Ratings Recap: National Lloyds, Tar Heel Re, World Insurance, Kentucky Growers

April 10, 2013

A.M. Best Co. has downgraded the issuer credit rating (ICR) to “a” from “a+” and affirmed the financial strength rating (FSR) of ‘A’ (Excellent) of National Lloyds Insurance Company as well as the FSR of ‘A’ (Excellent) and ICR of “a” of National Lloyds’ affiliate, American Summit Insurance Company. The outlook for all of the ratings is stable. All companies are domiciled in Waco, Texas, unless otherwise specified. In addition Best has withdrawn the ICR of “bbb+” of Hilltop Holdings Inc.(HTH), headquartered in Dallas. National Lloyds and American Summit are subsidiaries of their ultimate parent, HTH. Best explained that the downgrading of National Lloyds’ ICR reflects its “adverse operating results in recent years primarily due to unfavorable underwriting performance. The deterioration in National Lloyds’ underwriting performance was driven by increased weather-related losses in recent years, especially wind and hail events that occurred in the spring of 2012 in Texas. In response, management has increased rates, tightened policy coverage and is non-renewing and de-emphasizing unprofitable products and geographical regions that are more catastrophe-prone.” Best also cited more positive factors as including National Lloyds’ “adequate risk-adjusted capitalization, conservative investment strategy and local market expertise within its niche market of personal property insurance. In addition, National Lloyds benefits from the financial flexibility of its immediate parent holding company, NLASCO Inc., which was evidenced in 2012 by its explicit support in the form of a capital contribution to offset underwriting losses.” Best said in future rating cycles, “negative rating actions could occur if National Lloyds’ underwriting performance continues to deteriorate and/or there is a reduction in its overall risk-adjusted capitalization.” Best’s ratings of American Summit recognize its “solid risk-adjusted capitalization, conservative investment strategy and generally favorable operating performance. Over the last five years, American Summit has reported positive net income earnings driven by net underwriting gains, favorable other income and consistent net investment gains.” As partial offsetting factors Best cited “American Summit’s limited product offerings as primarily a provider of insurance for the mobile home market. In addition, American Summit’s overall performance is susceptible to the frequency and severity of localized storm activity as the majority of its business is produced in Arizona. This was largely evidenced in 2011, as American Summit reported a sizeable year-end underwriting loss driven by significant weather-related losses in Arizona. American Summit maintains a prudent catastrophe reinsurance program in conjunction with National Lloyds to mitigate losses associated with severe weather-related catastrophe events. The outlook for American Summit could be revised if its operating performance deteriorates and/or there is a material deterioration in its capital strength as measured by Best’s Capital Adequacy Ratio (BCAR). Best also explained that the withdrawal of HTH’s ICR is “due to recent changes in its organizational structure. On November 30, 2012, HTH acquired Plains Capital Corporation (a Texas-based and Dallas-headquartered financial holding company). As a result of this acquisition, total insurance operations account for only a small percentage of HTH’s business.”

Standard & Poor’s Ratings Services has assigned its ‘B+(sf)’ rating to the $500 million of series 2013-1 notes issued by Tar Heel Re Ltd. The notes cover losses in North Carolina from hurricanes on an annual aggregate basis. S&P said the rating is “based on the lower of the rating on the catastrophe risk (‘B+’), the rating on the assets in the issuer’s collateral account (‘AAAm’), and the rating on the ceding reinsurer (‘AA-‘). Covered losses will not be directly linked to Munich Re America’s exposure in North Carolina, but rather they will be based on the actual losses of the North Carolina Joint Underwriters Assn. (NCJUA) and the North Carolina Insurance Underwriters Assn. (NCIUA).” The bulletin also noted that “this is the fourth catastrophe bond sponsored by the NCJUA/NCIUA to be rated by Standard & Poor’s, though the first one modeled by Risk Management Solutions Inc. (RMS). Due to the significant differences between the ways AIR Worldwide Corp. and RMS model losses, the stress rate we applied to the aggregate exceedance probability curve was higher as compared with the indicative level for indemnified transactions set forth in our criteria.”

A.M. Best Co. has withdrawn the financial strength rating (FSR) of ‘A-‘ (Excellent) and issuer credit rating (ICR) of “a-” of Omaha-based World Insurance Company, following its merger into Des Moines-based American Republic Insurance Company, an affiliated company of American Enterprise Group. American Republic has an FSR of ‘A-‘ (Excellent) and an ICR of “a-” with a negative outlook. The transaction closed on March 31, 2013, and at that time all assets and liabilities of World were merged into American Republic.

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 Kentucky Growers Insurance Company. Best said the revised outlook “is based on Kentucky Growers’ unprofitable underwriting performance in recent years. Through 2012, the company’s five-year averages for pre-tax return on revenue and total return on surplus were negative. Kentucky Growers has recorded net underwriting losses in excess of $3 million in four of the last five years, including in 2012, primarily due to frequent and severe weather-related events. As a result, the company’s five-year average pure loss ratio significantly exceeded the average of the personal property composite, and surplus declined by 30 percent over the last five years.” However, Best also indicated that partially offsetting Kentucky Growers’ negative rating factors are “its local market presence and long-standing agency relationships. Also, despite the recent underwriting losses, the company’s risk-adjusted capitalization remains supportive of its ratings. Kentucky Growers has implemented numerous rate modifications that it expects will result in improved operating performance going forward. In addition, Kentucky Growers has purchased increased reinsurance protection under its aggregate excess of loss treaty.” Best added that the company will have to demonstrate sustained improvement in its operating performance while maintaining an appropriate level of risk-adjusted capitalization for the negative outlook to be revised. There is potential for Kentucky Growers’ ratings to be downgraded if its unfavorable operating performance continues or if capitalization is weakened.”

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