A.M. Best Revises Outlook to Negative for American Safety Insurance Holdings, Ltd. and Its Subsidiaries

A.M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength rating of A (Excellent) and issuer credit ratings (ICR) of “a” of the insurance operating subsidiaries of American Safety Insurance Holdings, Ltd. (ASI) (Hamilton, Bermuda) [NYSE:ASI], which include: American Safety Casualty Insurance Company, American Safety Indemnity Company (both domiciled in Oklahoma City, OK), American Safety Reinsurance, Limited (ASRE) (Hamilton, Bermuda) and its affiliate, American Safety Risk Retention Group, Inc. (Burlington, VT). Concurrently, A.M. Best has revised the outlook to negative from stable and affirmed the ICR of “bbb” of ASI.

The ratings are based on the consolidated financial condition and operating performance of ASRE and its three U.S. domestic subsidiaries and affiliate (entities), with each one receiving significant quota share reinsurance support from ASRE.

The revised outlook reflects the unfavorable underwriting results reported in 2011 by the ASI subsidiaries and A.M. Best’s expectation of similar results for 2012, which have been impacted by weather related losses and unfavorable development in prior year loss reserves, primarily for business
that has been placed in run off. The revised outlook also considers the inherent risks involved in ASI’s anticipated build-out of new and existing lines of business (particularly its excess and surplus lines and reinsurance divisions) through the expansion into new geographic territories, growth and expansion of its surety business associated with the recent acquisition of the Bluestone Agency in 2012 and the melding of new underwriting teams into ASI’s culture. Furthermore, this revised outlook takes into consideration the organization’s adverse prior year loss reserve development reported in 2011, and additional reserve strengthening in 2012, ASI’s recent de-emphasis on certain poorly performing reinsurance and program businesses, competitive headwinds, elements of execution risk associated with ASI’s diversification strategy and the challenges facing management to improve underwriting results over the near term.

Despite the revised outlook, the ratings reflect the adequate consolidated capitalization of the ASI subsidiaries, their solid, overall operating results over the long term and the effective management of their insurance operations. The ratings also recognize ASI’s core underwriting expertise in its niche markets, with customized risk management programs and loss control services. While ASI’s overall risk-adjusted capitalization remains supportive of the current ratings (driven by its manageable underwriting leverage and modest investment leverage) further deterioration in operating profitability combined with the possibility of additional share repurchases could have a limiting, or even negative impact on the organization’s capital strength.

ASI has taken advantage of its niche market expertise and has focused on generating operating earnings in support of business expansion and premium growth in recent years. However, the long-term profit or loss potential of the newer or expanded classes or lines of business have yet to be
established. A.M. Best expects ASI to continue providing explicit support as needed in order to manage growth, which is part of its business plan as well as to ensure that the capitalization of ASRE and its related subsidiaries and affiliate are adequately reflected in the ratings.

Positive rating actions could occur over the next 24 months, if there is notable sustained improvement in the underwriting results and operating profitability of ASI, especially as growth occurs in the assumed reinsurance portfolio and the newer segments of the excess and surplus lines portfolio.

Key factors that could trigger negative rating actions include continuation of the recent deteriorating trend in ASI’s operating ratios, particularly if it results in the company’s balance sheet being materially impaired. Similarly, a failure to maintain adequate capitalization in the subsidiaries or at a consolidated level will be factors affecting the ratings adversely.

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”; “Understanding BCAR for Property/Casualty Insurers”; “Understanding Universal BCAR”; and “Rating Members of Insurance Groups.” Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

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