Ratings Roundup: Allstate (bank), Queen City, Sutter, Auto Club (Michigan)

February 11, 2011

Standard & Poor’s Ratings Services announced that its ratings on Allstate Corp. (A-/Stable/A-2) and its operating subsidiaries “are not affected by the announcement that Allstate is exiting the banking business. As part of this transaction, approximately $1 billion in the deposits of Allstate Bank, which constitutes about 1 percent of Allstate’s total assets, will be sold to Discover Financial Services. The transfer of deposits will not affect insurance policies and other nonbanking products. This transaction is consistent with management’s strategic initiative to focus on insurance, retirement, and investment products, and it is expected to close by mid-year, subject to regulatory approval.”

A.M. Best Co. has assigned a financial strength rating of ‘A’ (Excellent) and issuer credit rating of “a” to Vermont captive insurer Queen City Assurance, Inc., and has assigned the ratings a stable outlook. “Queen City is the single parent captive of The Kroger Co. (Kroger) and has exhibited a strong operating performance as evidenced by profitable underwriting, solid and continued investment returns, excellent capital adequacy (both base and stressed) as well as stringent risk management techniques, which address the risks inherent in the company’s business,” said Best. “As Queen City is the single rated entity of Kroger, the analysis involves the business profile of Kroger.”

A.M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength rating of A- (Excellent) and issuer credit rating of “a-” of Petaluma, Calif.-based Sutter Insurance Company. Best said the affirmation of the ratings reflects Sutter’s “solid risk-adjusted capitalization, well-established market presence in California and generally favorable operating performance augmented by consistent investment income. In addition, management has made changes to certain underwriting strategies that are anticipated to favorably impact overall results going forward.” As partial offsetting factors Best noted Sutter’s “recent unprofitable underwriting performance and rapid premium growth, which has resulted in a downward trend in risk-adjusted capitalization.” Best added that the negative outlook recognizes its “concern with the possibility of continued underwriting volatility, which may potentially put further pressure on Sutter’s risk-adjusted capitalization.”

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 ratings (ICR) of “a” of The Auto Club Group, which is based in Dearborn, Mich., and its members. “The negative outlook is based on the deterioration in the group’s operating earnings in recent years, driven by unfavorable underwriting results,” Best explained. The Auto Club Group’s ratings “reflect its strong risk-adjusted capitalization, modest five-year operating performance and well-established position as a personal lines market leader in Michigan, as well as the benefits derived from offering insurance products to AAA members. The group’s strong risk-adjusted capitalization is driven by its moderate underwriting leverage,” Best added. However, these advantages are “partially offset by its above average non-affiliated investment leverage and moderate gross and net catastrophe exposure. The Auto Club Group has produced modest five-year operating earnings, driven by solid investment income, partially offset by underwriting losses for the period.” Best also indicated that these positive attributes are “derived from the Auto Club Group’s AAA affiliation, through which it writes a controlled book of business with a select class of policyholders. The success of this book is reflected in its large market share in Michigan. Management remains focused on improving its competitive position in Michigan and has recently acquired the MEEMIC Insurance Company to further diversify its distribution channels and target audience in Michigan into the education sector. The Auto Club Group also has recently implemented numerous strategic initiatives to improve underwriting performance, which include private passenger auto and homeowners’ rate adjustments in states where they are indicated, increased pricing sophistication to improve profitability and competitive position, and decreases in staffing and overhead costs to reduce the underwriting expense ratio.” As partial offsetting factors, Best cited the Auto Club Group’s “deterioration in operating results in recent years and its concentration of business in one state, which exposes it to regulatory and legal changes, as well as significant price competition in its core markets. The deterioration in operating results in recent years was driven by increased underwriting losses and lower investment income, as well as the group’s exposure to regulatory and legal changes in Michigan.” In addition Best noted that the “deterioration in underwriting results was reflective of a higher loss and loss adjustment expense ratio, which was driven by an increased frequency and severity of homeowners’ weather losses throughout the Midwest, greater private passenger auto liability loss cost severities due primarily to medical inflation and unfavorable loss experience for its non-Michigan business.” Best also said: “Before cost reduction efforts took effect in 2010, the Auto Club Group had an above average underwriting expense ratio, reflective of significant price competition, system development and implementation costs for new underwriting and policy administration systems, as well as higher advertising costs as competition increased.”
The FSR of A (Excellent) and ICRs of “a” have been affirmed for the The Auto Club Group and its following members:
Auto Club Insurance Association
• Auto Club Group Insurance Company
• MemberSelect Insurance Company
• Auto Club Property/Casualty Insurance Company
• MEEMIC Insurance Company

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