Ratings Recap: Penn National, MGA, MAPFRE USA

May 19, 2014

A.M. Best has affirmed the financial strength rating (FSR) of ‘A-‘ (Excellent) and issuer credit ratings (ICR) of “a-” of Pennsylvania National Mutual Casualty Insurance Company and its subsidiaries, Penn National Security Insurance Company, Founders Insurance Company and Partners Mutual Insurance Company (collectively referred to as Penn National Insurance Companies). Best has also affirmed the debt rating of “bbb” on $50 million, 9.5 percent surplus notes, due 2034 issued by Penn Mutual. The outlook for all of the ratings, however, remains negative. All companies are headquartered in Harrisburg, Pennsylvania, except for Partners Mutual Insurance Company, which is headquartered in Waukesha, Wisconsin. Best said its ratings “reflect Penn National’s excellent risk-adjusted capitalization, improving underwriting performance in 2013 and generally profitable operating results during the recent five-year period. Management’s initiatives to improve underwriting performance by eliminating the impact of lead-based paint claims through reinsurance, expanding use of predictive modeling and implementing enhanced underwriting standards to reduce weather-related losses have benefitted results, particularly in 2013.” As partial offsetting factors Best cited “the deterioration in Penn National’s underwriting results, particularly in the 2010—2012 period, which were driven by aforementioned issues with lead-based paint and weather-related claims.” The report explained that the “group’s returns on revenue and equity do not compare favorably to the composite averages over the long term. In addition, while management has acted to enhance Penn National’s geographic diversification, the group remains somewhat concentrated with 39 percent of premiums written in Pennsylvania, which exposes the group to the potential for elevated weather-related claims.” Best said the negative outlook reflects its “concerns with the trend in Penn National’s results through 2012 and the potential for that negative trend to continue. While noting the improvement in results in 2013, the negative outlook will remain until the improved performance is sustained over a longer period.” In conclusion Best said: “Factors that could result in downward ratings pressure include a return to ongoing weak operating earnings, emergence of unanticipated lead paint claims that negatively impact results and/or a material deterioration in performance or risk-adjusted capital of Penn National. Positive rating action could be taken on the outlook should the company’s improved performance demonstrated in 2013 be sustained over time.”

A.M. Best has upgraded the financial strength rating to ‘B++’ (Good) from ‘B+’ (Good) and issuer credit rating to “bbb” from “bbb-” of Dallas-based MGA Insurance Company, Inc., and has revised its outlook on both ratings to stable from positive. Best explained that the “positive rating actions primarily reflect MGA’s profitable underwriting performance and improved risk-adjusted capitalization in 2013, which is due to the reduced Florida personal injury protection (PIP) fee litigations.” In addition Best noted that “MGA’s net income continues to remain positive driven by a steady stream of favorable net investment income and capital gains that has partially offset underwriting losses over the last five years. The company’s unfavorable underwriting performance was partially due to inadequate rates in early years and increased Florida PIP fee litigations that occurred in 2012. In response, management continues to focus on improving its operating performance through various risk management strategies including rate adjustments and refining its underwriting criteria. The company maintains a conservative investment portfolio and moderate underwriting leverage measures.” As partial offsetting factors Best noted “MGA’s unfavorable underwriting performance in three of the last five years and geographic concentration of risk. While the company operates in several states, a majority of the company’s business is conducted in Florida and Texas, which exposes its results to regulatory, judicial and economic concerns. This was particularly evidenced in 2012 by the increased Florida PIP fee litigations that resulted in sizable underwriting losses and prior year adverse loss reserve development. To partially mitigate this risk, management has been de-emphasizing Florida’s exposure along with its significant rate increase.” In conclusion Best said: “Negative rating pressure may occur if MGA’s operating performance deteriorates and/or there is a significant decline in its overall risk-adjusted capital strength as measured by Best’s Capital Adequacy Ratio (BCAR). Any future positive rating actions are contingent upon the continuation of MGA’s favorable operating performance and surplus growth while maintaining adequate capitalization and moderate underwriting leverages.”

A.M. Best has revised the outlook to stable from negative and affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit ratings of “a” of the members of MAPFRE U.S.A. Group. The lead company in MAPFRE USA is The Commerce Insurance Company, headquartered in Webster, Mass., and includes its inter-company pool members, Citation Insurance Company (Webster, MA), Commerce West Insurance Company (Pleasanton, CA), American Commerce Insurance Company (Columbus, OH), MAPFRE Insurance Company of New York (Garden City, NY), MAPFRE Insurance Company of Florida (Miami, FL) and MAPFRE Insurance Company (Florham Park, NJ). Best said the ratings reflect MAPFRE USA’s solid risk-adjusted capitalization, good operating performance and local market expertise. In addition, MAPFRE USA’s inter-company pool members provide geographic diversification and rate flexibility to the group.” Best also indicated, however that these positive rating factors “are partially offset by MAPFRE USA’s concentration of business in Massachusetts, which is focused on private passenger automobile insurance, as well as its susceptibility to weather-related losses, which has been evident in MAPFRE USA’s underwriting results over the last several years.” Best said the “revised outlook reflects the stabilizing economic conditions within Spain, to which MAPFRE USA’s ultimate parent organization, MAPFRE S.A. (MAPFRE) (Spain), has material investment and business exposure. MAPFRE has a strong level of risk-adjusted capitalization and has generated robust overall earnings in recent years, despite extremely challenging economic conditions in its local market,” the report continued. “MAPFRE remains heavily exposed to the Spanish economy, with Spanish debt accounting for 40 percent of the group’s €40 billion [$55 billion] of invested assets at December 31, 2013. While economic headwinds such as high unemployment and a continued soft housing market persist, Spain is showing early signs of economic recovery. In addition, while Spain’s government debt remains elevated, Spanish, and more generally European, financial markets have stabilized over the past year easing the debt burden. Although Spain is a core insurance market for MAPFRE, its operations are well diversified geographically, particularly in the Americas. Furthermore, MAPFRE’s Spanish insurance business has been resilient and continues to perform strongly.” In conclusion best said: “Negative rating pressure could occur if there is deterioration in MAPFRE USA’s or MAPFRE’s risk-adjusted capitalization. Additionally, there could be negative rating pressure if there is further deterioration or volatility in the Spanish economy. Upwards rating movement is most likely to be generated from improving economic conditions within Spain over the longer term.”

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