Ratings Recap: Iron Horse, Dallas National, Armed Forces, Sooner, Harford Mutual, Philadelphia Contributionship

A.M. Best Co. has affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit rating of “a+” of Vermont-based Iron Horse Insurance Company, both with stable outlooks. Best said the ratings “reflect Iron Horse’s adequate risk-adjusted capitalization, explicit parental support, experienced management team and the role it plays as a direct captive subsidiary of Chevron Corporation.” As a partial offsetting factor Best noted “Iron Horse’s high net loss exposures, as the coverages provided tend to result in claims that are characterized as low frequency but high severity.” However, Best added that this is “somewhat mitigated by the captive’s ability to secure capital from Chevron in the event of a covered shock loss. Iron Horse directly benefits from the attention of Chevron’s experienced risk management team. Iron Horse also gains from Chevron’s global operations, which provide favorable geographic spread of risk and line of business diversification.” Best explained that “in its role as a captive insurer, Iron Horse, along with Heddington Insurance Limited, currently provides broad and competitive global insurance products for Chevron and its subsidiaries. The insurance needs of Chevron are supplied through these captive operations (where appropriate) and the commercial market. Iron Horse and the other Chevron captives provide comprehensive coverage above Chevron’s internal retentions, while Iron Horse’s reinsurance is placed through a corporate wide plan with the world’s leading providers of capacity, resulting in a diversified and balanced distribution of reinsurers. Key rating drivers that could lead to a positive outlook or an upgrading of Iron Horse’s ratings are material and sustained improvement of its underwriting performance and long-term maintenance of strong capital levels. Key rating drivers that could lead to a negative outlook or a downgrading of the company’s ratings are significant deterioration in its capital from either claims or investments, a reduced level of capital that does not support the ratings or a prolonged decline in underwriting profitability.” Best also said: “Iron Horse’s ratings are tied to the rating of Chevron, and a change to Chevron’s rating could result in changes to the captive’s ratings.”

A.M. Best Co. has removed from under review with developing implications and affirmed the financial strength rating of ‘B’- (Fair) and issuer credit rating of “bb-” of Dallas National Insurance Company, and has assigned a stable outlook to both rating. Best said: “The rating actions reflect the closure of the acquisition of Dallas National by Lonestar Holdco LLC, a direct subsidiary of Southport Lane L.P. The ratings also recognize Dallas National’s poor underwriting performance in recent years, most notably in 2011 and 2012, primarily driven by sizable adverse loss reserve development, as well as its historically high cost structure and vulnerable risk-adjusted capitalization.” As somewhat more positive factors Best cited “Dallas National’s improved risk-adjusted capitalization due to capital contributions from the new owner, its generally favorable operating performance prior to 2009 and the financial flexibility provided by Lonestar Holdco LLC.” In conclusion Best said: “Positive rating actions are not expected in the near term. Factors that could lead to negative rating actions include a deterioration in Dallas National’s underwriting performance and/or a sizable erosion of its risk-adjusted capitalization.”

A.M. Best Co. has downgraded the issuer credit rating (ICR) to “bbb” from “bbb+” and affirmed the financial strength rating (FSR) of ‘B++’ (Good) of Armed Forces Insurance Exchange (AFIE), based in Leavenworth, Kansas. Concurrently, the outlook for the FSR has been revised to negative from stable, while the outlook for the ICR remains negative. “The downgrading of AFIE’s ICR reflects the company’s trend of unfavorable underwriting performance that drove the decline in surplus and management not meeting its 2012 performance expectations,” Best explained. “The ratings of AFIE recognize its adequate level of capitalization and long-standing history as a provider of personal lines insurance products to the preferred risk segment of the military market.” As partial offsetting factors Best cited “the company’s unfavorable trend of underwriting performance, concentration of coastal exposures and elevated underwriting expense ratio.” Best explained that the “negative outlooks reflect the ongoing challenges facing management in order to improve profitability and strengthen the company’s capitalization in the near-term. Management recognizes catastrophe exposure as its major risk; however, it is executing its coastal mitigation strategies as well as other initiatives to address its elevated operating expenses, pricing segmentation and competitive market position.” In conclusion Best said: “Negative rating actions could occur if there were an unexpected and material decline in AFIE’s risk-adjusted capitalization, continued deterioration in its operating performance or a diminishing of its liquidity measures over the next several years.”

