Ratings Recap: Seaworthy, Central States Indemnity,Berkshire Hathaway Homestate

June 18, 2013

A.M. Best Co. has affirmed the financial strength rating of ‘A+’ (Superior) and issuer credit rating of “aa” of Seaworthy Insurance Company, based in Annapolis, Maryland, both with stable outlooks. The ratings reflect Seaworthy’s “supportive capitalization, historically favorable underwriting results indicative of the inherent benefits and advantages afforded by management’s specialty niche ocean marine expertise, as well as the implicit and explicit financial support provided by the ultimate parent, Berkshire Hathaway Inc., and a Berkshire subsidiary in the form of significant reinsurance transactions,” Best said. The ratings also take into consideration the” increased reinsurance protection provided by National Indemnity Company (NICO), as well as the reinsurance previously provided by NICO via 50 percent loss portfolio transfer and 50 percent quota share reinsurance provided at the time of Berkshire’s acquisition of Seaworthy and its parent, Boat America Corporation, in August 2007,” Best continued. As of December 31, 2012, “the loss portfolio agreement was increased to 75 percent, and effective January 1, 2013, the quota share was increased to 75 percent. In addition to Berkshire’s track record of supporting its member companies, these transactions demonstrate in effect the explicit commitment provided by Berkshire, for which Seaworthy receives rating enhancement.” As partial offsetting factors Best cited “Seaworthy’s significant product concentration, its susceptibility to large catastrophe events as evidenced in 2012 and the risks associated with expansion beyond members of the Boat Owners Association of The United States. Seaworthy is also challenged by the prevailing low interest rate environment and emphasis in highly liquid, low credit risk assets comprised mostly of cash and equities. Despite these factors, the outlook is based upon the expectation of a return to profitability, the continued financial flexibility provided by Berkshire, its strong balance sheet and the continued advantages garnered by Seaworthy’s lead specialty niche expertise.” In conclusion Best said: “Negative rating action could occur if Seaworthy’s capitalization and/or operating performance falls markedly short of Best’s expectations as a result of significant deterioration in loss trends, and any sudden change in parental commitment. Given Seaworthy’s limited business scope, the ratings also are subject to any sudden shifts within its core market niche, a drastic change in its business profile and any sudden and unforeseen disruption in its distribution.”

A.M. Best Co. has affirmed the financial strength rating of ‘A+’ (Superior) and issuer credit rating of “aa-” of Central States Indemnity Co. of Omaha (CSI), both with stable outlooks. Best said the ratings reflect CSI’s “excellent risk-adjusted capitalization, consistently profitable operating performance, favorable balance sheet liquidity and extremely conservative underwriting leverage, as well as the benefits made available through its ultimate parent, Berkshire Hathaway, Inc.” Best also noted that “CSI is a specialty insurance company that provides payment protection programs to some of the largest financial organizations in the country, agricultural equipment insurance, pet health insurance and Medicare supplement insurance.” As a partial offsetting factors Best cited “the significant reduction in CSI’s credit insurance book of business, which has resulted from the banking industry’s switch to non-insurance debt protection products in lieu of traditional credit insurance. CSI has migrated to other products and services and today writes more non-credit insurance premiums compared to its long-standing credit insurance business; however, the company’s total direct written premiums have declined by approximately 10 percent over the past five years. Additional offsetting factors include CSI’s elevated investment leverage and near-term execution risk and strain to earnings brought on by the up-front costs and investment associated with new lines of business.” Best said it believes “CSI is well positioned at its current rating level. However, negative rating actions could occur if there is a decline in underwriting and operating performance, if there is a considerable deterioration in risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio, or if Best determines that the company’s strategic importance to its parent no longer warrants rating enhancement.”

A.M. Best Co. has affirmed the financial strength rating of ‘A++’ (Superior) and issuer credit rating of “aa+” of Omaha-based Berkshire Hathaway Homestate Insurance Company and its five property and casualty affiliates: Cypress Insurance Company (San Francisco, CA), Oak River Insurance Company (Omaha, NE), Redwood Fire and Casualty Insurance Company (Omaha, NE), Brookwood Insurance Company (Coralville, IA) and Continental Divide Insurance Company (Englewood, CO). These companies are collectively referred to as Berkshire Hathaway Homestate Companies (BHHC). The outlook for all of the ratings is stable.
The ratings reflect BHHC’s “strong risk-adjusted capitalization, historically profitable operating performance and the successful track record of the executive team in managing operations,” said Best. “The ratings also acknowledge the group’s conservative underwriting leverage measures, aggressive claims management, effective loss control services and history of conservative loss reserving standards. Lastly, the ratings consider the additional financial flexibility and support provided by the group’s publicly traded parent and ultimate shareholder, Berkshire Hathaway Inc.” As offsetting factors Best cited “the volatility in the group’s underwriting results in recent years, challenging market conditions and its business profile, which is concentrated in the workers’ compensation line primarily in California (approximately two-thirds of direct writings were from the state of California in 2012). These elements of concentration expose the group to a heightened level of regulatory, judicial, legislative and competitive risks relative to its peers. An additional offsetting factor includes the risks associated with a large investment allocation in equity securities, as common stocks made up nearly 75 percent of policyholders’ surplus at year-end 2012, thus remaining a potential source of volatility in earnings and capital appreciation.” However, Best also indicated that “despite these concerns, the rating outlook reflects the group’s strong risk-adjusted capitalization, proven operating performance, management’s ability to quickly adapt to changing market conditions and the long-term support of Berkshire Hathaway Inc. While the group is well positioned at the current rating level, negative rating actions could result if operating performance falls markedly short of Best’s expectations, if there is a considerable deterioration in risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio, or if Best determines that the strategic importance of the group no longer warrants rating enhancement.”

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