Ratings: Odyssey Re, National Fire, American Safety, N.J. Manufacturers, Blue Whale

March 29, 2013

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 Odyssey Reinsurance Group members. Best also affirmed the ICR of “bbb” and the debt ratings of Delaware-based Odyssey Re Holdings Corp. The outlook for these ratings is stable. In addition Best has assigned an FSR of ‘A’ (Excellent) and an ICR of “a+” to Hudson Excess Insurance Company, also based in Delaware, the newest member of Odyssey Re. The outlook assigned to both of these ratings is stable is also stable. Best explained that the ICR upgrades “reflect Odyssey Re’s excellent risk-adjusted capitalization, strong financial performance and sound business position.” Best noted: “Odyssey Re is a global underwriter of reinsurance and specialty primary insurance products and ranks among the top 15 global reinsurance groups in terms of premium volume. Odyssey Re’s competitive position benefits from its worldwide market presence with regard to business mix and geographic reach. These positive attributes are further supported by Odyssey Re’s diversified geographic client base, combined with its large line capacity, broad product capability and an opportunistic business strategy. Odyssey Re’s investment management philosophy, which emphasizes a total return strategy, has augmented its earnings to the extent that on a total return basis it has outperformed its reinsurance peers over the past five-year period. The ratings also recognize Odyssey Re’s strong liquidity and the benefits derived from access to its ultimate parent, Fairfax Financial Holdings Limited, and Fairfax’s access to public markets.” As partial offsetting factors Best cited the “challenging underwriting and investment environments and Odyssey Re’s historical reliance on both realized and unrealized capital gains to bolster its overall financial performance.” Best said it “views this source of earnings as more variable and less predictable than earnings sourced from underwriting.” Best also indicated that “Odyssey Re maintains a manageable exposure to natural catastrophes as measured by its 1-in-250-year probable maximum loss estimates relative to statutory surplus.” In Best’s opinion, “Odyssey Re has developed an excellent and holistic enterprise risk management framework. Positive rating actions could occur if Odyssey Re maintains consistently strong underwriting performance and long-term profitability. Negative rating actions could occur if Odyssey Re experiences outsized catastrophe or investment losses relative to its peer group, or if capital erosion due to operating performance exceeds Best’s expectations.” In summary Best said: “The ICRs have been upgraded to “a+” from “a” and the FSR of ‘A’ (Excellent) has been affirmed for the following members of the Odyssey Reinsurance
Group: Odyssey Reinsurance Company; Hudson Insurance Company; Hudson Specialty Insurance Company; Newline Insurance Company Limited. The following debt ratings have been affirmed: Odyssey Re Holdings Corp.—
— “bbb” on $183 million 7.65 percent senior unsecured notes, due 2013
— “bbb” on $125 million 6.875 percent senior unsecured notes, due 2015

A.M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength rating of ‘A’- (Excellent) and issuer credit ratings (ICR) of “a-” of St. Louis-based National Fire and Indemnity Exchange (NIE). Best said the ratings reflect NIE’s “supportive capitalization and favorable underwriting leverage measures as well as its leadership position in the specialty niche fabricare industry. While the exchange operates with an expense ratio that is more than double that of the commercial property industry composite, its net loss and loss adjustment expense ratio remains superior to that of the composite, revealing the quality of its book of business.” Best explained that the negative outlook reflects its concerns with regard to NIE’s results in recent years, “specifically the adverse development on the loss reserves of the two most recent accident years. The exchange’s operating performance has been weaker than that of similarly rated companies. This development in turn constitutes a partial offsetting factor, as Best noted that NIE’s recent underwriting results “have been unfavorably impacted by adverse development on old environmental claims as case law in Indiana has gone against the ISO pollution exclusions utilized by NIE. Net investment income is also trending downward, presenting additional hardship because the exchange has been somewhat dependent on investment income to make up for underwriting losses. The unprofitable underwriting results are particularly problematic considering the company’s plans to grow top line premium fairly aggressively over the next couple of years.”

A.M. Best Co. has revised the issuer credit rating (ICR) outlook to positive from stable and affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit ratings (ICR) of “a” of the subsidiaries of Safety Insurance Group, Inc.: Safety Insurance Company, Safety Indemnity Insurance Company and Safety Property and Casualty Insurance Company, collectively known as Safety Group. The outlook for the FSR is stable. All companies are domiciled in Boston, Mass. Best also affirmed the ICR of “bbb” of Safety’s publicly traded holding company, Delaware-based Safety Insurance Group, Inc., and has revised the outlook on this rating to positive from stable. The rating actions reflect Safety’s “solid risk-adjusted capitalization, historically strong operating income and its market position as a leading personal automobile writer in Massachusetts,” Best said. “The ratings also acknowledge the group’s favorable loss reserve development and low investment leverage. Somewhat offsetting these positive factors is Safety’s concentration of business in Massachusetts, which primarily is in the private passenger automobile line. The group’s recently increased homeowners’ writings have provided some product diversification; however, this does create greater property catastrophe risk. Nevertheless, Safety does continue to maintain an effective reinsurance program to help mitigate the effects of severe weather-related events.” Best said: “Safety’s ratings could further benefit from producing consistently favorable earnings while maintaining strong risk-adjusted capitalization. However, the ratings and outlook may come under negative pressure if an unfavorable earnings trend develops and its capital deteriorates.”

