Ratings Recap: EMC, Penn Millers, FMH

June 3, 2011

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A-‘ (Excellent) and issuer credit rating of “a-” of EMC Insurance Companies (EMC) and its seven property/casualty insurance company affiliates, which operate under an inter-company pooling agreement led by Employers Mutual Casualty Company (EMCC) and EMC Reinsurance Company (EMC Re), a reinsurance company owned indirectly by EMCC. Best also affirmed the ICR of “bbb-” of EMC Insurance Group Inc., a downstream holding company majority owned by EMCC and the immediate parent of EMC Re. The outlook for all of the ratings is positive. All of the above named companies are headquartered in Des Moines, Iowa. The ratings of EMC and EMC Re reflect their “strong level of risk-adjusted capital, which is supported by the consistent generation of pre-tax operating and net income; favorable development of prior years’ loss and loss adjustment expense reserves in recent years; generally favorable core underwriting results; and the benefits the companies will continue to derive from pricing, risk selection and claims actions taken in recent years,” said Best. As offsetting factors the rating agency cited EMC and EMC Re’s “exposure to catastrophe and weather events that have produced variability in underwriting results in recent years; above-average levels of common stock leverage; potential for a lower level of favorable development of prior years’ loss reserves in the future; and the continuing impact of challenging insurance market conditions, particularly on EMC’s primary business. Further offsetting the EMC Re ratings is its dependence on EMCC as a production source.
The ratings of EMCI reflect the capital strength of its property/casualty insurance subsidiaries, the support of EMCC and the absence of financial leverage, with no public debt outstanding.” Best listed the companies covered by the rating action as follows: The FSR of A- (Excellent) and ICR of “a-” have been affirmed for EMC Insurance Companies and its following affiliates:
* Dakota Fire Insurance Company
* EMC Property and Casualty Company
* EMCASCO Insurance Company
* Employers Mutual Casualty Company
* Hamilton Mutual Insurance Company
* Illinois EMCASCO Insurance Company
* Union Insurance Company of Providence

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A-‘ (Excellent) and issuer credit rating (ICR) of “a-” of Penn Millers Insurance Group, which includes Penn Millers Insurance Company. Best also affirmed the FSR of ‘B++’ (Good) and ICR of “bbb+” of Penn Millers’ wholly owned, but separately rated affiliate, American Millers Insurance Company, as well as the ICR of “bbb-” of the publicly traded holding company parent, Penn Millers Holdings Corporation. All of the companies are domiciled in Wilkes Barre, PA. The outlook for all of the ratings is stable. The ratings reflect Penn Millers’ “significant presence in the agri-business market segment and capitalization enhanced by proceeds from Penn Millers Holdings’ 2009 IPO,” Best explained. In addition Best said the “positive rating factors are supported by the company’s established market position, long-term agency relationships and strong loss control services within the agri-business market.” As partial offsetting factors Best cited Penn Millers’ “below average underwriting results, primarily driven by high expense ratios and overall unprofitable commercial lines book, which represents approximately one-third of its overall writings. Further impacting results has been the increased frequency of large storms, which led to increased losses in both 2008 and 2010.” Best pointed out, however, that “management is committed to improving underwriting results by increasing the quality of its commercial lines writings and continues to focus on underwriting discipline within its agribusiness segment. Nonetheless, the group will be challenged to improve underwriting results given current soft market conditions, exposure to weather-related losses and its heightened expense structure.” Best added that the rating of American Millers reflects its “strong capitalization and operating performance in addition to the support it receives from its parent, Penn Millers Insurance.” As offsetting factors Best cited “the company’s modest business profile and its dependence on Penn Millers to generate all of its business. All of American Millers’ primary business is written through Penn Millers, with American Millers providing excess of loss reinsurance to the parent company for property losses above $450,000 up to $500,000.” The report also noted that “Penn Millers Holdings raised $45.2 million through its IPO in October 2009 and, after expenses, infused $25 million into Penn Millers Insurance and retained approximately $15 million. Funds from the IPO were also used to pay down its existing debt. Penn Millers Holdings’ ICR of “bbb-” largely reflects the operations at its wholly owned subsidiary, Penn Millers Insurance.”

A.M. Best Co. has upgraded the issuer credit ratings (ICR) to “a+” from “a” and affirmed the financial strength rating of ‘A’ (Excellent) of Iowa-based FMH Insurance Group and its members. FMH is comprised of Farmers Mutual Hail Insurance of Iowa and Farmers Union Co-Op Insurance Company, Inc. The outlook for all of the ratings is stable. The ratings reflect FMH’s “excellent capitalization, historically solid operating performance, strong agency relationships and the benefits derived from its market presence within the crop/hail and multiple peril crop insurance (MPCI) sectors,” Best explained. 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 their highly specialized lines of business.” As partial offsetting factors Best cited “the operational risk that changes in the agricultural marketplace will hinder execution of FMH’s business plan or that government changes in the agricultural crop insurance program will run counter to the company’s business plan; reliance on reinsurance; and potential for underwriting volatility with continued exposure to weather-related catastrophic events.” Best added that the stable outlook recognizes its expectation that “FMH will sustain strong underwriting and operating results over the near term and capitalization will remain well supportive of its ratings.”

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