Ratings Recap: American European, Liberty Mutual (Notes), Pacific Comp., IFA

June 20, 2013

A.M. Best Co. has downgraded the financial strength rating to ‘B’ (Fair) from ‘B+’ (Good) and issuer credit rating to “bb+” from “bbb-” for American European Insurance Company and its wholly owned subsidiaries, Rutgers Casualty Insurance Company and Rutgers Enhanced Insurance Company. All three companies are headquartered in Cherry Hill, NJ, and collectively referred to as American European Insurance Group (AEIG). Best also revised the outlook on all of the ratings to stable from negative. Best explained that the rating downgrades “reflect AEIG’s historically poor operating performance and execution risk in replacing business previously assumed from Merchants Mutual Insurance Company (MMIC), an unaffiliated insurer. Other negative factors include the company’s lack of scale driving its high and therefore uncompetitive expense ratio, as well as volatile total investment returns and competitive market conditions under which the group operates. Further, the group remains exposed to northeast storms that have impacted results over the past two years.” More positive factors include “AEIG’s solid capitalization and the recent actions taken by management to improve overall operating results,” said Best, adding that the outlook reflects its view that the “company’s strong level of capitalization will allow the necessary time for management’s initiatives to gain traction in the medium term. AEIG’s ratings could be negatively impacted if results do not materially improve in the near term.”

A.M. Best Co. has assigned a debt rating of “bbb” to the forthcoming $600 million 4.25 percent senior unsecured notes due 2023 to be issued by Liberty Mutual Group Inc. (LMGI), and has assigned them a stable outlook. The existing ratings of LMGI and its subsidiaries are unchanged. Best noted that “LMGI intends to use the net proceeds to redeem upcoming maturing notes and for general corporate purposes. Management views the current low interest rate environment in the capital markets as being favorable for the notes issuance and expects to lower the interest expense on LMGI’s debt as the prefunded debt repayments are made. The issued notes are to be guaranteed by LMGI’s immediate parents, Liberty Mutual Holding Company Inc. and LMHC Massachusetts Holding Inc.” Best also indicated that it “expects LMGI’s unadjusted and adjusted debt-to-capital ratios (excluding Accumulated Other Comprehensive Income) to be only modestly higher than its ratios of 27 percent and 20 percent, respectively, at March 31, 2013, as a result of the notes offering. The company’s financial leverage and coverage ratios are both within Best’s guidelines for LMGI’s current rating and are expected to remain so over the near term.”

A.M. Best Co. has upgraded the financial strength rating to ‘A-‘ (Excellent) from ‘B++’ (Good) and the issuer credit rating to “a-” from “bbb+” of Pacific Compensation Insurance Company, headquartered in Agoura Hills, Calif., and has revised its outlook on the ratings to stable from positive. “The rating actions reflect the additional explicit support provided to Pacific Comp by its affiliate captive reinsurer, AIHL Re, LLC (AIHL Re), and more importantly, the additional financial support provided by its parent, Alleghany Corporation,” Best explained. “Through intercompany reinsurance agreements effective January 1, 2013, AIHL Re provides Pacific Comp with a multi-year adverse development cover (ADC) and aggregate stop loss (ASL). Alleghany stands behind these covers via a $100 million Keep Well Agreement to AIHL Re, which guarantees the recoverable balances owed to Pacific Comp from AIHL Re up to $100 million. These funds also are intended to cover the statutory collateral requirements at Pacific Comp, if and when necessary.” Best also indicated that it “recognizes the explicit support provided to Pacific Comp by Alleghany via $105 million in capital contributions since 2007 and the allocation of resources and corporate governance.” As partial offsetting factors Best cited “Pacific Comp’s poor historical underwriting performance, narrow product focus and geographic concentration as it plans to organically grow in a competitive California workers’ compensation market. Despite these inherent challenges, the outlook takes into consideration changes in Pacific Comp’s leadership, management’s business plans, Alleghany’s profit tolerances, as well as the strict governance and explicit financial support provided by Alleghany.” In conclusion Best said: “Potential upward rating movement is unlikely in the near term as Pacific Comp continues to write new business as market conditions improve. Downward rating movement could result from a decline in Pacific Comp’s risk-adjusted capitalization to levels not supportive of its ratings, continued poor underwriting results and any material changes in the support provided by AIHL Re and/or Alleghany.”

A.M. Best Co. has downgraded the financial strength rating to ‘B’- (Fair) from ‘B+’ (Good) and issuer credit rating to “bb-” from “bbb-” of New Jersey-based IFA Insurance Company, both with negative outlooks. Best explained that the rating downgrades “reflect IFA’s net losses from Superstorm Sandy in the fourth quarter of 2012 and the first quarter of 2013, as well as changes in the New Jersey tax laws and the treatment of income taxes and deferred tax assets, which were necessitated by the deterioration in the company’s capital position. The most recent financial results follow IFA’s unprofitable operating performance in recent years, which is a result of the company’s adverse trends in bodily injury and personal injury protection loss experience in the New Jersey personal automobile market. Although the company continues to refine its underwriting criteria and implement rate increases in response to market trends and conditions, uncertainty exists regarding its ability to improve operating performance, given the competitive operating environment of the New Jersey automobile market and the continued challenging interest rate environment. Further downward rating actions may occur if IFA’s underwriting results continue to deteriorate, in conjunction with a corresponding loss of its risk-adjusted capitalization.”

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