[December 20, 2012]

A.M. Best Affirms Ratings and Revises Outlook to Negative for Indiana Lumbermens Mutual Insurance Company and Its Subsidiaries

A.M. Best Co. has affirmed the financial strength rating of B+ (Good) and issuer credit rating of "bbb-" of Indiana Lumbermens Mutual Insurance Company and its reinsured subsidiaries, Lone Star National Insurance Company and National Building Material Assurance Company. All companies are domiciled in Indianapolis, IN. The outlook for all ratings has been revised to negative from stable.

The negative outlook reflects ILM's poor underwriting results over the recent five-year period and A.M. Best's expectations for continued losses over the near term. The outlook also reflects further capital erosion through 2012 as ILM continues to face competitive market conditions, a still challenging macroeconomic environment impacting businesses within its niche and ongoing exposure to property and weather-related losses. While ILM's risk-adjusted capitalization supports its current ratings, continuing expense ratio pressures have adversely impacted the group's operating performance in recent years. Other factors contributing to underwriting losses include an accumulation of weather-related losses and areas of adverse loss reserve development in select accidnt years. Although management has implemented several strategic initiatives to improve the group's underwriting performance in recent years, the execution of ILM's business plan has yet to materialize into profitable results.

The affirmation of the ratings reflects ILM's supportive capitalization and strong niche market presence as a provider of insurance coverages to the building materials and manufacturing industries. The ratings also recognize management's initiatives to improve the group's underwriting performance in recent years, specifically exiting the workers' compensation line of business, a long troublesome line, and aggressively non-renewing unprofitable property business. Finally, the ratings recognize the added balance sheet protection provided by various aggregate stop-loss reinsurance agreements, which helps lessen the impact from severe underwriting losses in a given year.

Should ILM's operating losses exceed A.M. Best's expectations and/or if capitalization deteriorates further, negative rating actions would likely occur.

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" and "Understanding BCAR for Property/Casualty Insurers." Best's Credit Rating Methodology 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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