Ratings Roundup: McMillan-Warner, Republic, School Boards

February 24, 2012

A.M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Wisconsin-based McMillan-Warner Mutual Insurance Company (MWM). Best explained that the revised outlook reflects MWM’s “unfavorable underwriting performance over the recent two-year period, which has constrained surplus growth. The underwriting losses stemmed primarily from significant wind and hail claims activity due to the company’s concentration of business in one state, which has led to declines in underwriting and operating cash flows.” In addition Best noted that “MWM’s elevated investment leverage exposes its surplus to equity market volatility. Nevertheless, MWM continues to maintain excellent risk-adjusted capitalization, stemming primarily from its conservative underwriting leverage. The ratings also consider MWM’s historically positive operating performance prior to 2010, which resulted in positive earnings in years of modest catastrophe activity. The ratings of MWM could be downgraded if it continues to have negative operating results caused by underwriting losses that result from inadequate pricing of weather-related exposures and/or reduced reinsurance recoveries, which may cause further erosion of its surplus. The removal of the negative outlook could result from several years of improved operating performance based on underwriting profitability and surplus growth while maintaining excellent risk-adjusted capitalization.”

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A-‘ (Excellent) and issuer credit ratings (ICR) of “a-” and revised the outlook to negative from stable of the Dallas-based Republic Group and its property/casualty members. The revised outlook reflects the group’s “weakened underwriting performance in recent years and adverse reserve development occurring in earlier accident years, which remains a focus of ongoing management initiatives,” Best explained. The report also observed that the “underwriting losses primarily stemmed from catastrophe-related claims activity since 2008. Republic has been exposed to hurricane losses as well as localized wind, hail and tornado claims, arising from recent extreme weather anomalies. Adverse reserve development is primarily due to the commercial lines segment. Republic’s adverse reserve development results in an increase in its loss reserves and is not an immediate cash outflow item. In addition, Republic maintains a geographic concentration of risk. With approximately 60 percent of its direct premiums written in Texas, the group is subjected to above average risks from changes in the economic, judicial and regulatory environment, as well as localized competition and weather-related events.” On the plus side Best pointed out that despite these concerns, “Republic sustains excellent risk-adjusted capitalization, which is derived from its reasonable underwriting and investment leverage. Furthermore, Republic maintains sound risk management, which includes a thorough underwriting process, a prudent reinsurance program and a long-standing local market presence. The ratings also consider the company’s ongoing initiatives designed to improve underwriting performance. Factors that could result in future negative rating actions include a continued deterioration in Republic’s underwriting performance, continued adverse reserve development or a significant erosion of its capital base. Key rating triggers that could result in the removal of the negative outlook include sustained improvement in Republic’s underwriting performance, while maintaining strong risk-adjusted capitalization.” Best summarized the companies whose ratings are affected by its actions as follows: The FSR of ‘A-‘ (Excellent) and ICRs of “a-” have been affirmed for The Republic Group and its following property/casualty members: Republic Fire and Casualty Insurance Company; Republic Lloyds; Republic Underwriters Insurance Company; Republic-Vanguard Insurance Company; Southern County Mutual Insurance Company; Southern Insurance Company; Southern Underwriters; Insurance Company and Southern Vanguard Insurance Company.

A.M. Best Co. has downgraded the financial strength rating to ‘B+’ (Good) from ‘A-‘ (Excellent) and issuer credit rating to “bbb-” from “a-” of School Boards Insurance Company of Pennsylvania, Inc. (SBIC), and has revised its outlook on both ratings to stable from negative. The rating actions “reflect several consecutive years of variability in SBIC’s underwriting performance, which has resulted in large net losses in recent years,” Best explained. The deterioration in the company’s underwriting results “was primarily driven by losses in its workers’ compensation program, adverse reserve development occurring on earlier accident years, large property losses and its declining premium volume.” Best also noted that SBIC “has undertaken numerous strategic initiatives to improve underwriting profitability, including an innovative approach to determining adequate premium levels, implementing a new workers’ compensation injury management (claims) model and restructuring the company’s reinsurance program to minimize exposures.” Nonetheless, Best continued, “SBIC may be somewhat challenged to achieve a similar level of profitability as it had in the past due to increasing competition that is driven by the soft market, increasing reinsurance costs, a strict regulatory environment, as well as a litigation environment that lends to uncertainty with regard to claim emergence. Despite these concerns, the outlook reflects SBIC’s strong capital position, management’s local market knowledge and expectations of improvement in operating performance despite ongoing competitive market conditions.” Best pointed out that “SBIC provides a broad range of property and liability coverages to public schools in Pennsylvania that are eligible members of the Pennsylvania School Boards Association. While positive rating actions are unlikely for SBIC in the midterm, the potential for downward rating pressure over the near term includes ongoing weak operating earnings due to further deterioration in its underwriting performance, which weakens the company’s overall capitalization. Conversely, factors that could result in upward rating actions include a significant improvement in SBIC’s operating earnings as well as the resulting return on revenue measures, which can be sustained over a period of time. Accordingly, this would improve the company’s ability to generate additional organic surplus growth while strengthening overall capitalization.”

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