A.M. Best Affirms Ratings of Virginia Surety Company, Inc.

OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best Co. has affirmed the financial strength rating (FSR) of A- (Excellent) and issuer credit rating of “a-” of Virginia Surety Company, Inc. (Virginia Surety) (Chicago, IL). The outlook for both ratings is positive.

“Risk Management and the Rating Process for Insurance Companies”

The rating affirmations for Virginia Surety reflect its strong capitalization, profitable operating results and specialty niche underwriting expertise, as well as its leadership position in the extended warranty market. Virginia Surety also benefits from its extensive database, broad administrative capabilities and the company’s ability to integrate its products and services across its broad client distribution channel. The ratings also take into consideration the unlimited guarantee and indemnification provided by National Indemnity Company, for the run-off of all non-warranty business written prior to the 2006 acquisition of The Warranty Group, Inc., and its subsidiary, Virginia Surety by the current owner, Onex Corporation [TSX: OCX].

These positive rating factors are offset by Virginia Surety’s level of dividends over the last few years, its long-term ownership uncertainty (given the company’s current ownership status), its high gross underwriting leverage and the credit risk associated with non-rated unauthorized captive reinsurers. However, recoverable risk is somewhat mitigated through the use of collateral via letters of credit and funds held on recoverable balances. Despite these attenuating factors, the positive outlook is based upon the expectation for continued profitability and the maintenance of supportive capitalization.

Virginia Surety and its affiliated companies are the largest underwriters of consumer extended warranties worldwide. Underwriting activities principally include coverage for extended warranty programs on automobiles, household appliances, consumer electronics, credit card enhancement programs and nonstructural home warranty.

The positive outlook reflects the likelihood Virginia Surety’s ratings will be upgraded over the next 12 to 36 months pending sustained profitability in its core businesses, continued capital growth, a supportive level of capital and its ability to attract and retain new and existing distribution partnerships. The outlook also is contingent on The Warranty Group, Inc. maintaining a conservative financial leverage and liquidity profile, which would afford Virginia Surety further financial flexibility, if necessary.

At the same time, the ratings/outlook of the company could be downgraded if capitalization and/or operating performance falls markedly short of A.M. Best’s expectations, including any significant deterioration in loss trends, any sudden and unforeseen disruption in its distribution channels and any material changes in holding company financial leverage, liquidity and GAAP interest coverage ratios.

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”; “Rating Members of Insurance Groups”; “Understanding BCAR for Property/Casualty Insurers”; “Assessing Country Risk”; 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.

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