Ratings Recap: Gateway, State Mutual, Discovery, Southern Mutual

May 1, 2012

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 St. Louis-based Gateway Insurance Company, and has assigned a negative outlook to both ratings. The rating actions reflect the “substantial deterioration in Gateway’s underwriting and overall operating performance over the past three years, most notably in its long-haul trucking and construction programs, and Florida book of commercial auto lines, as well as the company’s significant operating losses in 2010 and 2011,” Best explained. “Effective May 1, 2012, Gateway will discontinue and begin running off the long-haul trucking program that has contributed significantly to its large operating losses. In addition, there is substantial uncertainty surrounding the company’s operating outlook given the execution risk associated with its operating plans, particularly relating to the planned run-off of its trucking operations; the potential for adverse prior year loss reserve development; and the current competitive environment in property/casualty markets.” However, Best also indicated that these negative rating factors are “largely offset by Gateway’s adequate risk-adjusted capitalization, favorable historical operating results on its core book of commercial auto lines—excluding the Florida business—and the financial flexibility provided by its ultimate parent, Diane M. Hendricks Enterprises, Inc. (DMHE Inc.), which has demonstrated explicit financial and operational support since purchasing the company in 2005. Further negative rating actions could occur if Gateway’s underwriting and overall profitability measures do not meet Best’s expectations, or should DMHE Inc. fail to provide necessary financial support to maintain adequate risk-adjusted capitalization.”

A.M. Best Co. has revised the outlook to stable from negative and affirmed the financial strength rating of ‘B+’ (Good) and issuer credit rating of “bbb-” of Georgia-based State Mutual Insurance Company. Best said the revised outlook reflects State Mutual’s “considerably improved risk-adjusted capitalization primarily due to its entering into two reinsurance agreements on an older ordinary life block of business during 2011. Additionally, the company will benefit from realized capital gains taken from its bond portfolio tied to the reinsurance agreements. Furthermore, the stable outlook acknowledges the company’s ongoing execution of its long-term business plan and improved performance of its mortgage loan portfolio.” Best also noted that while State Mutual’s capitalization is adequate at this time, it “remains concerned about its exposure to real estate related investments and its declining premium income. Although the amount of real estate related holdings within its investment portfolio has been reduced in recent years, these holdings remain high at approximately 140 percent of total surplus, particularly high for a company of State Mutual’s size.” Best said it believes State Mutual is “well positioned at its current rating level in the near term. Factors that could lead to negative rating actions include continued weak operating results, significant losses within its investment portfolio or a material deterioration of its risk-adjusted capital.”

A.M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength rating of ‘B’ (Fair) and issuer credit rating of “bb” of North Carolina-based Discovery Insurance Company. Best explained that the revised outlook “reflects significant operating losses from the impact of adverse loss reserve development in its affiliated workers’ compensation business and losses from three weather-related events, which were exacerbated by the termination of quota share reinsurance, on its non-standard automobile physical damage coverage. As a result of the losses incurred on the affiliated workers’ compensation business effective January 1, 2012, DIC’s management discontinued writing this business and placed the outstanding loss reserves into run off.” As somewhat more positive factors Best cited “DIC’s adequate risk-adjusted capitalization, long-standing agency relationships and local market knowledge in North Carolina. Potential future negative rating actions may occur if there is adverse loss and loss adjustment reserve development on the workers’ compensation run-off reserves and greater than projected losses from weather-related events that result in underwriting and operating losses that further erode surplus.”

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 South Carolina-based Southern Mutual Church Insurance Company (SMCIC), and has revised its outlook for both ratings to negative from stable. The rating actions reflect SMCIC’s “poor underwriting and operating results in recent years, its geographic concentration of risk and its susceptibility to natural catastrophe events, as evidenced by the company’s sizeable catastrophe related losses in recent years and the outcome from its modeled catastrophe loss,” Best explained. “SMCIC’s business profile is somewhat geographically concentrated relative to its rating level, as more than 80 percent of its writings are derived from two southeastern states, which leaves the company exposed to regulatory, competitive and catastrophe risks.” Best said the negative outlook reflects its “concern that further storm activity may materially impact earnings and capitalization as well as the execution risk associated with management’s turnaround efforts.” However, Best also cited “SMCIC’s adequate level of capitalization, management’s efforts to improve operating results going forward and the company’s established presence in its niche market of providing coverages to churches and religious organizations,” as partially offsetting the negative rating factors. Best also indicated that the “company also benefits from strong relationships with its insured base focusing on customer service and efficient claims management. Management continues to tighten underwriting standards, enhance loss prevention measures, while achieving better rate adequacy on new and renewal business as well as refining SMCIC’s reinsurance program. Further negative rating actions may occur if SMCIC’s poor underwriting performance persists, causing a further deterioration in its risk-adjusted capitalization.”

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