Ratings Recap: Loudun Mutual, Hastings Mutual, Ellington Mutual, American Safety RRG

December 13, 2013

A.M. Best Co. has upgraded the financial strength rating to ‘A’ (Excellent) from ‘A-‘ (Excellent) and the issuer credit rating to “a” from “a-” of Virginia-based Loudoun Mutual Insurance Company, and has revised its outlook for both ratings to stable from positive. “The rating upgrades and the revised outlook reflect Loudoun’s solid risk-adjusted capitalization, generally consistent operating performance and long-standing local market presence,” Best explained. “The ratings further reflect Loudoun’s prudent reinsurance program and favorable balance sheet liquidity. Despite the company’s concentration of exposure to weather-related events, it has performed well in most years. In addition, Loudoun’s performance has held up through various market cycles and challenging market conditions, demonstrating management’s ability to effectively manage its business and position itself for future success.” As partial offsetting factors Best cited “Loudoun’s limited business profile as reflected by its exposure to significant weather-related events due to its business concentration in Virginia as well as its elevated common stock leverage and expense ratio. Although the company maintains an expense disadvantage, mainly due to its elevated commission costs, its underlying book of business continues to perform well relative to its personal property composite. As a single state writer with a property-predominate book of business, Loudoun’s underwriting results will remain susceptible to weather-related events.” Best indicated that while it “believes Loudoun’s ratings are well positioned at the current rating level, negative rating actions could occur should the company’s operating results fall significantly short of Best’s expectations or there is a material decline in its risk-adjusted capitalization level.”

A.M. Best Co. has downgraded the financial strength rating to ‘A’ (Excellent) from ‘A+’ (Superior) and issuer credit rating to “a+” from “aa-” of Michigan-based Hastings Mutual Insurance Company, and has revised the outlook for both ratings to stable from negative. “The rating downgrades are based on Hastings Mutual’s deterioration in underwriting results and operating earnings over the previous five-year period, which was driven by significant storm losses in its operating territories,” Best explained. “Hastings Mutual’s current ratings are based on its strong risk-adjusted capitalization, reflective of its modest underwriting leverage, conservative investment risk profile and favorable loss reserve development. The company’s modest five-year pre-tax operating earnings were driven by solid investment income and other income, partially offset by underwriting losses. These positive rating factors are derived from the company’s long-standing agency relationships and management’s adherence to sound operating fundamentals. Hastings Mutual has implemented a comprehensive review of its operations, which includes rate adjustments where indicated, more sophisticated rating plans, insurance-to-value initiatives, agency training and performance reviews, investments in underwriting and claims systems technology, as well as the utilization of outside consultants to review medical bills for bodily injury claims.” As partial offsetting factors Best cited “Hastings Mutual’s geographic concentration and corresponding exposure to severe weather-related losses, which has driven the deterioration in its underwriting results and operating earnings over the previous five-year period. In addition, private passenger auto loss experience deteriorated due to increased bodily injury and personal injury protection loss severities, which were driven by medical inflation.” Best did noted that “Hastings Mutual reported improved underwriting results and operating earnings in 2011, driven by lower large non-storm losses, increased favorable loss reserve development on its personal auto liability and workers’ compensation lines of business as well as the earning of rate increases in numerous states and lines of business. However, in recent years, underwriting results and operating earnings once again deteriorated due to increased frequency and severity of storm losses, which adversely impacted its homeowners and auto physical damage lines of business. Underwriting results were adversely impacted in recent years by the June 2012 Derecho storm and the November 2013 Midwest windstorm. Hastings Mutual is well positioned at its current rating level. However, a continuation of adverse underwriting results could potentially lead to further rating pressure,” Best concluded.

A.M. Best Co. has downgraded the financial strength rating to ‘B’ (Fair) from ‘B+’ (Good) and the issuer credit rating to “bb” from “bbb-” of Wisconsin-based Ellington Mutual Insurance Company (EMIC). The outlook for both ratings remains negative. Best said the rating actions are based on its “concerns regarding EMIC’s trend of increasing operating losses, declining risk-adjusted capitalization and policyholder’s surplus. Furthermore, the ratings and outlook reflect its dependence on one reinsurer, its increased common stock investment leverage, concentrated business profile that has exposed the company to frequent and severe wind and hail events, and management’s ability to reverse operating loss trends in the near term.” However, Best also indicated that, “despite these negative attributes, EMIC has adequate risk-adjusted capitalization, history of adequate loss reserving practices, long-standing agency relationships and historic presence writing property business in underserved rural areas of Central Wisconsin. Future negative rating actions could occur if the initiatives undertaken by EMIC’s management to return to operating profitability do not materialize in the near term. Conversely, a return to a stable outlook may occur if EMIC returns to and sustains operating profitability, leading to strengthened policyholder’s surplus and risk-adjusted capitalization as calculated by Best’s Capital Adequacy Ratio.”

A.M. Best Co. has downgraded the financial strength rating (FSR) to ‘B++’ (Good) from ‘A’ (Excellent) and the issuer credit rating (ICR) to “bbb+” from “a” of Vermont-based American Safety Risk Retention Group, Inc., and has removed both ratings from under review with negative implications and assigned a stable outlook. Best said the “rating actions are based on American Safety RRG currently operating as a stand-alone entity as a result of the completion of the acquisition of its former publicly traded ultimate parent, American Safety Insurance Holdings, Ltd. (ASI) (Hamilton, Bermuda), by Fairfax Financial Holdings, Ltd.” Best noted that “American Safety RRG was not a part of ASI’s acquisition by Fairfax and therefore will not be an affiliate of either one of the publicly traded entities going forward. The ratings reflect the benefits to American Safety RRG’s executed loss portfolio transfer and casualty excess of loss reinsurance contracts.” Best added that American Safety RRG’s ratings are based on its “expectation that management will run the company in accordance with business plans shared with and evaluated by A.M. Best. In conclusion Best said: “Positive rating actions could occur if American Safety RRG succeeds in meeting or exceeding its operating plan of providing insurance solutions to protect specialty niche businesses against liabilities associated with environmental hazards, resulting in organic capital growth, balance sheet fortification and an enhanced business profile. The execution risk involved with American Safety RRG adding to its current book of business profitably is one of the key factors that could trigger negative rating actions, specifically if underwriting or operating results fall materially short of its plan. Similarly, a failure to maintain adequate risk-adjusted capitalization also would be a factor that would affect the company’s ratings adversely.”

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