AM Best


A.M. Best Assigns Debt Rating to United Fire; Affirms Ratings for United Fire & Casualty Group and United Life


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Jim Peavy

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FOR IMMEDIATE RELEASE

OLDWICK, N.J. - MAY 13, 2002 12:00 AM (EDT)
A.M. Best Co. has assigned a "bbb" rating to the $69 million of convertible preferred stock [NASDAQ: UFCSP] issued by United Fire & Casualty Company (United Fire) [NASDAQ: UFCS], on May 6, 2002. Concurrently, A.M. Best has affirmed the financial strength rating of A (Excellent) of the United Fire & Casualty Group (the property/casualty companies led by United Fire). These debt and financial strength ratings have been assigned a negative outlook. Furthermore, A.M. Best has affirmed the financial strength rating of A- (Excellent) of United Life Insurance Company, a wholly owned subsidiary of United Fire. United Life was assigned a stable rating outlook. All of the companies listed above are located in Cedar Rapids, Iowa.

United Fire's preferred stock issue offers a 6.375% annual dividend and is convertible into common shares at an initial conversion price of $40.26 per share. Shares are convertible at the option of the holder at anytime. United Fire is obligated to redeem all unconverted shares by May 15, 2014.

United Fire is a publicly-traded company, which along with its related insurance subsidiaries, ranks among the 100 largest property/casualty insurance groups in the United States. United Fire is a regional insurer, which through its independent agency network, targets the small- to medium-size commercial accounts and individuals. A broad array of life and annuity products are also offered through United Life.

The preferred stock and financial strength ratings of United Fire and United Life take into account the immediate benefit from the issuance of the preferred stock, whose net proceeds (approximately $66 million) enhance the overall capitalization of these entities. United Fire anticipates contributing between $20 and $30 million to the life operations and using the remaining proceeds for its property/casualty operations and general corporate purposes. This new funding will improve the risk-adjusted capitalization of United Life, which had declined due to increased business activity and investment risk. The preferred stock rating further incorporates the benefits of issuing this security directly from a publicly-owned operating company whose earnings and cash flows are available for dividend service. Other positive factors are United Fire's solid regional Midwest market position, conservative reserving practices, re-underwriting and pricing initiatives taken by management and the future benefits to be gained from these actions. A.M. Best also anticipates improved operating earnings and the continuation of favorable reserve redundancies.

Offsetting these positive rating factors are United Fire's compressed profit margins in recent years, its relatively high expense structure, the effects from weather-related losses and the increased dividends related to the preferred stock offering. Additionally, the integration of American Indemnity - which historically had poor operating results - negatively impacted prior year earnings. Over the years, earnings continue to vary significantly and are extremely susceptible to weather-related losses and catastrophes, particularly in the Midwest. The rating also considers the increased dividend demands necessary to support the preferred stock. Over the years, a significant portion of United Fire's operating income has been used to accommodate shareholder dividends, therefore limiting surplus growth. The ability to pay dividends is subject to standard regulatory restrictions, and in 2002, dividend capability is estimated at 1.8 times both shareholder and preferred stock dividends.

Despite United Fire's successful capital raising initiative, A.M. Best remains somewhat concerned with the group's ability to generate capital through retained earnings, particularly in light of United Fire's susceptibility to weather, catastrophes and the continuation of significant dividend demands. A.M. Best believes the combination of general price firming in the property/casualty marketplace and new business opportunities are likely to place added pressure on future capital needs and retained earnings of United Fire. Accordingly, A.M. Best views United Fire's rating outlook as negative.

The following security has been assigned a rating of "bbb" with a negative outlook:

- 6.375% Convertible Preferred Stock, Series A

The following companies' financial strength rating of A (Excellent) have been affirmed with a negative outlook:

- United Fire & Casualty Group

- United Fire & Casualty Company

- Addison Insurance Company

- United Fire & Indemnity Company

- United Fire Lloyds

- Lafayette Insurance Company

The following company's financial strength rating of A- (Excellent) has been affirmed with a stable outlook:

- United Life Insurance Company

A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source.

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