Ratings Recap: Auto Owners, Stonebridge, Tokio Marine (U.S.), Courtesy, Young America, Old Glory

June 21, 2012

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A++’ (Superior) and issuer credit ratings (ICR) of “aa+” of Auto-Owners Insurance Company and its four wholly owned property/casualty subsidiaries. Together the companies make up the Auto-Owners Insurance Group (AOIG). Best also affirmed the FSR of ‘A+’ (Superior) and ICR of “aa-” of Auto-Owners Life Insurance Company (AOLIC), a wholly owned subsidiary of Auto-Owners. The outlook for all of the ratings is stable. All of the companies named above are domiciled in Lansing, Michigan. Best said the ratings reflect AOIG’s “superior capitalization, historical trend of solid operating income, experienced management team, blend of personal and commercial product offerings and long-standing agency relationships. In addition, AOIG has strong risk management techniques and a well-established market position. As offsetting factors Best noted “the group’s modest premium growth over the recent five-year period, trend of underwriting losses and concentration of business in Michigan and Florida. As these are AOIG’s two leading states, this geographic concentration exposes it to challenging economic, legislative and regulatory environments and weather-related catastrophic events. Additionally, as a member of the Michigan Catastrophic Claims Association (MCCA), AOIG is exposed to rising retentions and credit risk for personal injury protection medical losses.” Best said the “ratings of Auto-Owners Life recognize its steady growth of capital and surplus, strong risk-adjusted capitalization, strong regional market presence and strategic value to AOIG. Challenges faced by Auto-Owners Life include rates of return that are below industry averages, a significant portion of reserves in interest-sensitive products, exposure to spread compression in the current low interest rate environment and a geographic concentration in which a third of total premiums are generated from Michigan.” While Best said it “does not expect to downgrade (or place a negative outlook on) the ratings of Auto- Owners or its subsidiaries in the near to mid term, such actions would ensue if the group were to incur material losses in its capitalization; have a severe reduction in the profitability of its core book of business; be unable to contain its exposure to catastrophic events within its underwriting footprint with the current set of preventative measures that have been recently put in place; or have substantial adverse reserve development relative to its peers, as well as the industry’s averages. In summary Best said: “The FSR of ‘A++’ (Superior) and ICRs of “aa+” have been affirmed for Auto-Owners Insurance Company and its wholly owned subsidiaries: Home-Owners Insurance Company; Owners Insurance Company; Property-Owners Insurance Company; Southern-Owners Insurance Company.

A.M. Best Co. has upgraded the financial strength rating to ‘A’ (Excellent) from ‘A-‘ (Excellent) and issuer credit rating to “a” from “a-” of Ohio-based Stonebridge Casualty Insurance Company, the property/casualty subsidiary of The Netherlands AEGON N.V., both with stable outlooks. The rating actions reflect Stonebridge’s “sustained profitability and further recognition of its role and strategic importance as a member of AEGON’s U.S. operations, the explicit reinsurance support provided by Stonebridge Life Insurance Company (Rutland, VT), as well as the benefits of receiving implied support (if necessary) in the future,” Best explained. In addition, the ratings “recognize Stonebridge’s excellent capitalization, the synergies it gains from affiliates in the United States as well as management’s knowledge, specialty niche expertise and established market position in the travel insurance market. The rating outlook reflects the continuation of operating profitability, expected revenue and profits to be gained from newly established business partnerships as well as a commitment to maintain a level of capitalization that is supportive of its ratings.” Best said it believes that “Stonebridge is well positioned at its current rating level. Negative rating actions could occur if risk-adjusted capital and/or operating performance falls markedly short of Best’s expectations and/or any sudden change in parental support.”

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A++’ (Superior) and issuer credit ratings (ICR) of “aa+” of Tokio Marine and Nichido Fire Insurance Co., Ltd. (U.S. Branch) (TMNF-US) and its reinsured subsidiaries, Tokio Marine America Insurance Company, Trans Pacific Insurance Company and TM Specialty Insurance Company, headquartered in Phoenix, Arizona. Best has also upgraded the FSR to ‘A++’ (Superior) from ‘A’ (Excellent) and ICR to “aa+” from “a” of TNUS Insurance Company. The outlook for all ratings is stable. All of the companies are domiciled in New York, NY, unless otherwise specified. The ratings of TMNF-US and its subsidiaries “reflect the status and critical role these companies play as part of Tokio Marine and Nichido Fire Insurance Co., Ltd.’s (TMNF-Japan) global strategy,” said Best. The report explained that the “primary focus of TMNF-US’ strategy is to support the insurance needs of TMNF-Japan’s clients that are doing business in the United States. The ratings also reflect the strong risk-adjusted capitalization and excellent overall earnings of TMNF-US. The rating upgrades for TNUS reflect the explicit support provided by TMNF-US, in the form of a 100 percent quota share reinsurance contract. The ratings of TMNF-US are a direct extension of the ratings assigned to TMNF-Japan. Therefore, the rating triggers of TMNF-US are the same ratings triggers that pertain to TMNF-Japan. As for TNUS, negative rating triggers could occur if reinsurance support by TMNF-US were either reduced or terminated.”

