Ratings: American Resources, Attorneys Mutual, Markel (notes), Caelus Re, National Automotive

March 21, 2013

A.M. Best Co. has upgraded the financial strength rating to ‘B’ (Fair) from ‘B-‘ (Fair) and issuer credit rating to “bb+” from “bb-” of Alabama-based American Resources Insurance Company Incorporated (ARIC), both with stable outlooks. Best said the “rating upgrades reflect ARIC’s improved risk-adjusted capitalization as management shrinks its run-off liabilities, generally favorable development of legacy loss reserves in recent years and the continued wind-down of warranty contracts, with about 90 percent of them expiring as of year-end 2012.” As partial offsetting factors Best cited ARIC’s “continued (albeit diminished) uncertainty associated with run-off legacy black lung workers’ compensation and auto warranty liabilities, the challenges inherent with re-entering the market in August 2012, including overall execution risk associated with the implementation of its business plan, and the expectation of continued underwriting losses through 2015 as set forth by management due to major upfront investments in technology and staff in support of business production. The underwriting losses will likely result in a decline in risk-adjusted capitalization in the near term. Despite these concerns, the outlook recognizes the continued orderly run-off of ARIC’s legacy liabilities, the implementation of its improved corporate governance controls and the resolution of outstanding issues related to ownership interests of the former management group.” Best said it believes “ARIC is adequately positioned at its current rating level. Continued favorable run-off of the company’s liabilities, improvement in risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio or profitable operations supported by an appropriate level of risk-adjusted capital could lead to favorable movement in ARIC’s ratings. However, the ratings and/or outlook may come under negative pressure if there is adverse development with the company’s run-off liabilities, a significant deviation in actual operating results from projected results over the near term or a significant erosion of its capital base beyond A.M. Best’s expectations.”

A.M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Birmingham, Alabama-based Attorneys Insurance Mutual of the South, Inc. RRG (AIM). Best said the rating action “reflects the adverse operating performance during the latest five-year period. Recently, AIM experienced sizeable underwriting and operating losses due in large part to the negative impact on its swing rated reinsurance treaties. Furthermore, net investment income has declined annually due to the continuing low interest investment environment, thereby providing less support to generating adequate overall income for AIM. However, Best said that “overall, the ratings of AIM reflect its excellent risk-adjusted capitalization, low underwriting leverage and conservative operating strategy. They also consider AIM’s leadership position in providing lawyers professional liability insurance, primarily to sole practitioners and smaller-sized law firms in the state of Alabama.” As partial offsetting factors Best cited the company’s “deterioration in underwriting and operating results, which began in 2008, as well as the product and geographic concentration of risk. These factors increase its susceptibility to adverse economic, regulatory or legislative changes. Furthermore, the potential for additional negative results driven by the swing rated reinsurance treaty could impact surplus going forward.” Best also said: “AIM’s ratings could be downgraded as a result of continued adverse underwriting performance, such as from a decline in premium revenue, elevated loss costs due to claim severity and/or inadequate loss reserves, or from a decline in surplus. The rating outlook for AIM could be revised upward if operating results become profitable for a sustained period while maintaining supportive capitalization.”

A.M. Best Co. has assigned debt ratings of “bbb+” to the $250 million 3.625 percent senior unsecured notes due 2023 and the $250 million 5.0 percent senior unsecured notes due 2043, issued under the existing shelf registration of Markel Corp., both with stable outlooks. Best noted that after the close of the Alterra Capital Holdings Limited transaction, which is expected in second quarter 2013, “Markel’s total debt-to-capital ratio is projected to be at a manageable 27 percent, increasing to 34 percent when debt is measured to tangible equity. At December 31, 2012, Markel’s stand-alone debt leverage was 28 percent. Markel’s financial leverage and coverage ratios remain within Best’s guidelines for its debt ratings. At the holding company level, Markel will have pro-forma cash and investments in excess of $1.0 billion, affording it a significant level of liquidity.”

Standard & Poor’s Ratings Services has assigned its ‘BB-(sf)’ rating to the notes issued by Caelus Re 2013 Ltd., which cover losses from hurricanes, earthquakes, and ensuing damage caused by related earth shake, fire following, and sprinkler leakage on a per-occurrence basis. S&P said the “rating is based on the lower of the rating on the catastrophe risk (‘BB-‘), the rating on the assets in the collateral account (‘AAAm’), and the rating on Nationwide Mutual Insurance Co. (A+/Stable/–). At closing, the notes will cover a 90 percent share of losses between the initial attachment point of $1.90 billion and the initial exhaustion point of $2.20 billion. The loss amount will be based on the paid losses and loss reserves of Nationwide, as adjusted by the related adjustment factors as applicable. We expect Nationwide to retain at least a 10 percent share of the ultimate net loss from an event. This is the third catastrophe bond sponsored by Nationwide.”

A.M. Best Co. has downgraded the financial strength rating to ‘C’ (Weak) from ‘B’ (Fair) and issuer credit rating to “ccc” from “bb” of Louisiana-based National Automotive Insurance Company, and has assigned a negative outlook to both. Best said the rating downgrades “reflect National Automotive’s significant decline in capitalization following adverse reserve development in its non-standard automobile business, which resulted in the need for significant reserve strengthening in the fourth quarter of 2012, causing a material decline in its surplus. National Automotive’s adverse reserve development was driven by increased auto liability losses and an increase in the required minimum statutory automobile limits in Louisiana.” Best explained that the negative outlook “reflects National Automotive’s reduced surplus and decline in its risk-adjusted capitalization. The outlook further considers the company’s ongoing challenges to improve underwriting results over the near term and avoid additional surplus losses. Factors that could result in future negative rating actions include a continued deterioration in National Automotive’s underwriting performance, continued adverse reserve development or erosion of its capital base.”

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