Ratings Recap: DTRIC, Kansas Bankers, ProAssurance, American Federated

June 15, 2012

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A-‘ (Excellent) and issuer credit ratings (ICR) of “a-” of Honolulu-based DTRIC Insurance Company Limited and its reinsured affiliate, DTRIC Insurance Underwriters, Limited. The outlook for all of the ratings is stable. The ratings reflect DTRIC’s “adequate risk-based capitalization, prudent reserving practice and improving operating performance,” said Best. The ratings also “consider the explicit support from DTRIC’s Japan-based parent, Aioi Nissay Dowa Insurance Company Limited, as it participates in DTRIC’s major reinsurance arrangements and provides a financial guarantee.” Best described DTRIC’s risk-based capitalization as remaining “adequate. In view of the increase of DTRIC’s exposure to natural catastrophe risk due to its business growth and change in business mix, it has reviewed its reinsurance arrangement and increased its reinsurance protection. DTRIC also reviews its catastrophic exposures regularly to ensure that it is adequately protected. DTRIC’s operating performance has improved in fiscal year 2011. The 93 percent combined ratio in 2011 is the lowest in the most recent five years, and the consistent investment return also contributes to its favorable operating result in 2011.” As partial offsetting factors Best cited the “prevailing soft market conditions in Hawaii and the potential impact from natural catastrophes.” However, the report also noted that “DTRIC has been tightening its underwriting standards in certain targeted lines of business and gradually putting more focus on profitable market segments in view of the competitive insurance market in Hawaii. Nonetheless, operating performance will still be affected by the recovery pace of the economy and the company’s investment return. Assessing the impact of natural catastrophes is a major challenge because of data limitation. Historical catastrophe events that caused major economic losses had occurred long time ago. These factors create additional difficulties for DTRIC to estimate the frequency and severity of its potential catastrophic losses from its growing exposure. Best believes DTRIC is well positioned at its current rating level. Factors that could result in negative rating actions include a significant decline in risk-adjusted capitalization or deterioration in operating performance.”

A.M. Best Co. has affirmed the financial strength rating of ‘A++’ (Superior) and issuer credit rating of “aa+” of Kansas Bankers Surety Company, both with stable outlooks. The ratings reflect Kansas Bankers’ “superior risk-adjusted capitalization, historical operating profitability, solid balance sheet liquidity measures and strong niche market presence of serving the small to medium-sized commercial bank market,” Best explained. “The positive rating attributes are supported by Kansas Bankers’ conservative underwriting leverage measures, high quality balance sheet and brand recognition among Midwest regional commercial banks, a market the company has served for decades. In addition, Kansas Bankers maintains a relatively conservative investment portfolio that has avoided sizeable realized and unrealized investment losses over the recent five-year period. Furthermore, management continues to emphasize profitability over top-line growth, as demonstrated by the decision in 2008 to discontinue its Bank Deposit Guaranty Bond product, which made up approximately 50 percent of its premium writings in previous years. Lastly, the ratings recognize the additional financial flexibility and support provided by Kansas Bankers’ publicly traded parent company and ultimate shareholder, Berkshire Hathaway Inc.” As partial offsetting factors Best cited “Kansas Bankers’ lackluster operating results in recent years, which have been strained by underwriting losses in the Bank Deposit Guaranty Bond and Directors and Officers (D&O) products. In addition, the company maintains business concentration risks arising from its product and geographic focus. The company has a limited product diversification profile, focused solely on the banking industry. Its two largest products, D&O Indemnity and Bank Lender Liability and Financial Institution Crime Bonds account for more than 75 percent of premium volume. In addition, with a heavy concentration in the Midwest, the company’s top five states account for more than 70 percent of direct premiums written.” Best said “these factors leave the company more susceptible to regulatory, legislative, economic and competitive environment changes than more diversified peers. Despite these concerns, the outlook reflects Kansas Bankers’ superior risk-adjusted capitalization, proven expertise in its niche market and management’s ability to quickly adapt to changing market conditions in the banking industry.” Best added that it “believes Kansas Bankers is well positioned at its current rating level. However, negative rating actions could occur if operating performance falls markedly short of Best’s expectations, if there is a considerable deterioration in risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio, or if Best determines that the group’s strategic importance to its parent no longer warrants rating enhancement.”