A.M. Best Co. has affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit rating of “a+” of Florida-based Courtesy Insurance Company, and has revised its outlook on the ratings to stable from positive. The affirmation of Courtesy’s ratings reflects its “solid capitalization, excellent historical operating performance and the additional financial benefits derived from its affiliation with JM Family Enterprises, Inc.,” Best explained. “These rating factors are supported by Courtesy’s favorable pre-tax operating returns, which have benefited from expense controls, pricing discipline and management’s niche market expertise in the auto warranty business,” Best continued. In addition the report noted that “these factors are further supported by the favorable operating synergies and efficient marketing and distribution platforms provided by JM Family, a diversified automotive company with approximately $9 billion in revenue and ranked by Forbes as the 27th-largest privately held company in the United States.” Best said the “revised outlook reflects Courtesy’s captive orientation and the inherent challenges related to the scope of its parent’s business profile, which is concentrated in the U.S. automotive industry. Since Courtesy’s operations are captive in nature, the interdependency among the affiliates of JM Family plays an important role in Courtesy’s ratings. Courtesy is a property/casualty company specializing in a variety of insurance products for retail automotive dealers, which insure obligations assumed under various automotive-related service products. Courtesy is a part of the JM&A Group, which is one of the largest independent providers of finance and insurance products in the automotive industry and a division of JM Family.” Best indicated that “possible upward rating actions on Courtesy’s ratings could result from continued strengthening in the financial condition of JM Family. Conversely, possible downward rating actions could result from a significant decline in the company’s operating performance and capitalization or a significant decline in the financial condition of the parent.”

A.M. Best Co. has removed from under review with negative implications and downgraded the financial strength rating to ‘B’ (Fair) from ‘B++’ (Good) and issuer credit rating to “bb+” from “bbb” of Dallas-based Young America Insurance Company, and has assigned a stable outlook to both ratings. Best concurrently announced that it has withdrawn the ratings as the company has requested to no longer participate in Best’s interactive rating process. Best noted that in the second quarter of 2012, Young America was acquired by the El Paso-based EP Loya Group, LP, which purchased 100 percent of the equity interests of Young America. Loya does not participate in Best’s interactive rating process. Therefore, Best explained, “Young America’s ratings and outlook are based on the most recent financial data available to A.M. Best at year-end 2011 and the company’s first quarter of 2012 financial statements. The rating downgrades reflect Young America’s generally negative operating performance, which was led by underwriting losses four of the last five years. Underwriting losses were primarily due to weather-related events during the latest five-year period. As a result, risk-adjusted capitalization deteriorated in 2011 and continued with a downward trend in the first quarter of 2012 as net premiums written and loss reserves increased sharply, while surplus declined marginally. As a result, underwriting leverage ratios also increased.”

A.M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength rating of ‘B++’ (Good) and issuer credit rating of “bbb” of Texas-based Old Glory Insurance Company. Best said the revised outlook “reflects the declining trend in Old Glory’s underwriting performance over the past several years and the challenges it faces in the near term in its competitive markets. In recent years, the company’s operating results have been driven by less favorable underwriting results associated with premium growth in new markets, competitive pricing conditions and a high expense ratio.” Best also, indicated that the Old Glory’s rating s “reflect its strong risk-adjusted capitalization and expertise in the workers’ compensation marketplace. The ratings also acknowledge the support of its parent, Heartland Security Insurance Group, Inc., which has a conservative operating structure with no debt and has made regular capital contributions.” Best said it “expects that Heartland Security will continue to support Old Glory’s planned premium growth and operating shortfalls with capital contributions as needed, allowing Old Glory to maintain a level of risk-adjusted capitalization that continues to support its current rating level. Key rating factors that could lead to future negative rating actions include Old Glory’s operating performance falling markedly short of A.M. Best’s expectations or a significant decline in its risk-adjusted capitalization.”

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