Ratings Recap: Nat’l. Interstate, Best Meridian, SC Farm, Fireman’s Fund La.

February 25, 2013

A.M. Best Co. has affirmed the issuer credit rating (ICR) of “bbb+” of National Interstate Corporation (NATL), as well as the financial strength rating (FSR) of ‘A’ (Excellent) and ICRs of “a+” of the operating members of National Interstate Group (National Interstate). The outlook for all of the ratings is positive. All companies are domiciled in Richfield, Ohio, except for Vanliner Insurance Company, which is domiciled in Fenton, Missouri. NATL is 52 percent owned by Great American Insurance Company, a wholly owned subsidiary of American Financial Group, Inc. Best said the ratings “reflect the group members’ excellent operating performance, which outperforms the peer composite over the long term, strong risk-adjusted capitalization and demonstrated expertise within the transportation industry, which is its niche market. In addition, the ratings acknowledge the experienced management team and conservative operating philosophy.” Best noted that National Interstate’s “specialty focus provides the group with a sustainable competitive advantage, particularly in terms of pricing, claims adjusting and loss control, resulting in high policyholder retention rates despite the competitive operating environment. Management has effectively broadened the group’s product base through expansion into underserved markets as evidenced by growth within its Alternative Risk Transfer (ART) segment. Additionally, the group’s financial flexibility is enhanced by its publicly traded immediate parent, NATL, which maintains modest financial leverage and strong interest coverage.” As partial offsetting factors Best cited “the concentration of business within the passenger and truck transportation industries, the inherent risks associated with modest new business premium growth occurring within the group’s ART business component, and to a lesser extent, the risks associated with the 2010 acquisition of Vanliner Group, Inc.” Best said “positive rating actions could be taken on National Interstate’s ratings if underwriting and operating results materially outperform other similarly rated commercial auto insurers while maintaining a strong level of risk-adjusted capitalization. Key factors that could trigger negative rating actions on National Interstate’s ratings include the deterioration of risk-adjusted capitalization and/or operating results, particularly if the resulting performance trails that of similarly rated peers.” Best summarized the companies affected by the ratings review as follows: The FSR of ‘A’ (Excellent) and ICRs of “a+” have been affirmed for the following members of National Interstate Group: National Interstate Insurance Company; National Interstate Insurance Company of Hawaii, Inc.; Triumphe Casualty Company; Vanliner Insurance Company.

A.M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength rating (FSR) of ‘A-‘ (Excellent) and issuer credit rating (ICR) of “a-” of Miami-based Best Meridian Insurance Company (BMIC), as well as the FSR of ‘B++’ (Good) and ICR of “bbb+” of Best Meridian International Insurance Company SPC (BMIIC), which is based in the Cayman Islands. The outlook for all of the ratings is stable. Best explained that the “revised outlook for BMIC reflects a significant increase in its exposure to commercial mortgage loans recorded over the last two years. Also of note is the concentration of these loans in Florida and the relatively high allocation to real estate linked assets relative to surplus.” Best added that while it “”recognizes the strategy to diversify away from fixed income investments to improve investment returns, BMIC’s entry into the commercial mortgage market is relatively new.” As a result Best indicated that it “will take some time” for the rating agency “to assess the longer-term performance of the portfolio given its high exposure. Other negative rating factors include a sharp increase in BMIC’s assumed premiums in 2012 and geographic concentration in certain Latin American companies where there is financial and political instability.” Best said, however, that despite the revised outlook, “the ratings of BMIC continue to reflect its well-established marketing presence and cultural knowledge of Latin American countries, its continued trend of profitable operating results in core lines of business and its favorable risk-adjusted capitalization. The ratings of BMIIC are based upon its consistent profitability, net premium growth, adequate level of risk-adjusted capitalization and a demonstrated commitment by the parent company, BMI Financial Group, Inc.” As a partial offsetting factor Best cited “the high level of deferred acquisition costs reflecting new business growth and the limited financial resources of its ultimate parent.” Best said: “Key rating factors that could result in BMIC’s outlook returning to stable include sustainable net premium growth levels while maintaining profitable operations, continued high risk-adjusted capitalization and acceptable performance of its commercial mortgages. Key rating factors that may result in negative rating actions include increased exposure to mortgage loans or significant non-performance of the company’s newly acquired mortgage loans, a decline in operating earnings, disruption in its business model in key international markets or a significant decrease in risk-adjusted capitalization.”

A.M. Best Co. has removed from under review with developing implications and affirmed the financial strength rating of ‘B++’ (Good) and issuer credit ratings of “bbb” of South Carolina Farm Bureau Mutual Insurance Company and Palmetto Casualty Insurance Company (together known as South Carolina Farm Bureau), and has assigned both ratings a negative outlook. Best said; “While the affirmation of the ratings of South Carolina Farm Bureau reflects its adequate risk-adjusted capitalization, the assigned outlook is negative primarily due to the organization’s ongoing unfavorable operating performance in recent years, especially since 2010, as surplus declines have become more significant during this period. This is due to frequent occurrences of weather events, which have produced significant underwriting losses that have negatively impacted South Carolina Farm Bureau’s capital position.” Best added that “although the group’s risk-adjusted capitalization is still supportive of its current ratings, and management is taking additional steps to improve operating performance and capitalization, a continuation of adverse underwriting performance that further erodes its capital position could result in further rating downgrades. Furthermore, South Carolina Farm Bureau has been in the process of merging with three other mutual entities since early 2011: Colorado Farm Bureau Mutual Insurance Company, Louisiana Farm Bureau Mutual Insurance Company and Farm Bureau Mutual Insurance Company of Arkansas, Inc.” Best indicated that “while the merger is expected to result in an entity with a significantly greater premium and capital base, along with a wider geographic spread, the removal of the under review status of South Carolina Farm Bureau is due to its current circumstances. While the potential does exist for South Carolina’s ratings to be downgraded based on its own financial performance as reflected by the negative outlook, it is not expected to be significantly impacted by the completion of the merger process itself. Pending regulatory and policyholder approvals, the transaction is expected to be completed by year-end 2013.”

A.M. Best Co. has withdrawn the financial strength rating of ‘A’ (Excellent) and issuer credit rating of “a+” of Fireman’s Fund Insurance Company of Louisiana (FFIC of LA), following its merger into its affiliate parent company, Fireman’s Fund Insurance Company (FFIC), based in Novato, Calif. The transaction closed on November 30, 2012, at which time all assets and liabilities of FFIC of LA were merged into FFIC.

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