A.M. Best Co. has upgraded the issuer credit ratings (ICR) to “a+” from “a” and affirmed the financial strength rating (FSR) of ‘A’ (Excellent) of the subsidiaries of Alabama-based ProAssurance Corporation (PRA), collectively referred to as ProAssurance Group. The outlook of the FSR has been revised to positive from stable, while the ICR remains positive. Best also upgraded the ICR of PRA to “bbb+” from “bbb”, as well as the indicative debt ratings under the shelf registration to “bbb+” from “bbb” on the senior unsecured debt, to “bbb” from “bbb-“on the subordinated debt and to “bbb-” from “bb+” on the preferred stock of PRA. The outlook assigned to these ratings remains positive. In addition Best affirmed the FSR of ‘A-‘ (Excellent) and ICRs of “a-” of ProAssurance National Capital Insurance Company, which is based in Washington D.C. The outlook for these ratings remains positive. Best has also affirmed the FSR of ‘A’ (Excellent) and ICR of “a” of Illinois-based Podiatry Insurance Company of America (PICA) and the FSR of ‘A-‘ (Excellent) and ICR of “a-” of PACO Assurance Company, Inc. The outlook for PICA’s ratings is stable, while the outlook for PACO’s ratings has been revised to stable from negative. Best explained that the “upgrading of the ICR of ProAssurance reflects its excellent capital strength, strong national business profile and extended trends of favorable operating performance. The company’s solid underwriting performance is driven by conservative reserving practices, disciplined underwriting standards and a proactive claim handling philosophy based on its localized expertise. The rating also considers the leading market position the organization holds across multiple jurisdictions. The rating also acknowledges the depth and breadth of the organization’s enterprise risk management programs and policies.” Best said the “outlook is based on the expectation of continued superior favorable performance across multiple facets of the organization.” As a partial offsetting factor Best noted “ProAssurance’s product concentration in the highly cyclical medical professional liability market. This risk is mitigated somewhat by ProAssurance’s wide jurisdictional diversification, along with growth in premium writings in legal professional liability. The rating upgrades further reflect the financial flexibility afforded to PRA’s subsidiaries. PRA’s financial leverage is very conservative, interest coverage is strong, and it holds significant levels of cash and short-term investments outside of the insurance operating companies that are available for use without regulatory approval. The FSR of ‘A’ (Excellent) was affirmed, and the ICR was upgraded to “a+” for the following subsidiaries of ProAssurance Corporation: ProAssurance Casualty Company, ProAssurance Indemnity, Company, Inc. ProAssurance Specialty Insurance Company, Incorporated.”

A.M. Best Co. has placed under review with negative implications the financial strength rating (FSR) of ‘B++’ (Good) and issuer credit rating (ICR) of “bbb” of American Federated Insurance Company and the FSR of ‘B+’ (Good) and ICR of “bbb-” of its sister company, American Federated Life Insurance Company, known collectively as American Federated Insurance Companies. The American Federated Insurance Companies are wholly owned subsidiaries of First Tower Corp., a multiline specialty finance company. The rating actions reflect the disclosure of a definitive agreement under which Prospect Capital Corporation “will acquire 80.1 percent of First Tower, with the remaining 19.9 percent of the shares being retained by First Tower management,” Best explained. “Prospect is a closed-end investment company that lends to and invests in private and microcap public businesses. The ratings will remain under review until the close of the transaction, discussions with new ownership about its plans and completion of Best’s analysis of its impact on the companies’ ratings.”

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