Ratings Roundup: Park, Farmers of Salem, Auto-Owners, DTRIC

June 10, 2011

A.M. Best Co. has downgraded the financial strength rating to ‘C++’ (Marginal) from ‘B-‘ (Fair) and issuer credit rating to “b” from “bb-” of New York’s Park Insurance Company, and has assigned a negative outlook to the ratings. Best said it had based the ratings “on Park’s rapid premium growth in each of the past three years, and its capitalization, which is marginal, as net premiums have grown excessively as compared to the company’s surplus. Other negative factors are the limited geographic scope and operating volatility associated with the ramp-up of the company. Park also recently began writing coverage for other commercial transportation, which is not in its niche market of ready-mix concrete.” As partial offsetting factors to the negative view, Best cited “a management team with strong niche market expertise and a solid working relationship with agents and accounts. Park provides commercial auto and general liability coverage on a per occurrence basis to accounts involved in the commercial transportation and ready-mix concrete business.” In addition Best noted that “Park has a risk management program in place, in which drivers must meet strict requirements, including drug testing and Department of Motor Vehicle record checks. As a component of the risk management program, Park requires each vehicle to be inspected and meet strict criteria prior to accepting the account. The drivers are considered professionals and remain with the companies for the long term, resulting in low turnover rates. Park has implemented the required technology platform enabling it to quote, bind and issue policies.”

A.M. Best Co. has revised the outlook to positive from stable and affirmed the financial strength rating of ‘B++’ (Good) of new Jersey-based Farmers Mutual Fire Insurance Company of Salem County. Best also upgraded the issuer credit to “bbb+” from “bbb” and revised the outlook on this rating to positive from stable. The positive rating actions “reflect Farmers of Salem’s strong operating earnings and solid risk-adjusted capitalization,” said Best. “The ratings also recognize Farmers of Salem’s prudent catastrophe management initiatives and local market expertise. These positive rating factors are reflective of management’s conservative underwriting strategy, which has resulted in strong surplus growth.” As a partial offsetting factor Best cited “Farmers of Salem’s property concentration in New Jersey. Although the company maintains predominantly a single-state geographic concentration, exposure is spread out throughout the state. However, a single state geographic concentration exposes earnings to catastrophic losses as well as market and regulatory concerns.”

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A++’ (Superior) and issuer credit ratings (ICR) of “aa+” of Auto-Owners Insurance Group (AOIG) and its members. AOIG is comprised of five property/casualty companies led by Auto-Owners Insurance Company and its four wholly owned subsidiaries. Best also affirmed the FSR of ‘A+’ (Superior) and ICR of “aa-” of Auto-Owners Life Insurance Company (AOLIC), a wholly owned subsidiary of Auto-Owners. The outlook for all ratings is stable. All companies named above are domiciled in Lansing, Mich. The ratings reflect “AOIG’s superior capitalization, trend of solid operating income, experienced management team, commercial and personal product offerings and long-standing agency relationships,” said Best. In addition, the group possesses strong risk management techniques and a well-established market position.” As partial offsetting factors Best cited AOIG’s “modest premium growth and trend of underwriting losses over the recent five-year period. The group has significant premium volume in Michigan, which exposes it to challenging economic, legislative and regulatory environments.” Best also indicated that as a “member of the Michigan Catastrophic Claims Association, AOIG is somewhat exposed to rising retentions and credit risk of collecting on its largest reinsurance recoverable. Over the recent three-year period, Auto-Owners reported underwriting losses primarily due to above average weather-related losses emanating from Midwestern tornado/hail, winter storms and the inland effects from Hurricane Ike.” Best said the ratings of Auto-Owners Life reflect its “integral role as the life member of AOIG, favorable level of risk-adjusted capitalization, recent trends of increased life and annuity premiums and consistent trend of operating income, particularly in its ordinary life line of business. Partially offsetting rating factors include Auto-Owners Life’s small contribution to the group, large exposure to interest sensitive fixed annuities and its limited business profile, which is highly dependent on the parent company’s property/casualty business. Best summarized the ratings affected as follows: The FSR of ‘A++’ (Superior) and ICR of “aa+” have been affirmed for Auto-Owners Insurance Group and its following members:
* Auto-Owners Insurance Company
* Home-Owners Insurance Company
* Owners Insurance Company
* Property-Owners Insurance Company
* Southern-Owners Insurance Company

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A-‘ (Excellent) and issuer credit ratings (ICR) of “a-” of DTRIC Insurance Company Limited (DTRIC) and its reinsured affiliate, DTRIC Insurance Underwriters, Limited. The outlook for all ratings is stable. Both companies are domiciled in Honolulu, Hawaii. The ratings reflect DTRIC’s “adequate risk-based capitalization, prudent reserving practice, various distribution channels and stable loss ratio over the past five years, despite the highly competitive environment in its marketplace,” said Best. The ratings also consider the explicit support from DTRIC’s Japan-based parent, Aioi Nissay Dowa Insurance Company Ltd., as it “participates in DTRIC’s major reinsurance arrangements and provides a financial guarantee. Best also noted that DTRIC’s risk-based capitalization “remains more than adequate to support its current risks as demonstrated by Best’s Capital Adequacy Ratio, which stood at over 200 percent for fiscal year 2010. The company’s claims reserving practice is considered conservative. In addition to its competitive advantage in developing motor business through its strategic alliance with Toyota Motor Corporation’s partner, Servco Pacific Inc., DTRIC targets other alliances to further diversify its premium sources. DTRIC also enjoys administrative and operational services from Royal State Financial Corporation, a minority owner of DTRIC and an affiliate of Royal State Insurance Group.” As partial offsetting factors Best cited “the prevailing soft market conditions, DTRIC’s high cost of doing business in Hawaii and geographic concentration of risks in terms of catastrophe events and regulatory and economic issues.” The report also noted that “DTRIC’s combined ratio increased to 99.3 percent in 2010 from 93.5 percent in 2006 due to the upward trend of the expense ratio, which stood at 37.7 percent in 2010 compared to 31 percent in 2006. As the company operates in a single state, its underwriting performance is exposed to the economic trends and regulatory issues in Hawaii. The competitive market pressures with regard to compensation resulted in the reinstatement of benefits, which had been reduced in 2009 and 2010. The expense ratio is expected to slightly increase in the near term, leading to a thinner buffer to record underwriting profit. DTRIC’s ability to control its cost will be crucial in determining the sustainability of its underwriting margin.”

Topics AM Best

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