Ratings Recap: Church Mutual, Ocean Harbor, HSBC (Del.), Golden RRG, Southern Pioneer, Affirmative

June 20, 2012

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and downgraded the issuer credit ratings (ICR) to “a” from “a+” of Wisconsin-based Church Mutual Insurance Company. The outlook for both ratings is stable. The rating actions reflect Church Mutual’s “poor underwriting results in recent years, which deteriorated sharply relative to historical results, driven primarily by losses associated with the high frequency of weather-related events,” Best explained. “Further impacting results are the competitive market conditions within the religious institutions marketplace. Given the company’s weakened underwriting results and reduced net investment income on declining bond yields, Church Mutual’s return measures have fallen in recent years.” However, Best also cited more positive factors including “Church Mutual’s strong capitalization, historically favorable operating performance and prominent position in the religious institutional marketplace.” Best indicated that the company “benefits from management’s extensive knowledge of the church specialty niche market and its strong franchise recognition among the religious community. Church Mutual’s specialty niche focus provides it with sustainable competitive advantages, particularly in terms of pricing, claims adjusting and loss control. The company maintains additional competitive advantages including a cost effective, countrywide direct distribution system with approximately 90 percent of business produced by its direct sales force. The rating further acknowledges the company’s historically prudent loss reserving standards that have allowed for substantial favorable loss reserve development on prior accident years. In addition, the rating recognizes the added balance sheet protection provided by aggregate stop-loss reinsurance agreements, which reduces the impact of severe catastrophe-related underwriting losses.”

A.M. Best Co. has removed from under review with negative implications and downgraded the financial strength rating (FSR) to ‘B’ (Fair) from ‘B+’ (Good) and issuer credit ratings (ICR) to “bb+” from “bbb-” of Ocean Harbor Casualty Insurance Company (OHCIC), headquartered in New York City, and its newly acquired reinsured affiliate, Hawaiian Insurance and Guaranty Insurance Company, Limited (HIG). Best also removed from under review with developing implications and affirmed the FSR of ‘B’ (Fair) and ICR of “bb+” of Indianapolis-based Great Northwest Insurance Company (GNW). Best explained that the rating actions “follow the acquisition by RM Ocean Harbor Holding, Inc. (RMOHHI) on behalf of its primary insurance operating company, OHCIC. The outlook assigned to the ICRs is negative, while the outlook assigned to the FSR is stable.” Best said the ratings and outlook “reflect OHCIC’s weakened risk-adjusted capitalization following its acquisition of the stock of GNW Holding, Inc. and its two wholly-owned subsidiaries, GNW and HIG. Additionally, the ratings and outlook reflect the January 31, 2012 corporate reorganization and divestiture of Safe Harbor Insurance Company into an affiliated stand-alone entity, and GNW Holding, Inc. becoming an intermediate holding company between OHIG and RMOHHI. Due to this restructuring, GNW Holding, Inc.’s ICR of “b” has been withdrawn. Following the acquisition, OHIG’s net underwriting leverage and reinsurance dependence measures increased from the assumed premiums and liabilities and compare unfavorably to its respective composite measures.” Best also noted that this “geographic and product line expansion brings with it additional property exposure to hail and wind perils, potential unfavorable judicial and regulatory changes and competitive market dynamics, which contributed to the group’s increased risk profile. Furthermore, although the group has a comprehensive reinsurance program to mitigate catastrophe losses, it has increased its retained level of risk from catastrophes.” As more positive factors Best cited “OHIG’s five-year operating profitability, albeit declining, which includes the five-year operating results of GNW and HIG. Operating profitability was derived primarily from the group’s conservative bond portfolio, which generated consistent investment income over the latest period and offset underwriting losses. Additionally, OHIG has had favorable loss reserve development primarily from its lead member, OHCIC. There may be future positive rating and/or outlook changes if OHIG generates sustained operating income that grows policyholders’ surplus and increases risk-adjusted capitalization as reflected by Best’s Capital Adequacy Ratio (BCAR) capital model.” However, Best indicated that “there may be future negative rating actions if the group’s operating performance deteriorates and erodes policyholders’ surplus or there is a further decline in its risk-adjusted capitalization as reflected by BCAR.”

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of HSBC Insurance Company of Delaware, both with stable outlooks. The ratings reflect HSBC Insurance Company’s “excellent level of risk-adjusted capitalization and historically strong underwriting and operating performance,” said Best. As a partial offsetting factor Best cited “the company’s premium reductions over the past five years driven by the termination of a 50 percent coinsurance agreement with an affiliate, Household Life Insurance Company. In addition, premiums also have been impacted by the decision of the company’s parent, HSBC Finance Corporation (HSBCFC), to no longer accept new business and close its consumer lending branch offices in the United States. The lending business of HSBCFC was historically a significant source of business for HSBC Insurance Company. While the adjustment of the quota share agreement (from 20 percent to 50 percent) for Lender’s Placed Homeowners’ Insurance with Assurant Inc. generated significant premium growth in 2011, net written premiums in 2011 were down more than 60 percent from the 2007 level.” Best said the outlook reflects its “expectation that HSBC Insurance Company will continue to generate solid operating earnings along with maintaining its strong risk-adjusted capitalization and solid liquidity position. While the ratings for HSBC Insurance Company are stable, future positive rating actions may result from its continued strong underwriting and operating performance, which outperformed its peers for a period of time, in conjunction with stabilization of the company’s product mix. However, negative rating actions could result if HSBC Insurance Company’s underwriting and operating performance falls markedly short of Best’s expectations or if there is a significant deterioration in the company’s risk-adjusted capitalization.”

