Ratings Recap: Standard Casualty, Grinnell, Erie & Niagara, Northwest GF Mutual

November 23, 2011

A.M. Best Co. has upgraded the financial strength rating to ‘A-‘ (Excellent) from ‘B++’ (Good) and issuer credit rating to “a-” from “bbb” of Texas-based Standard Casualty Company, and has removed both ratings from under review with negative implications and assigned a stable outlook. Best explained that Standard Casualty’s ratings “had previously been downgraded on September 17, 2010, due to the uncertainty of its former parent company, Palm Harbor Homes, Inc.’s credit facility, debt obligations and liquidity requirements, which could have resulted in a potential burden on Standard Casualty. The ratings of Standard Casualty were placed under review on November 22, 2010, based on Palm Harbor’s deteriorating financial condition and the possibility that it might be forced to seek protection under U.S. bankruptcy laws. On November 29, 2010, Palm Harbor and five of its subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Standard Casualty was not included in the filing. In March 2011, Palm Harbor’s assets were sold to Cavco Industries, Inc. in a process pursuant to Section 363 of the Bankruptcy Code, and in June 2011, the acquisition of Standard Casualty was completed, following regulatory approval.” Best explained that the “rating upgrades reflect Standard Casualty’s new structure as a subsidiary of Cavco, one of the leading producers of factory-built homes in the United States. In addition, the ratings recognize Standard Casualty’s solid risk-adjusted capitalization and generally favorable operating performance. While the ratings for Standard Casualty are stable, positive rating actions could occur if there is a sustainable long-term improvement in its operating performance, capital strength and business profile.” However, best also warned that “negative rating actions could occur if there is a prolonged decline in the company’s underwriting profitability and/or considerable deterioration in its capital strength as measured by A.M. Best’s capital model.”

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and issuer credit ratings (ICR) of “a+” of Iowa’s Grinnell Mutual Group and its operating members, Grinnell Mutual Reinsurance Company and Grinnell Select Insurance Company. Best has also revised its outlook on the ICR to negative from stable, while the outlook for the FSR is stable. The revised ICR outlook is “based on Grinnell’s deterioration in underwriting results and operating earnings in recent years,” Best explained. “The deterioration in underwriting results has been driven by unfavorable loss experience on Grinnell’s assumed property reinsurance line of business and an above average underwriting expense ratio. Grinnell’s FSR reflects its strong risk-adjusted capitalization, moderate five-year operating performance, focused operating strategy and well-established market position as a leading reinsurer of farm mutuals in the Midwestern United States.” Best also noted that “Grinnell provides reinsurance and direct coverages to regional farm mutual companies that are statutorily limited to writing property business only. The relationship with the farm mutuals creates a strategic advantage for Grinnell, allowing it to penetrate the small towns and rural areas of its operating territory. This is accomplished through the independent agencies whose farm mutual business Grinnell reinsures. Management is focused on continuous improvement of underwriting results and operating efficiency. Recent initiatives include rate increases in virtually all lines of business, tightened underwriting controls, intensive training sessions aimed at improving underwriting and claims processes and streamlined operations by reorganizing its previously regionalized marketing structure to one which is more function oriented.” As partial offsetting factors Best cited “Grinnell’s concentration of risk within the Midwest and corresponding exposure to severe weather-related losses. Grinnell’s exposure to adverse weather patterns in the Midwest has been illustrated in recent years as it experienced severe weather-related losses, primarily in its assumed property reinsurance business, which resulted in a combined ratio above breakeven. This deterioration in underwriting results has tempered operating earnings and surplus growth in recent years. The unfavorable loss experience for the assumed property reinsurance business also was driven by inadequate rates for this line of business. In addition, the volatility inherent in Grinnell’s book of business also has led to a greater dependence upon reinsurance to mitigate its catastrophe exposure. Furthermore, Grinnell maintains an above average underwriting expense ratio, which is driven by an elevated commission expense due to its independent agency structure. Grinnell remains challenged to maintain its high operational standards, given the significant exposures inherent in writing weather-sensitive insurance products in the rural Midwest. With Grinnell’s negative ICR outlook, a downgrading of the ICR could result from a continuation of unfavorable operating performance and/or surplus deterioration.”

