Ratings Recap: Standard Casualty, Principal Financial, NAICO

November 16, 2012

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer crediting rating “a-” of Texas-based Standard Casualty Company, both with stable outlooks. Best explained that Standard Casualty “is a subsidiary of Cavco Industries Inc. The rating actions reflect Standard Casualty’s adequate risk-adjusted capitalization, excellent local market knowledge and generally favorable operating results. Standard Casualty has shown a historical pattern of net earnings driven by its conservative underwriting philosophy and a steady stream of investment income. As a result, the company has reported positive pre-tax operating gains in four of the last five years (2007 – 2011). The exception being 2011, in which the company was adversely impacted by weather-related events and wildfire losses. Furthermore, Standard Casualty’s investment portfolio is fairly conservative and has been the primary driver of pre-tax operating gains.” Best added that the company’s “balance sheet liquidity is excellent and the company has generated positive operating cash flow in most years.” As partial offsetting factors Best noted “Standard Casualty’s aggressive growth mainly in Arizona and New Mexico and its recent operating losses driven by frequent and severe weather-related events. As a result, underwriting losses were reported in 2011 and have continued into 2012.” Best said it “anticipates that Standard Casualty may experience underwriting volatility due to its anticipated aggressive growth and inherent exposure to frequent and severe weather-related events. In addition, as a predominate Texas writer, Standard Casualty is exposed to potential judicial, regulatory and economic concerns. However, these risks are partially mitigated as the company historically has adhered to strict underwriting guidelines and a conservative operating philosophy. In future rating cycles, pressure may be put on Standard Casualty’s ratings and outlook should its growth strategy result in operating losses and loss of surplus, which may lead to weaker risk-adjusted capitalization.”

A.M. Best Co. has commented that the financial strength, issuer credit and debt ratings of Principal Financial Group, Inc. (PFG), headquartered in Des Moines, Iowa, and its subsidiaries are unchanged following the recent announcement that it has signed a definitive agreement to acquire AFP Cuprum S.A., which is based in Chile, for approximately $1.5 billion. The sale is expected to close in the first quarter of 2013, subject to regulatory approvals. The outlook for all ratings is stable. Best explained that PFG “intends to pay for the acquisition with a combination of the proceeds from its recent debt offerings, the issuance of new debt and available holding company cash.” Best also indicated that the “transaction is expected to increase PFG’s financial leverage due to the anticipated amount of new debt that will need to be issued to help finance the acquisition. While the amount of excess capital would diminish.” Best added that it doesn’t, “believe it will meaningfully alter the holding company’s financial flexibility. The acquisition of Cuprum is consistent with PFG’s international growth strategy, which includes the expansion of its strategically core defined contribution pension, voluntary pension and asset accumulation products.” Best said it “expects that the acquisition will have limited impact on the financial strength, capitalization, liquidity and business profile of PFG’s operating companies and is anticipated to be immediately accretive to the organization’s overall operating earnings. The transaction remains subject to regulatory approval and execution risk, which A.M. Best will continue to monitor as part of its overall rating assessment process.”

A.M. Best Co. has revised the outlook to positive from stable and affirmed the financial strength rating of B++’ (Good) and issuer credit rating of “bbb+” of Oklahoma-based National American Insurance Company (NAICO). Best said “factors supporting the ratings include NAICO’s excellent risk-adjusted capitalization, stable operating performance and long-standing regional market presence. The ratings also consider the financial leverage and interest coverage of the organization on a consolidated enterprise level, which has improved in recent years due in part to the retirement of a $6.9 million debenture at the immediate parent company level, Chandler (USA), Inc. This transaction improved the financial leverage, currently 18.1 percent, and cash coverage measures of the organization, both of which are within A.M. Best’s parameters for NAICO’s current ratings.” As partial offsetting factors Best cited NAICO’s “relatively low level of investment earnings resulting in low total return measures,” as well as its “high level of reinsurance dependence to support its operations, including reinsurance placed with its ultimate parent, Chandler Insurance Company, Ltd.,” which is based in the Cayman Islands. However, Best added that this “concern is somewhat mitigated by NAICO’s use of trust account deposits provided by Chandler, Ltd. Despite these concerns, the outlook reflects NAICO’s improving risk-adjusted capital position, stable operating performance over the recent five-year period and management’s projections for sustained operating profitability over the near term. Positive rating actions could occur over the longer term if the company can sustain the recent improvement in its operating performance, which would permit additional growth in surplus in support of its planned premium growth. However, negative rating actions could occur should adverse reserve development occurring on prior accident years negatively impact NAICO’s operating performance, and/or premium growth in excess of projections weakens overall capitalization to a level that no longer supports its ratings.”

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