Ratings Recap: Keystone, Forestry Mutual, Residential Re, National Unity, Dakota

May 12, 2011

A.M. Best Co. has upgraded the financial strength rating (FSR) to ‘A+’ (Superior) from’ B++’ (Good) and the issuer credit ratings (ICRs) to “aa-” from “bbb” of Keystone Insurance Company and its subsidiaries, AAA Mid-Atlantic Insurance Company (AAA MAIC) and AAA Mid-Atlantic Insurance Company of New Jersey. Best has also removed the ratings from under review with positive implications and assigned a stable outlook. In addition Best affirmed the FSR of ‘A+’ (Superior) and ICRs of “aa-” of California State Auto Group and its members. The outlook for all ratings is stable. The rating actions “follow the completion of the acquisitions and recent regulatory approvals from the respective Departments of Insurance adding Keystone, AAA MAIC and AAA MAICNJ into the California State Auto’s intercompany pooling agreement, retroactive to January 1, 2011,” Best explained. “As members of California State Auto, these companies will receive greater financial flexibility, additional access to capital, sophisticated pricing tools and improved technology systems. With the acquisitions, California State Auto acquires companies with similar American Automobile Association (AAA) brand-name recognition and additional market opportunities. California State Auto also improves its geographic diversification as these newly acquired companies are licensed in several northeast U.S. states.” Best indicated that the rating and outlook of California State Auto reflects its “strong risk-adjusted capitalization, favorable operating earnings and significant personal lines market presence in its selected operating territories, specifically in California, where it ranks among the top five carriers in market share for private passenger auto and homeowners coverage. Furthermore, the group benefits from its long association with AAA Northern California, Nevada & Utah (formerly known as the California State Automobile Association), the Northern California, Nevada and Utah affiliate of the AAA, which enhances customer loyalty and affinity.” Best summarized the companies affected by the rating action as follows:
The FSR of ‘A+’ (Superior) and ICRs of “aa-” have been affirmed for the following members of California State Auto:
* AAA Northern California, Nevada & Utah Insurance Exchange
* Western United Insurance Company
* ACA Insurance Company
The FSR has been upgraded to A+ (Superior) and the ICRs have been upgraded to “aa-” for the following members of California State Auto:
* Keystone Insurance Company
* AAA Mid-Atlantic Insurance Company
* AAA Mid-Atlantic Insurance Company of New Jersey
In addition Best noted that it has withdrawn the FSR of ‘B++’ (Good) and ICR of “bbb” of AAA Mid-Atlantic Insurance Group (AAA MAIG) and assigned an NR (Not Rated) to the FSR and the ICR. These withdrawals are due to the elimination of the AAA MAIG’s pooling agreement, and as a result, the elimination of AAA MAIG.”

A.M. Best Co. has upgraded the financial strength rating to ‘B-‘ (Fair) from ‘C++’ (Marginal) and issuer credit rating to “bb-” from “b+” of North Carolina-based Forestry Mutual Insurance Company (FMIC), and has revised its outlook on both ratings to stable from positive. The rating actions “reflect FMIC’s increasing surplus and positive operating results as well as its expertise in loss control and safety procedures needed for the higher hazard risks the company insures,” said Best. “Additionally, FMIC has benefitted from management’s initiatives taken in recent years to re-underwrite the business, improve FMIC’s geographic diversification into neighboring states and to implement a zero tolerance policy for failure to comply with safety requirements.” Best added that the stable outlook reflects its view that “FMIC’s operating performance and risk-adjusted capitalization will continue to improve in the near term.” As partial offsetting factors Best cited FMIC’s “limited business profile as well as by market and economic conditions that create unique challenges for a single line niche writer of workers’ compensation insurance for forestry and logging related risks. In addition, while FMIC’s performance has been negatively affected by an increase in large claims, overall frequency levels have significantly improved in recent years. With a lowering of FMIC’s retention levels on its reinsurance program, the company is better protected from large losses, and thus, reduced volatility in earnings is expected in the future. Also mitigating the increase in larger claims is the effectiveness of FMIC’s safety program and strong reserving practices.”

Standard & Poor’s Ratings Services has assigned its preliminary ‘B+ (sf)’, ‘B- (sf)’ and ‘B (sf)’ ratings to the Class 2011-1, 2, and 5 notes, respectively, to be issued by Residential Reinsurance 2011 Ltd. (Res Re 2011), a special-purpose Cayman Islands exempted company licensed as a Class B insurer. HSBC Bank (Cayman) Ltd., as share trustee, holds all of Res Re 2011’s issued and outstanding shares in trust for charitable or similar purposes. “The cedents will be United Services Automobile Assn., a reciprocal interinsurance exchange organized under the laws of Texas; USAA Casualty Insurance Co., a Texas corporation; and USAA General Indemnity Co., which are all rated AAA/Negative/–” said S&P. These companies (collectively referred to as USAA) “will be responsible for the quarterly payment due under the retrocession contract in place between them and Res Re 2011. Also included in the group of ceding insurers are USAA Texas Lloyd’s Co. (a Texas Lloyd’s plan insurer) and Garrison Property & Casualty Insurance Co., which are currently unrated.” S&P added that “in each class of notes, the cedents will transfer a portion of their U.S. hurricane, earthquake exposure, severe thunderstorm, winter storm, and wildfire exposure via a securitization to 144A fixed-income investors. Covered losses for classes 1 and 2 will be calculated on a per occurrence basis, and for the Class 5 notes, on an annual aggregate basis.” S&P summarized the notes’ ratings as follows: Preliminary Ratings Assigned Residential Reinsurance 2011 Ltd.
Class 2011-1 notes B+ (sf)
Class 2011-2 notes B- (sf)
Class 2011-5 notes B (sf)

A.M. Best Co. has revised the outlook to positive from stable and affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Texas-based National Unity Insurance Company. Best said the ratings of National Unity reflect its “strong risk-adjusted capitalization, consistently profitable operating performance and strong niche market expertise. The outlook reflects Best’s expectation that the company will sustain its capitalization and operating performance as it continues to expand into new operating territories and enhance its product mix to include domestic auto and homeowners coverages.” Best explained that the positive rating factors are “derived from National Unity’s strong capitalization resulting from consecutive years of pre-tax operating income, which were driven by positive underwriting results and solid investment income. National Unity is a market leader in providing auto liability coverage to Mexican tourists while driving in the United States. Management’s comprehensive knowledge of the Mexican insurance market and strong relationship with local producers contribute to its strong operating results.”

A.M. Best Co. has upgraded the issuer credit ratings (ICR) to “bbb+” from “bbb” and affirmed the financial strength rating (FSR) of ‘B++’ (Good) of Dakota Group and its members – Dakota Truck Underwriters and First Dakota Indemnity Company. The outlook for the ICR is positive, while the outlook for the FSR has been revised to positive from stable. The companies are domiciled in Sioux Falls, SD. The rating actions reflect Dakota’s “strong capitalization, historically positive operating performance and specialized market presence as a niche workers’ compensation writer in the upper Midwestern states,” Best explained. “Dakota’s relatively strong after-tax returns and moderating premium volumes have led to improved underwriting leverage, which is reflected in a stronger level of risk-adjusted capitalization.” As partial offsetting factors Best cited Dakota’s “liquidity ratios that are below the workers’ compensation industry composite norms, and the company’s relatively high rate of premium balance receivables when compared to admitted assets and surplus.” However, best added that, despite these concerns, the outlook reflects its “expectation that capitalization as well as operating performance will continue to remain supportive of Dakota’s operations.”

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