A.M. Best Co. has upgraded the issuer credit rating to “a+” from “a” and affirmed the financial strength rating of ‘A’ (Excellent) of New York’s Erie and Niagara Insurance Association, both with stable outlooks. The rating actions “reflect Erie and Niagara’s very strong risk-adjusted capitalization, sustained operating profitability throughout various market cycles, conservative leverage measures and favorable balance sheet liquidity,” said Best. “These positive rating factors are the result of Erie and Niagara’s modest underwriting leverage and strong underwriting results, which reflect the company’s extensive knowledge of its market. Despite current soft market conditions and elevated commission expense ratios, Erie and Niagara’s underwriting results have remained profitable since 2003.” Best added that the “outlook is reflective of its strong risk-adjusted capitalization, as well as Best’s expectation that Erie and Niagara” will continue to generate profitable underwriting and operating results.” As partial offsetting factors Best cited Erie and Niagara’s “adverse loss reserve development reported over the past 10 years and its underwriting and regulatory risks associated with being a mono-state insurer.” However, Best also indicated that the company “has settled the majority of claims that generated adverse loss development over the past ten years, which should help lessen the potential for future adverse development. Despite heighten storm activity throughout the Northeast, the company is expected to report underwriting earnings in 2011. Erie and Niagara is an assessment co-operative property/casualty insurer that does not write business in the five boroughs of New York City or Long Island. The company underwrites business in both personal and commercial lines of insurance, including commercial multiple peril, homeowners, fire, farm owners, landlord packages, manufactured home and inland marine.” Best said it believes Erie and Niagara “is well positioned at its current rating level in the near to medium term. Factors that may lead to negative rating actions include a material deterioration of risk-adjusted capital, diminishing trends in its operating performance or (given its single state operating territory) future regulatory changes that have a measurable impact on operating results.”

A.M. Best Co. has downgraded the financial strength rating to ‘B-‘ (Fair) from ‘B+’ (Good) and issuer credit rating to “bb-” from “bbb-” of South Dakota-based Northwest G.F. Mutual Insurance Company, and has assigned a negative outlook to both ratings is negative. The rating downgrades for Northwest are “due to its decline in overall risk-adjusted capitalization and its continued poor underwriting operating performance. In recent years, the company has been impacted by frequent and severe weather related events as well as the financial crisis in 2008,” Best explained. As a result, “pre-tax operating losses and negative net income have been reported for three consecutive years with this trend continuing in 2011. Significant surplus declines were reported in 2008, 2010 as well as through the third quarter of 2011, when the company’s surplus declined an additional 37.5 percent with the combined ratio escalating to 124.9 percent. These results primarily are due to significant underwriting losses caused by frequent tornado/hail storms in Northwest’s core operating territories of the Dakotas. In recent years, Northwest’s ongoing negative underwriting performance has mainly derived from frequent weather-related losses, which continue to hinder its capital position. These losses combined with the company’s recent growth in premium writings have resulted in an erosion of its risk-adjusted capital position and an increase in its underwriting leverage ratios.” Best did point out, however, that “Northwest has implemented several corrective actions to improve profitability, which include policy count reduction, curtailing of writing policies in more catastrophe prone areas, increase rates and tighten underwriting standards. However, if Northwest’s negative trends in declining overall risk-adjusted capitalization and adverse operating performance continue it could result in further deterioration of the company’s ratings as reflected by the continuation of the negative outlook. Conversely, there could be positive movement in the current ratings and/or outlook if there were a sustained turnaround in the currently poor underwriting and operating results, along with a sustained improvement in the company’s risk-adjusted capital position.”

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