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A.M. Best Downgrades Ratings of Unitrin, Inc. and Its Key Subsidiaries

Posted on 14 Apr 2009

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OLDWICK, N.J. April 10 (BestWire) — A.M. Best Co. has downgraded the financial strength ratings (FSR) to A- (Excellent) from A (Excellent) and the issuer credit ratings (ICR) to “a-” from “a” for Unitrin Property and Casualty Insurance Group (Unitrin P&C) and certain members, as well as United Insurance Company of America (UICA) (Chicago, IL), Union National Life Insurance Company (Baton Rouge, LA) and The Reliable Life Insurance Company (St. Louis, MO), which are the three career agent life/health subsidiaries of the group’s publicly-traded parent, Unitrin, Inc. (Unitrin) [NYSE: UTR]. Concurrently, A.M. Best has downgraded the ICR and senior debt ratings to “bbb-” from “bbb” of Unitrin. The outlook for all ratings is stable. The downgrading of Unitrin P&C’s ratings is a result of the deterioration of its operating performance and capitalization in recent years. In 2008, the group’s results were negatively impacted by frequent and severe weather-related events, which resulted in significant underwriting losses, sizeable realized and unrealized capital losses due to equity market volatility and the group’s elevated common stock leverage, as well as the need to support the operations of its Fireside Bank subsidiary. In addition, A.M. Best is concerned regarding the operational risk inherent in integrating the companies of the recently purchased Direct Response Corporation. These companies have had unfavorable operating performance in recent years and might cause a further drag on Unitrin P&C’s earnings. Although Unitrin maintains moderate financial leverage with debt-to-tangible capital of approximately 30% at year-end 2008, financial flexibility has been reduced from a liquidity perspective due to investment losses. Furthermore, Unitrin has approximately $200 million of senior debt maturing in 2010, which may place a strain on the operating companies. These factors are offset by Unitrin P&C’s market presence and long-standing independent agency relationships. In addition, the ratings reflect Unitrin P&C’s adequate risk-adjusted capitalization, despite recent deterioration, recently reduced common stock investment leverage and geographic spread of risk. The rating actions on Unitrin’s life/health career agency subsidiaries recognize A.M. Best’s view that Unitrin’s overall financial flexibility has been reduced, and in turn, may increase the demands on the financial resources of these subsidiaries. Moreover, the rating actions acknowledge A.M. Best’s belief that the life/health operations may be challenged to sustain organic premium growth given the limited growth potential in the mature home service market; to improve operating results given the reduced levels of invested assets and low interest rates; and to maintain adequate stand-alone risk-adjusted capital levels while navigating through the current credit market turmoil and recessionary environment. Consolidated risk-adjusted capitalization of the three key life/health subsidiaries remains sufficient despite large dividend payments made to Unitrin over the past several years. A.M. Best notes that Unitrin made a $25 million capital contribution to UICA in January 2009. The current ratings reflect the life/health career agency subsidiaries’ important role within the Unitrin organization, strong niche presence in the home service life insurance market, well-established employee agency field force and overall positive operating performance. A.M. Best notes that Unitrin’s life/health companies have negligible exposure to the equity markets and a stable liability structure relative to some of their life/annuity peers. However, UICA and its two major life affiliates experienced material realized investment losses in 2008, while maintaining significant holdings in below investment grade bonds, limited partnerships and real estate asset classes that cause concern for A.M. Best prospectively. A.M. Best has upgraded the FSR to A- (Excellent) from B+ (Good) and ICR to “a-” from “bbb-” of Mutual Savings Fire Insurance Company (MSFIC) (Decatur, AL). The outlook for these ratings is stable. The ratings recognize that MSFIC is now 100% reinsured by Unitrin P&C’s lead company, Trinity Universal Insurance Company (Trinity Universal) (Dallas, TX). In addition, A.M. Best has removed from under review with positive implications and affirmed with a positive outlook the FSR of B++ (Good) and ICR of “bbb” of Response Insurance Group (Delaware) and its following members: Response Insurance Company, National Merit Insurance Company (Bellevue, WA), Response Worldwide Direct Auto Insurance Company, Response Worldwide Insurance Company, Warner Insurance Company and its separately rated member, Response Indemnity Company of California (Culver City, CA). These companies are domiciled in Meriden, CT, unless otherwise specified. The positive outlook reflects that these companies eventually will be reinsured by Trinity Universal. Additionally, A.M. Best has affirmed the FSR of A- (Excellent) and ICR of “a-” of Reserve National Insurance Company (RNIC) (Oklahoma City, OK), Unitrin’s independent agency company. The outlook for both ratings is stable. The ratings reflect RNIC’s positive premium trends, favorable operating performance and adequate stand-alone risk-adjusted capitalization. Partially offsetting these positive rating factors is the challenge for RNIC to sustain its operating performance, given its limited business profile marketing accident and health products and Medicare supplement insurance to individuals and small business owners living in rural areas. At the same time, A.M. Best has upgraded the FSR to A- (Excellent) from B++ (Good) and ICR to “a-” from “bbb” of Mutual Savings Life Insurance Company (MSLIC) (Decatur, AL). The outlook for these ratings is stable. (Please see link below for a detailed listing of the companies and ratings.) These actions follow the completion of MSLIC’s integration into Unitrin, which acquired the company along with MSFIC in April 2008. A.M. Best believes MSLIC has benefitted from its new parent through additional financial flexibility and expanded marketing resources. MSLIC has modestly enhanced Unitrin’s market share in the home service and limited supplemental health benefit segments while expanding the group’s geographic footprint. For a complete list of Unitrin, Inc.’s FSRs, ICRs and debt ratings, visit