A.M. Best Downgrades Ratings of State Auto Financial Corporation and State Auto Insurance Companies and Its Members

OLDWICK, N.J.--(BUSINESS WIRE)-- A.M. Best Co. has downgraded the financial strength rating (FSR) to A (Excellent) from A+ (Superior) and issuer credit ratings (ICR) to “a+” from “aa-” of State Auto Insurance Companies (State Auto) and its operating members. Concurrently, A.M. Best has downgraded the ICR to “bbb+” from “a-” and debt rating to “bbb+” from “a-” on $100 million 6.25% senior unsecured notes, due 2013 issued by the group’s intermediate holding company,State Auto Financial Corporation (STFC) [NASDAQ: STFC]. The outlook for all ratings has been revised to stable from negative. The above named companies are headquartered in Columbus, OH. (See below for a detailed listing of the companies.)

The downgrades are based on State Auto’s deterioration in underwriting and operating earnings in recent years, driven by an increased frequency and severity of property catastrophe losses.

The ratings reflect State Auto’s strong risk-adjusted capitalization, long-standing regional market presence, well-established agency relationships, strong brand name recognition and diversified product offerings. State Auto also benefits from its software technology, which further enhances and cultivates agency relationships while improving overall operating efficiencies. Solid investment income, expanded pricing models, as well as improved risk management, have contributed to moderate operating earnings over the previous five-year period. The ratings further reflect the financial flexibility and access to capital through STFC.

State Auto’s negative rating factors include its exposure to localized tornado/hail storms and hurricane activity. These exposures historically have been mitigated through comprehensive reinsurance programs and available credit facilities, as well as underwriting initiatives aimed at reducing catastrophe exposures. However, the increased frequency and severity of storm losses in recent years has dampened State Auto’s underwriting profitability and overall earnings. In addition, the group’s underwriting results remain pressured by its above average underwriting expense ratio, primarily related to agents’ commissions.

State Auto has recently implemented numerous strategic initiatives to improve underwriting results. These initiatives include rate increases in numerous states and lines of business, a reduction of property exposures in catastrophe-exposed areas, the implementation of increased wind and hail deductibles, an enhanced insurance-to-value program, the increased use of property catastrophe reinsurance and agency management actions.

The FSR has been downgraded to A (Excellent) from A+ (Superior) and the ICR has been downgraded to “a+” from “aa-” for State Auto Insurance Companies and its following members:

• State Auto Property and Casualty Insurance Company
• State Automobile Mutual Insurance Company
• Milbank Insurance Company
• Farmers Casualty Insurance Company
• State Auto Insurance Company of Ohio
• Meridian Citizens Mutual Insurance Company
• Patrons Mutual Insurance Company of Connecticut
• Litchfield Mutual Fire Insurance Company
• Beacon National Insurance Company
• Meridian Security Insurance Company
• State Auto Florida Insurance Company
• State Auto Insurance Company of Wisconsin
• Beacon Lloyds Insurance Company
• Rockhill Insurance Company
• Plaza Insurance Company
• American Compensation Insurance Company
• Bloomington Compensation 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”; “Natural Catastrophe Stress Test Methodology”; “Catastrophe Risk Management Incorporated Within the Rating Analysis”; “Rating Members of Insurance Groups”; 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.

Copyright © 2011 by A.M. Best Company, Inc.ALL RIGHTS RESERVED.

A.M. Best
Kenneth Tappen, 908-439-2200, ext. 5248
Senior Financial Analyst
[email protected]
or
Joseph Burtone, 908-439-2200, ext. 5125
Assistant Vice President
[email protected]
or
Rachelle Morrow, 908-439-2200, ext. 5378
Senior Manager, Public Relations
[email protected]
or
Jim Peavy, 908-439-2200, ext. 5644
Assistant Vice President, Public Relations
[email protected]

Source: A.M. Best Co.