UTR Unitrin, Inc.

A.M. Best Co. has affirmed the financial strength rating (FSR) of A- (Excellent) and issuer credit ratings (ICR) of “a-” of Unitrin Property and Casualty Insurance Group (Unitrin P&C) and its members. A.M. Best also has affirmed the FSRs of A- (Excellent) and ICR of “a-” of the life/health subsidiaries collectively referred to as Unitrin Life & Health Group (Unitrin L&H) and the separately rated Reserve National Insurance Company (Reserve National) (Oklahoma City, OK). These companies are all subsidiaries of the publicly-traded parent, Unitrin, Inc. (Unitrin) [NYSE: UTR].

Concurrently, A.M. Best has affirmed the ICR and senior debt ratings of “bbb-” on unsecured senior notes and senior unsecured debt, as well as “bb” on preferred stock of Unitrin, which is included in Unitrin’s “automatic shelf” that expires November 2, 2013. The outlook for all the above ratings is stable, except for the ratings of Reserve National, which is negative. All companies are headquartered in Chicago, IL, unless otherwise specified. (See link below for a detailed listing of the companies and ratings.)

The affirmation of the ratings for Unitrin P&C reflects its adequate risk-adjusted capitalization and balance sheet liquidity, historically profitable earnings, diverse business profile, long-standing independent agency relationships, the actions management has taken to improve earnings, as well as Unitrin’s position as one of the 20 largest personal lines writers in the United States. The ratings also acknowledge excess capital within the organization and the added financial flexibility of Unitrin to raise capital through equity or debt offerings during favorable markets.

Partially offsetting these positive rating factors is Unitrin P&C’s below average operating performance and elevated expense ratio, challenging underwriting and investment markets, combined with above average leverage ratios and negative operating cash flows each of the last three years.

Unitrin P&C’s capitalization adequately supports its underwriting, investment and business risks. Earnings generally have been favorable over the last five years, despite underwriting losses from severe weather-related events. Unitrin P&C maintains a diverse business profile with a strong market presence, good geographic spread of risk, multi-channel distribution and long-standing agency relationships. The ratings and outlook also take into consideration actions by management to improve earnings, the financial flexibility to raise capital through equity or debt during favorable markets and excess capital within Unitrin’s Fireside Bank, which is in run off and may be available if needed.

The affirmation of the ratings for Unitrin L&H recognize its important role within the Unitrin organization, strong niche presence in the home service life insurance market, as well as its well established employee agency field force and strong operating performance. The life/health subsidiaries are among the market leaders in the mature home service life insurance segment, predominantly marketing low face amount permanent and term life policies. Unitrin L&H’s consolidated risk-adjusted capitalization is enhanced by its strong profitability, which historically has offset large dividend payments made to Unitrin. With the absence of a net dividend to the parent in 2010, Unitrin L&H’s year-end 2010 regulatory capital ratio is at its highest level in the last five years. Furthermore, A.M. Best notes Unitrin L&H’s stable liability structure relative to its life/annuity peers is facilitated by sales of straightforward, lower risk product offerings through career agents.

Partially offsetting these strengths is A.M. Best’s belief that Unitrin L&H may be challenged to reverse declining organic premium growth trends given its limited growth potential in the mature home service market. A.M. Best also notes the continued high concentration of real estate and Schedule BA assets—limited liability investment companies and limited partnerships—relative to total capital that remain well above industry averages.

In affirming the ratings of Reserve National, A.M. Best notes the generally increasing net premium trends in its core individual accident and health businesses, favorable operating performance and adequate stand-alone risk-adjusted capitalization. The negative outlook acknowledges A.M. Best’s view that Reserve National will be challenged by the new health care reform landscape, which may hamper the company’s ability to compete in its core markets as well as to maintain its historically favorable operating performance.

The ratings of Unitrin are reflective of the financial strength of its core insurance operations and the subordination of its senior most creditors to the insurance companies’ policyholders. In addition, the organization’s financial leverage and interest coverage are within acceptable limits for its current ratings.

For a complete list of Unitrin, Inc. and its subsidiaries’ FSRs, ICRs and debt ratings, please visit www.ambest.com/press/051306unitrin.pdf.

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”; “Understanding BCAR for Life and Health Insurers”; “A.M. Best’s Liquidity Model For U.S. Life Insurers”; “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.

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