A.M. Best Revises Outlook to Negative from Stable for Mercer Insurance Group and Its Members

Business Wire, June 18, 2009

OLDWICK, N.J. -- 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 Mercer Insurance Group (Mercer) (Pennington, NJ). The ratings apply to the following four inter-company reinsurance pool members: Mercer Insurance Company (Lock Haven, PA), Mercer Insurance Company of New Jersey, Inc. (Pennington, NJ), Franklin Insurance Company (Lock Haven, PA) and Financial Pacific Insurance Company (FPIC) (Rocklin, CA). Concurrently, A.M. Best has revised the outlook to negative from stable and affirmed the ICR “bbb” of Mercer Insurance Group, Inc (Mercer, Inc.) (headquartered in New Jersey).

The revised outlook reflects the group’s diminished level of capitalization in 2008 and A.M. Best’s viewpoint that management will be pressed to restore capitalization to previously strong levels in the medium term. Risk-adjusted capitalization has decreased since 2004 due to increasing underwriting leverage, the ongoing drain on earnings from west coast construction defect claims and the 2005 acquisition of FPIC. Impacting surplus growth in 2008 were both realized and unrealized capital losses on Mercer’s investment portfolio, stockholder dividends and an increase in the group’s non-admitted deferred tax asset.

The ratings reflect Mercer’s adequate capitalization, its solid operating performance and conservative management philosophy. The group continues to record favorable underwriting results, which have been an important driver of strong pre-tax returns on both revenue and surplus that either meet or exceed industry peers.

These positive rating factors are partially offset by Mercer’s declining level of risk-adjusted capitalization, elevated expense structure and the risks associated with possible further adverse development on its construction defect liabilities. These concerns are partially mitigated by the historically strong reserve positions taken on more recent accident years.

With the October 1, 2005 acquisition of FPIC by Mercer’s publicly-traded parent, Mercer, Inc. [NASDAQ:MIGP], Mercer reduced its geographic concentration from nearly 80% in New Jersey (prior to the acquisition) to nearly 30% and roughly 55% in California (post acquisition).

For Best’s Credit Ratings, an overview of the rating process and rating methodologies, please visit www.ambest.com/ratings.

The principal methodologies used in determining these ratings, including any additional methodologies and factors that may have been considered, can be found at www.ambest.com/ratings/methodology.

Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.