Ratings Recap: Sirius (US), HDI-Gerling (US), Permanent General, Lexon/Bond Safeguard, Selective(NJ)

October 8, 2012

A.M. Best Co. has affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit rating of “a” of new York-based Sirius America Insurance Company, both with stable outlooks. Sirius America’s ratings “reflect its enhanced risk management strategy, its strategic importance to its parent, Sirius International Group Ltd., long-term market presence and excellent level of risk-adjusted capitalization,” Best explained. As a result of the organization’s global strategies, “Sirius America has improved its overall performance, increased brand awareness and enhanced its capital position.” However, Best indicated that a “positive long-term trend has yet to be fully established. Recent favorable underwriting results, along with net realized capital gains have increased overall capital for the company.” As offsetting factors Best cited the “historical volatility in Sirius America’s overall operating performance.” However, the rating agency also noted that Sirius America is a wholly-owned subsidiary of Sweden’s Sirius International Insurance Corporation and “benefits from accident year stop loss and capital maintenance agreements with Sirius International.”

A.M. Best Co. has revised the outlook of the issuer credit rating (ICR) to positive from stable and affirmed the financial strength rating (FSR) of A (Excellent) and the ICR of “a” of Chicago-based HDI-Gerling America Insurance Company (HDI-GAIC). The outlook for the FSR is stable. The rating actions taken on HDI-GAIC are in “lock-step” with the rating actions taken by A.M. Best Europe – Rating Services Limited on its immediate parent, German-based HDI-Gerling Welt Service AG (HG-WS), and the immediate parent of HG-WS, HDI-Gerling Industrie Versicherung AG (HDI-Gerling Industrie), from whom HDI-GAIC receives substantial financial support and its ratings. Best said the “revised outlook on HG-WS and HDI-Gerling Industrie follow the successful completion of the Talanx AG ‘s initial public offering (IPO) on October 1, 2012 and the future financial flexibility afforded to this group, which was a concern. Talanx AG is the intermediate management holding company owned by the ultimate mutual parent company, HDI Haftpflichtverband der Deutschen Industrie V.a.G.” In addition Best noted that “HG-WS and HDI-Gerling Industrie continue to provide HDI-GAIC with substantial internal financial support via significant facultative cessions and 95 percent quota share treaties, which have been in effect since July 1, 2008 and January 1, 2000, respectively. The ratings of HDI-GAIC also reflect additional support provided by retroactive reinsurance with HDI-Gerling Industrie, which covers any net adverse development on policies incepting prior to January 1, 2000 and the implied support of future parental commitment. HDI-GAIC principally markets global-linked commercial lines business to HDI-Gerling Industrie clients that have operations in the United States. Given the substantial explicit support HDI-GAIC receives from HG-WS and HDI-Gerling Industrie, any upward or downward movement in the ratings of either HG-WS or HDI-Gerling Industrie would influence HDI-GAIC’s ratings.”

A.M. Best Co. has commented that the financial strength rating (FSR) of ‘A-‘ (Excellent) and issuer credit ratings (ICR) of “a-“for the members of the Permanent General Insurance Group (PGIG Group) are unchanged. The outlook for all ratings is stable. Best issued the commentary following the announcement of the potential sale of PGC Holdings, Corp. and its insurance subsidiaries to AMFAM, Inc., a subsidiary holding company of American Family Mutual Insurance Company. PGC Holdings, Corp. is a subsidiary of Capital Z Partners, Ltd (Bermuda). The sale price will be approximately $239 million. The transaction is expected to close before the end of 2012. Regulatory approval is required. Best said it “does not anticipate that the sale of PGC Holdings, Corp. will result in a significant change in its risk-adjusted capitalization, operating performance or the business profile for its insurance operating companies. The management of the PGIG Group is expected to remain intact as well as the intercompany reinsurance pooling agreement between the insurance companies. The FSR of ‘A-‘ (Excellent) and ICRs of “a-” are unchanged for the following members of the Permanent General Insurance Group: Permanent General Assurance Corporation; Permanent General Assurance Corporation of Ohio; The General Automobile Insurance Company, Inc.”

A.M. Best Co. has downgraded the financial strength rating to ‘B++’ (Good) from ‘A-‘ (Excellent) and issuer credit ratings to “bbb” from “a-” of Lexon Insurance Company, which is based in Austin, Texas, and its affiliate, Bond Safeguard Insurance Company, which is based in Illinois. Best has also revised its outlook on these ratings to negative from stable. Best said the rating action “reflects the declining operating results and variability in development of prior years’ loss reserves, driven by the continued emergence of claims stemming from the companies’ subdivision surety bonds that, in Best’s opinion, reflect the companies’ outsized risk appetite.” However, Best also indicated that the ratings reflect the companies’ adequate risk-adjusted capitalization, niche surety market focus and the advantages gained from management’s experience in the surety marketplace.” The outlook reflects Best’s view that “management will be challenged to return underwriting and operating results to favorable levels in the near term. The companies historically produced underwriting and operating results that outperformed their peers in the surety composite. In recent years, however, the companies’ business has been negatively impacted by the downturn in the U.S. housing market, which generated increased losses and also resulted in a reduced demand for some of their key products, requiring them to develop new offerings to offset the decline in premiums. In addition, the companies maintain a significant portion of the limits they offer, and even relatively small losses can have a substantial impact on overall performance, particularly when there is an accumulation of losses. While the company maintains an adequate level of risk-adjusted capitalization under a stressed scenario (as measured by Best’s Capital Adequacy Ratio [BCAR]) and statutory surplus has continued to increase, BCAR has decreased significantly. To offset the reduction in revenue resulting from decreased subdivision writings, the companies have expanded their writings of license and permit as well as customs bonds, having contracted with a number of specialty bond brokers throughout the United States. The companies’ infrastructure has also been expanded in support of these initiatives through the hiring of experienced underwriters and executives with substantial experience in these bond segments in recent years. Over time, the addition of this generally lower limit business should have a positive impact on the companies’ results.” However, Best said that in the interim it “anticipates that management will be challenged by the potential financial difficulties of its clients.”

A.M. Best Co. has assigned a financial strength rating of ‘A’ (Excellent) and issuer credit ratings of “a+” to New Jersey-based Selective Casualty Insurance Company (SCIC) and Selective Fire & Casualty Insurance Company (SFCIC), and has assigned a stable outlook to all of the ratings. Best noted that SCIC and SFCIC are newly formed subsidiaries of Selective Insurance Group, “and were established to facilitate a more flexible tiered pricing structure in New Jersey. The ratings assigned to SCIC and SFCIC reflect the explicit support provided by Selective Insurance Company of America in the form of an intercompany pooling agreement, which became effective July 1, 2012. This pooling agreement was executed following the receipt of regulatory approval.”

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