A.M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength rating (FSR) of ‘A++’ (Superior) and issuer credit ratings (ICR) of “aa+” of New Jersey Manufacturers Insurance Company and its wholly owned subsidiary, New Jersey Re-Insurance Company, collectively referred to as NJM Insurance Group. Best also affirmed the FSR of ‘A’ (Excellent) and ICRs of “a” of NJM’s two other subsidiary companies, New Jersey Casualty Insurance Company (NJC) and New Jersey Indemnity Insurance Company (NJI). The outlook for these ratings is stable. All of the companies are domiciled in West Trenton, New Jersey. Best said the ratings reflect NJM’s “superior capitalization, generally strong operating performance in recent years, as well as its dominant local market presence and expertise. However, Best also indicated that these positive factors are partially “offset by the group’s relatively tight business concentration, mainly within New Jersey.” Best explained that the negative outlook highlights its “concerns with the deterioration in NJM’s underwriting performance over the past two years in the face of catastrophic weather events, with the associated challenges the group will face if frequent and severe weather events again impact the Northeast. NJM’s positive rating attributes are derived from management’s adherence to sound operating fundamentals that are reflected in its moderate underwriting leverage, conservative investment risk and prudent loss reserving practices. Its direct marketing approach and efficient cost structure have consistently produced low underwriting expense ratios. This significant expense advantage, combined with generally favorable loss experience prior to 2011 and consistent strong investment income, has enabled NJM to provide significant policyholder dividends while maintaining solid risk-adjusted capitalization. In addition, these policyholder dividend payments have significantly enhanced customer loyalty, resulting in superior business persistency and strong overall operating performance.” Best also noted that “NJM’s statewide market leader position is augmented by its extensive workers’ compensation managed care capabilities, its own preferred provider network, strong business persistency and reputation for providing quality service. As a result of its business concentration within New Jersey, NJM is exposed to risk from market volatility, legislative changes and judicial decisions. It has been subject to a difficult operating environment, reflective of regulatory constraints and uncertainty due to the political nature of the state’s insurance markets. This concentration also exposes it to severe catastrophic weather events; the four largest weather events in NJM’s history have occurred in the past three years, including Irene in 2011 and Sandy in 2012. The group’s historical track record of consistently strong earnings, superior capital position and extensive local market knowledge serve to somewhat offset the concentration and regulatory concerns. Nonetheless, NJM continues to review its rates, underwriting criteria and concentration in an effort to address the underwriting losses posted the past two years, and return to prior levels of operating profitability.” Regarding future rating movement, Best said NJM’s return to a trend of operating profitability would be necessary for it “to consider revising the outlook back to stable. Conversely, a continued trend of difficult underwriting experience leading to additional operating loss would lead to consideration of downward rating movement.” Best also noted that the ratings for NJC and NJI “recognize their superior capitalization and positions as residual writers for the workers’ compensation (NJC) and auto (NJI) markets of NJM. The ratings also acknowledge the common management and infrastructure shared with NJM. Any consideration of rating movement for these two companies would most likely hinge on the performance of NJM.”

A.M. Best Co. has affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit rating of “a+” of Vermont-based captive Blue Whale Re Ltd., both with stable outlooks. Best said ratings reflect Blue Whale’s “strong capitalization and conservative operating strategy. The ratings also consider the company’s critical and central role and favorable profile as part of the Pfizer Group, as well as the excellent performance of its operations.” As partial offsetting factors Best cited Blue Whale’s “very large gross and net underwriting exposures to property losses and its dependence on reinsurance.” Best explained that Blue Whale is a single parent captive of Pfizer Inc., a leading global pharmaceutical company. “As Blue Whale (re)insures Pfizer’s global property exposures, it plays an important role in Pfizer’s overall enterprise risk management and assumes a critical role in protecting the Pfizer Group’s assets. Thus, Blue Whale benefits from Pfizer Group’s extensive risk management and loss control programs.” In addition Best noted: “Blue Whale operates at conservative underwriting leverage levels; however, it provides coverages with extremely large limits, and its gross exposures per loss occurrence are elevated. Although Blue Whale benefits from reinsurance protection, its net retentions remain very substantial. Reinsurance is provided by a large panel of reinsurers, and Blue Whale relies on significant capacity to be able to support its obligations. As such, it is heavily dependent on reinsurance.” Best added that nevertheless, it “recognizes the quality of the reinsurers and the substantial financial resources and support available to the captive as part of the Pfizer Group. Positive rating actions could occur if there is a sustainable and long-term improvement in the operating performance and capital strength of Blue Whale and Pfizer. Conversely, negative rating actions could occur as a result of material operational and performance issues at both Blue Whale and Pfizer. Rating pressure would be likely if there were any adverse changes to many of the regulatory standards to which Pfizer adheres. The potential for future acquisitions, the associated integration risks and company profile changes could lead to both positive and/or negative pressure on the ratings, depending on the acquisition details.”

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