Group (MIG) and its members. Best has also placed the ICR of “bbb” of Mercer Insurance Group, Inc. under review with negative implications. These rating actions follow the announcement that United Fire & Casualty Company (UFCS) has entered into a merger agreement to acquire all of the outstanding stock of Mercer, Inc. |See above]. Under the terms of the agreement, UFCS will pay $28.25 per share in cash, with an aggregate transaction value of approximately $191 million, excluding transaction costs. The acquisition is expected to close during the first quarter of 2011. Best explained that the “negative implications are reflective of the potential drag, which may be applied to MIG and Mercer, Inc., due to the negative rating outlook currently assigned to UF&C. The ratings will remain under review pending regulatory approval and discussions with management.” Best added that MIG’s ratings reflect its “favorable capitalization, solid operating performance and conservative management philosophy. The group continues to record favorable underwriting results, which have been an important driver of strong pre-tax returns on both revenue and surplus that either meet or exceed industry peers.” As offsetting factors best cited “Mercer Inc.’s elevated expense structure and the risks associated with possible further adverse development on its construction defect liabilities. MIG’s East Coast operations’ are focused on writing homeowners’ and commercial lines coverages, including workers’ compensation, commercial automobile and a religious institution package policy. MIG’s western operations, principally California, largely consist of underwriting small- to medium-size contractors, manufactures, retail services and wholesale sectors.” The FSR of ‘A’ (Excellent) and ICR of “a” have been placed under review with negative implications for Mercer Insurance Group and its following members: Mercer Insurance Company; Mercer Insurance Company of New Jersey, Inc.; Franklin Insurance Company; Financial Pacific Insurance Company

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