Ratings Recap: Berkshire Hathaway Homestate, Rural Community, Imperial Fire

June 30, 2014

A.M. Best has affirmed the financial strength rating of ‘A++’ (Superior) and the issuer credit ratings of “aa+” of Omaha-based Berkshire Hathaway Homestate Insurance Company, and its five property and casualty affiliates: Cypress Insurance Company (San Francisco, CA), Oak River Insurance Company (Omaha, NE), Redwood Fire and Casualty Insurance Company (Omaha, NE), Brookwood Insurance Company (Coralville, IA) and Continental Divide Insurance Company (Englewood, CO). These companies are collectively referred to as Berkshire Hathaway Homestate Companies (BHHC). The outlook for all of the ratings is stable. Best said the “ratings reflect BHHC’s strong risk-adjusted capitalization, historically profitable operating performance and the successful track record of the executive team in managing operations. The ratings also acknowledge the group’s conservative underwriting leverage measures, aggressive claims management, effective loss control services and history of conservative loss reserving standards. Lastly, the ratings consider the additional financial flexibility and support provided by the group’s publicly traded parent and ultimate shareholder, Berkshire Hathaway Inc.” As partial offsetting factors Best’s report cited “the volatility in the group’s underwriting results in recent years, challenging market conditions and its business profile, which is concentrated in the workers’ compensation line primarily in California. Nearly two-thirds of direct writings were from the state of California in 2013. These elements of concentration expose the group to a heightened level of regulatory, judicial, legislative and competitive risks relative to its peers. An additional offsetting factor includes the risks associated with a large investment allocation in equity securities, as common stocks made up nearly 94 percent of policyholders’ surplus at year-end 2013, thus remaining a potential source of volatility in earnings and capital appreciation. Despite these concerns, the rating outlook reflects the group’s strong risk-adjusted capitalization, proven operating performance, management’s ability to quickly adapt to changing market conditions and the long-term support of Berkshire Hathaway Inc.” Best concluded that while the group “is well positioned at the current rating level, negative rating actions could result if operating performance falls markedly short of Best’s expectations, if there is a considerable deterioration in risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio, or if Best determines that the strategic importance of the group no longer warrants rating enhancement.”

A.M. Best has affirmed the financial strength rating of ‘A’ (Excellent) and the issuer credit rating of “a+” of Minnesota-based Rural Community Insurance Company (RCIC), both with stable outlooks. Best said the “ratings reflect RCIC’s excellent level of risk-adjusted capitalization, historically profitable operating performance and the benefits derived from its leading position within the multi-peril crop insurance (MPCI) industry. In addition, significant financial flexibility and operating liquidity is afforded through the company’s ultimate parent, Wells Fargo & Company, one of the largest publicly traded financial services organizations in the United States. The ratings also recognize the added balance-sheet protection provided by an aggregate stop loss reinsurance treaty, which minimizes the potential impact from severe underwriting losses and management’s knowledge and expertise in the highly specialized MPCI marketplace.” The report also indicated, however, that these positive factors are “somewhat offset by RCIC’s rather narrow product mix and the potential for underwriting volatility due to operational risk from changes in the agricultural marketplace or government changes in either the agricultural crop insurance program or farm bill, which could run counter to RCIC’s business plan. While RCIC relies heavily on reinsurance, concern with respect to that reliance is somewhat mitigated by the high credit quality of its reinsurers, including the Federal Crop Insurance Corporation. Positive ratings changes are not expected in the near to medium term. However, negative actions could be taken if risk-adjusted capitalization or operating performance falls markedly short of Best’s expectations.”

A.M. Best has placed under review with positive implications the financial strength rating (FSR) of ‘B+’ (Good) and the issuer credit rating (ICR) of “bbb-” of Louisiana-based Imperial Fire and Casualty Insurance Company. Best explained that the review status with positive implications “follows the recent announcement that National General Holdings Corp. (NGHC) (Winston-Salem, NC) has purchased Imperial, National Automotive Insurance Company and the business assets of Imperial Management Corporation.” Best also indicated that the positive implications “reflect the FSR of ‘A-‘ (Excellent) and the ICR of “a-” of Integon National Insurance Company, the lead company of the National General Group, and the addition of Imperial to the affiliated pool agreement of Integon.” NGHC is a licensed property/casualty writer offering personal auto, recreational vehicle, motorcycle, commercial auto and other lines. Imperial is a licensed property/casualty writer, domiciled in Louisiana primarily offering private passenger non-standard auto in Louisiana, Florida and Texas.” Best said the ratings would remain under review until it “has the opportunity to evaluate Imperial under the new parent company and fully analyze its future business plans, as well as its overall risk-adjusted capitalization.”

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