Ratings Recap: Stonebridge, RLI Group, Am. Agricultural, ARIC

June 23, 2011

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Stonebridge Casualty Insurance Company, the Columbus Ohio-based property/casualty subsidiary of The Netherlands AEGON N.V., both with stable outlooks. The ratings reflect Stonebridge’s “excellent capitalization, financial and operational support provided by AEGON, the synergies Stonebridge gains from affiliates in the AEGON USA family and management’s knowledge and expertise in the travel insurance market niche,” Best explained. As offsetting factors Best cited “Stonebridge’s varied premium writings and inconsistent underwriting performance.” However, Best explained that, notwithstanding these concerns the rating outlook “reflects Stonebridge’s sustained operating profitability, as well as the commitment of AEGON to maintain a level of capitalization that is supportive of the company’s ratings.”

A.M. Best Co. has revised the outlook to positive from stable and affirmed the issuer credit ratings (ICR) of “aa-” of RLI Group and its members, as well as the financial strength rating (FSR) of ‘A+’ (Superior) of RLI. The outlook for the FSR is stable. Best has also revised the outlook to positive from stable and affirmed the ICR of “a-” of RLI’s publicly traded parent holding company, RLI Corp. In addition Best has revised the outlook to positive from stable and affirmed the debt rating of “a-” on the $100 million 5.95 percent senior unsecured notes, due 2014 of RLI Corp. All the RLI companies are domiciled in Peoria, IL. Best also affirmed the FSR of ‘A’ (Excellent) and ICR of “a+” of Seattle-based Contractors Bonding and Insurance Company (CBIC), a company acquired by RLI Corp. in a deal that was completed in April 2011. The outlook for these ratings is stable. Best said the revised ICR outlook “reflects RLI’s outstanding long-term operating profitability, superior capitalization and excellent business profile as one of the leading specialty property/casualty insurers in the United States. The ratings also reflect the financial flexibility afforded to RLI by RLI Corp.” As partial offsetting factors Best cited the group’s “above average equity leverage and the resulting susceptibility of earnings to the volatility of the financial markets.” Best noted that a “mature book of business written via a well developed underwriting platform and strict adherence to established underwriting and pricing principles have helped drive RLI’s excellent historical operating results. In recent years, RLI has significantly reduced its earthquake exposure, which has helped limit potential volatility in its capitalization. Organically generated earnings have fueled a considerable increase in reported surplus, strengthening the group’s capital position; however, shareholder dividend payments have served to temper retained earnings and surplus appreciation. This was particularly true in 2010 when an extraordinary $208 million in dividends were paid to the parent. The extraordinary dividend was designed to return excess capital to shareholders in addition to funding planned common share repurchases. As an accomplished niche underwriting company, RLI has been able to maintain its strong operating results through focusing on markets considered underserved, thereby insulating it somewhat from the different stages of the market cycle. RLI’s investment philosophy has successfully focused on preserving capital and maintaining adequate liquidity to meet financial obligations. At March 31, 2010, RLI Corp.’s unadjusted debt-to-capital stood at a relatively modest 10.9 percent. Additionally, its coverage ratios, reflecting the ability of generated earnings to cover interest payments and overall fixed charges, were very favorable. The relatively low level of financial leverage and strong fixed charge coverage recognizes the considerable balance sheet strength of RLI Corp. and provides significant financial flexibility to the operating subsidiaries.” Best explained that “RLI is a leading specialty lines insurer with operations conducted on an admitted and non-admitted basis throughout the United States. Principal lines of business include commercial property, facultative property, commercial and personal umbrella, general liability, commercial package, directors and officers, miscellaneous professional liability, fidelity, transportation, surety and marine. During 2010, RLI also entered into an agreement to become a quota share reinsurer of multi-peril crop insurance and crop hail premium and exposure as well.” In addition Best said the rating affirmations of CBIC “recognize its strong risk-adjusted capitalization, historically profitable underwriting and operating results, demonstrated expertise in the surety and small contractor market and the future benefits to be derived from its affiliation with RLI.” However Best also noted that “CBIC’s limited business scope and a slight decline in profitability as market conditions have softened” should be considered as partial offsetting factors. Best said it “expects CBIC to benefit from being able to offer its property/casualty products to RLI clients, while CBIC’s profitable portfolio provides an excellent geographic complement to RLI’s existing surety business. CBIC specializes in providing surety bonds and related niche property/casualty insurance coverage serving over 30,000 contractors via over 4,000 agents and brokers throughout the United States.” Best summarized the ratings affected as follows: The FSR of ‘A+’ (Superior) and ICR of “aa-” have been affirmed for RLI Group and its following members:
* Mt. Hawley Insurance Company
* RLI Indemnity Company
* RLI Insurance Company

A.M. Best Co. has downgraded the financial strength rating to ‘A-‘ (Excellent) from ‘A’ (Excellent) and issuer credit rating to “a-” from “a” of Indianapolis-based American Agricultural Insurance Company (AAIC), and has revised its outlook on both ratings to stable from negative. The rating downgrades “reflect AAIC’s poor underwriting performance and surplus losses in recent years, which have continued into 2011,” Best explained. “AAIC has experienced significant underwriting losses over the past five years, with a five-year average combined ratio that is considerably worse than the reinsurance composite. Although the company has reduced net retained exposure, frequent and severe catastrophe events have resulted in continued underwriting losses.” However, Best also, noted that “AAIC maintains a strong risk-adjusted capitalization, which is derived from its conservative operating strategies. In addition, AAIC maintains a favorable expense structure and has a long standing relationship with the Farm Bureau insurance companies. Furthermore, AAIC’s investment portfolio is relatively conservative, and it has a unique market position as the primary reinsurer to the Farm Bureau insurance companies.”

A.M. Best Co. has revised the outlook to stable from negative and affirmed the financial strength rating of ‘B-‘ (Fair) and issuer credit rating of “bb-” of Alabama-based American Resources Insurance Company, Incorporated (ARIC). Best said the revised outlook ‘reflects ARIC’s improved risk-adjusted capitalization in recent years, which includes the elimination of debt and higher levels of liquid assets. The rating affirmations reflect the continued orderly run off of ARIC’s liabilities, which began in late 2007 when it entered into quota share reinsurance agreements with Hermitage Insurance Company and its wholly owned subsidiary, Kodiak Insurance Company, which effectively led to ARIC ceding off its earned premiums and associated losses and underwriting expenses as of October 1, 2007.” Best added that it would “continue to monitor the uncertainties and execution risk surrounding ARIC’s run-off liabilities over the near to intermediate term.”

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