A.M. Best Downgrades Ratings of Affirmative Insurance Holdings, Inc. and Its Subsidiaries

Business Wire, Inc.

OLDWICK, N.J.--(BUSINESS WIRE)-- A.M. Best Co. has downgraded the financial strength rating (FSR) to C (Weak) from C+ (Marginal) and issuer credit ratings (ICR) to “ccc” from “b-” of Affirmative Insurance Company(Burr Ridge, IL) and its subsidiaries, collectively known as Affirmative Insurance Group. A.M. Best also has affirmed the FSR of C (Weak) and the ICR of "ccc" of Affirmative Insurance Company of Michigan (AICMI) (Bingham Farms, MI). Concurrently, A.M. Best has withdrawn the ratings of AICMI at the company’s request.

In addition, A.M. Best has downgraded the ICR to "c" from "cc" of the parent company, Affirmative Insurance Holdings, Inc. (Affirmative) (headquartered in Addison, TX) [NASDAQ: AFFM]. The outlook for all ratings is negative. (See below for a detailed list of the companies.)

The downgrades of the members of the Affirmative Insurance Group reflect its weak risk-adjusted capitalization based on Best’s Capital Adequacy Ratio (BCAR) and unfavorable operating results. Earnings for 2011 fell significantly below projections, and underwriting performance in recent years has been adversely impacted by losses mainly from competitive pricing, higher than expected severity of automobile personal injury protection claims and adverse reserve development. The group’s operating history was marked by weak internal controls over operations and aggressive growth in challenging markets.

In addition, financial leverage at Affirmative is excessive due to debt, and its debt servicing ability is contingent upon fee income generated from insurance company production. Premium growth has been down significantly over the last five years, and a continuation of this trend may result in lower fee income to service the debt. In A.M. Best’s opinion, the holding company carries an above average risk of default on its debt, which puts pressure on the ratings of its insurance subsidiaries. However, the insurance subsidiaries may not pay dividends without prior regulatory approval due to their negative unassigned surplus positions.

These concerns are partially offset by remedial action begun in 2010, with a change in senior management, discontinued operations in Florida and Michigan, cancellation of unprofitable agents, increased premium rates, stricter underwriting and internal controls and actions to reduce expenses. As a result of the decision to exit the Michigan non-standard auto market, AICMI was placed in voluntary run-off, and management has requested that the ratings for this company be withdrawn.

The negative outlook reflects the organization's continued negative trend in capitalization, operating performance and financial leverage and the challenges management faces to make significant lasting improvements given weak economic conditions and challenging underwriting and investment markets. The ratings may be further downgraded if capitalization continues to weaken. However, a favorable earnings trend that leads to capital appreciation without excessive growth may lead to a stable ratings outlook and potentially a ratings upgrade.

The FSR has been downgraded to C (Weak) from C+ (Marginal) and the ICR to “ccc” from “b-” for the following members of Affirmative Insurance Group:

Affirmative Insurance Company
Insura Property and Casualty Insurance Company, Inc.
USAgencies Casualty Insurance Company, Inc.

The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Key criteria utilized include: “Risk Management and the Rating Process for Insurance Companies”; “Catastrophe Analysis in A.M. Best Ratings”; “Insurance Holding Company and Debt Ratings”; “Understanding BCAR for Property/Casualty Insurers”; and “Rating Members of Insurance Groups.” Best’s Credit Rating Methodology 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.

A.M. Best Company
Charles M. Huber, 908-439-2200, ext. 5122
Senior Financial Analyst
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or
Rachelle Morrow, 908-439-2200, ext. 5378
Senior Manager, Public Relations
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or
Joseph Burtone, 908-439-2200, ext. 5125
Assistant Vice President
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or
Jim Peavy, 908-439-2200, ext. 5644
Assistant Vice President, Public Relations
[email protected]