A.M. Best Co. has affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit rating of “a” of Vermont-based Sooner Insurance Company, both with stable outlooks. Best said the ratings are “based on Sooner’s excellent capitalization, history of consistently producing net underwriting income and net income, as well as being the captive insurer for its ultimate parent, ConocoPhillips.” The ratings also consider the parent’s overall risk management strategy and Sooner’s core involvement in this strategy. As partial offsetting factors Best noted the “the possible change in Sooner’s net retentions that could happen year over year, as well as the limited diversification of business written, which is expected with a single parent captive.” Best also indicated that “Sooner has a history of strong underwriting results and operating returns. Its loss experience has remained favorable due, in part, to ConocoPhillips’ strong risk management program. ConocoPhillips’ corporate insurance and health, safety and environmental groups conduct periodic reviews of its potential loss exposures through a specialist in industrial risks. From year to year, Sooner may have high net retentions based upon the capacity of the overall insurance market. However, if net retentions were to increase, Sooner does have the capital to retain these risks. Although the majority of the company’s capital is loaned to ConocoPhillips, there is limited counterparty risk due to this affiliation as well as the parent’s strong balance sheet and history of positive earnings.” Best said it is “unlikely to upgrade Sooner’s ratings over the long term due to its limited market profile. Key rating drivers that could lead to rating downgrades are a significant loss of surplus, consistent adverse reserve development and/or a significant change in Sooner’s risk profile.”

A.M. Best Co. has upgraded the financial strength rating to ‘A’ (Excellent) from ‘A-‘ (Excellent) and issuer credit ratings to “a” from “a-” of The Harford Mutual Insurance Company and its property/casualty subsidiary, Firstline National Insurance Company, collectively known as Harford Mutual Insurance Companies, which operate under an inter-company pooling agreement. Both companies are domiciled in Bel Air, Maryland. Best has also revised its outlook on the ratings to stable from positive. Best said its rating actions reflect Harford’s “excellent level of risk-adjusted capital, which is supported by a generally improved underwriting and operating performance since 2003, consistently favorable development of prior years’ loss and loss adjustment expense reserves, low underwriting leverage relative to its peers and strong liquidity. Management’s focus on underwriting discipline, price monitoring, risk aggregation, reserving methodology, internal controls and technology in recent years has contributed to Harford’s improved underwriting performance.” As partial offsetting factors Best cited “Harford’s underwriting losses in 2010 and 2011, which were driven by unusually high catastrophe and weather-related losses and a spike in large fire losses, a consistently higher expense ratio than its peers and elevated levels of common stock leverage. Surplus and risk-adjusted capitalization remained strong despite operating losses in 2010 and 2011 as a result of management’s strong risk culture, which included an effective reinsurance program.” Best said that, “while Harford is well positioned at its current rating level, negative pressure on the outlook could occur if heavy underwriting losses return.”

A.M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength rating of ‘A+’ (Superior) and issuer credit ratings of “aa-” of The Philadelphia Contributionship for the Insurance of Houses from Loss by Fire, Inc. and its wholly owned subsidiaries, Philadelphia Contributionship Insurance Company and Germantown Insurance Company. All of the companies are domiciled in Philadelphia. Best said the “revised outlook reflects Philadelphia Contributionship’s trend of underwriting losses over the past three years, which were driven by record catastrophes and other severe weather-related events.” However, Best also pointed out that “surplus and capitalization declined only modestly, as the losses were largely offset by net investment income and capital investment gains.” Best explained that its ratings of Philadelphia Contributionship “acknowledge its sustained, strong capitalization and long-standing market presence in Philadelphia and the surrounding areas. These positive rating factors are partially offset by the group’s high investment leverage, which leaves surplus exposed to equity market volatility, and its concentration of property business, which while subject to management’s ongoing catastrophe risk mitigation initiatives, remains susceptible to losses from severe, weather-related events.” Best said: “Negative rating actions could occur if there is a sudden, unexpected and material decline in Philadelphia Contributionship’s risk-adjusted capitalization, a deterioration in its operating performance or its liquidity measures are diminished. Positive rating actions, including removal of the negative outlook, could occur following a material improvement in the company’s risk-adjusted capitalization or sustained improvement in its operating performance.”