Ratings of Dallas National Insurance Downgraded, Under Review

May 23, 2012

A.M. Best Co. has downgraded the financial strength rating to B-(Fair) from B (Fair) and issuer credit rating to “bb-” from “bb” of Dallas National Insurance Co. (Dallas National) in Dallas, Texas. Both ratings have been placed under review with developing implications.

A.M. Best said the rating downgrades are the result of Dallas National’s deteriorated and unfavorable risk-adjusted capitalization following volatility in its underwriting performance in recent years.

The company experienced a significant underwriting loss in 2011, and strengthened its loss and loss adjustment expense reserves at year-end 2011, according to the ratings agency.

These factors contributed to a sharp decline in policyholder surplus in 2011, which resulted in elevated underwriting leverage measures and risk-adjusted capitalization that is no longer supportive of its previous rating level.

The under review status follows Dallas National’s disclosure of a definitive agreement under which Lonestar Holdco LLC, an indirect subsidiary of Southport Lane LP, will acquire controlling interest in the company.

The ratings will remain under review until the close of the transaction and the completion of A.M. Best’s analysis of its impact on the company’s ratings. The transaction is expected to close in July 2012, pending regulatory approval.

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