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 Las Vegas-based Golden Insurance Company, RRG, and has revised its outlook for the ratings to negative from stable. Best said the downgrading of the ratings “reflects Golden’s negative overall results and underwriting trends that could be exacerbated if the housing market continues to slump and pressures Golden’s premium volume as well as its capital market volatility mutes investment yields and income.” Best also indicated that the rating downgrades reflect its “concerns with Golden’s current risk management processes and the necessity to restate and refile its December 31, 2011 statutory financial statements with the Nevada Department of Insurance. Factors that could result in future negative rating actions include additional deterioration in Golden’s underwriting results or a decline in its risk-based capitalization. Potential factors that could result in positive rating actions are improved underwriting results, surplus appreciation and tangible enhancements to its enterprise risk management processes.”

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘B++’ (Good) and the issuer credit rating (ICR) of “bbb+” of Arkansas-based Southern Pioneer Property & Casualty Insurance Company. Best confirmed the stable outlook for the FSR, but revised the outlook for the ICR to negative from stable. The affirmation of Southern Pioneer’s ratings reflects its “conservative underwriting leverage measures, demonstrated track record of favorable reserve development and solid liquidity,” Best said. “The ratings also reflect the company’s niche expertise in its chosen markets utilizing multiple distribution sources and the recent underwriting actions and improved technology infrastructure, which should enable the company to return to profitability.” Best explained that the “revised outlook for Southern Pioneer’s ICR reflects the company’s deterioration in underwriting performance and earnings in recent years as a result of storm-related losses generated from its personal lines business (homeowners, dwelling fire and vacant dwelling), and a continued elevated expense structure. Downward rating pressure could result from continued margin compression, a continuation of severe weather-related events in key operating territories and management’s inability to lower expenses.”

A.M. Best Co. has downgraded the financial strength rating (FSR) to ‘C’ (Weak) from ‘C+’ (Marginal) and issuer credit ratings (ICR) to “ccc” from “b-” of Illinois-based Affirmative Insurance Company and its subsidiaries, collectively known as Affirmative Insurance Group. Best also affirmed the FSR of ‘C’ (Weak) and the ICR of “ccc” of Affirmative Insurance Company of Michigan (AICMI). Best then withdrew the ratings of AICMI at the company’s request. In addition, Best has downgraded the ICR to “c” from “cc” of the parent company, Texas-based Affirmative Insurance Holdings, Inc. The outlook for all of the ratings is negative. The downgrades of the members of the Affirmative Insurance Group “reflect its weak risk-adjusted capitalization based on Best’s Capital Adequacy Ratio (BCAR) and unfavorable operating results,” the report explained. “Earnings for 2011 fell significantly below projections, and underwriting performance in recent years has been adversely impacted by losses mainly from competitive pricing, higher than expected severity of automobile personal injury protection claims and adverse reserve development.” Best also noted that the “group’s operating history was marked by weak internal controls over operations and aggressive growth in challenging markets. In addition, financial leverage at Affirmative is excessive due to debt, and its debt servicing ability is contingent upon fee income generated from insurance company production. Premium growth has been down significantly over the last five years, and a continuation of this trend may result in lower fee income to service the debt.” Best added that in its opinion “the holding company carries an above average risk of default on its debt, which puts pressure on the ratings of its insurance subsidiaries. However, the insurance subsidiaries may not pay dividends without prior regulatory approval due to their negative unassigned surplus positions.” Best did indicated that these “concerns are partially offset by remedial action begun in 2010, with a change in senior management, discontinued operations in Florida and Michigan, cancellation of unprofitable agents, increased premium rates, stricter underwriting and internal controls and actions to reduce expenses. As a result of the decision to exit the Michigan non-standard auto market, AICMI was placed in voluntary run-off, and management has requested that the ratings for this company be withdrawn.” Best said the “negative outlook reflects the organization’s continued negative trend in capitalization, operating performance and financial leverage and the challenges management faces to make significant lasting improvements given weak economic conditions and challenging underwriting and investment markets. The ratings may be further downgraded if capitalization continues to weaken. However, a favorable earnings trend that leads to capital appreciation without excessive growth may lead to a stable ratings outlook and potentially a ratings upgrade.” A summary of the ratings is as follows: The FSR has been downgraded to ‘C’ (Weak) from ‘C+’ (Marginal) and the ICR to “ccc” from “b-” for the following members of Affirmative Insurance Group: Affirmative Insurance Company; Insura Property and Casualty Insurance Company, Inc.; USAgencies Casualty Insurance Company, Inc.

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