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Ratings Recap: Pro Assurance, AES Global, Alfa Group, ARI Mutual, Springfield

December 23, 2013

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A+’ (Superior) and the issuer credit ratings (ICR) of “aa-” of ProAssurance Casualty Company, ProAssurance Indemnity Company, Inc. and ProAssurance Specialty Insurance Company, Inc. The companies are select subsidiaries of ProAssurance Corporation (PRA), collectively referred to as ProAssurance Group. The outlook for all of these ratings is stable. The companies are headquartered in Birmingham, Alabama. Best also affirmed the ICR of “a-“of PRA, as well as the debt rating of PRA’s senior unsecured debt issue of $250.0 million, 5.30 percent 10-year senior unsecured notes due 2023. In addition Best affirmed the indicative debt ratings under the shelf registration of “a-” on the senior unsecured debt, “bbb+” on the subordinated debt and “bbb” on the preferred stock of PRA. The outlook for these ratings is stable. Best has also affirmed the FSR of ‘A’ (Excellent) and the issuer credit rating of “a” of the additional subsidiaries of PRA: Medmarc Casualty Insurance Company and Noetic Specialty Insurance Company, both headquartered in Chantilly, Virginia, also with stable outlooks. Along with these rating actions, Best has affirmed the FSR of ‘A’ (Excellent) and ICR of “a” of Podiatry Insurance Company of America (PICA) and the FSR of ‘A-‘ (Excellent) and ICR of “a-” of PACO Assurance Company, Inc., both headquartered in Nashville, Tennessee, also subsidiaries of PRA. The outlook for these ratings remains stable. The affirmation of ProAssurance’s ratings reflects its “strong risk-adjusted capital, favorable operating performance and strong business profile in the medical professional liability insurance sector and other business lines,” Best explained. “The group’s ongoing underwriting success is credited to management’s conservative reserving practices, disciplined underwriting standards and proactive legal defense and claims handling philosophy. The ratings also consider the group’s market position across multiple jurisdictions and diversification across multiple disciplines within the medical professional liability space, along with legal professional liability lines and the recently added life sciences and medical device liability business.” Best indicated that “these ratings also acknowledge the depth and breadth of ProAssurance’s enterprise risk management programs and policies. While competitive and investment challenges continue to exist, the outlook is based on the expectation of continued superior performance across the organization and capitalization that is supportive of these ratings.” Best said the “ratings of Medmarc and Noetic reflect their excellent capital positions, ongoing strong operational results and their position in the market as leaders in medical device product liability. These ratings also receive support from the companies’ relationship with its ultimate parent PRA, the continued integration of the company into the organization and explicit operational and financial support provided by members of the group.” Best’s report noted that “as PRA is a member of a publicly traded organization, these ratings also reflect the financial flexibility afforded to all of PRA’s subsidiaries. PRA’s financial leverage is very conservative, interest coverage is strong, and it holds significant levels of cash and short-term investments outside of the insurance operating companies that are available for use without regulatory approval. Additional factors supporting the affirmation of the ratings include the extensive operational support and industry expertise available across the organization.”

A.M. Best Co. has assigned a financial strength rating of ‘B+’ (Good) and issuer credit rating of “bbb-” to Vermont-based captive AES Global Insurance Company (AGIC), both with stable outlooks. Best said the ratings reflect AGIC’s “adequate risk-adjusted capitalization, consistently favorable operating performance and sound risk management capabilities. Also inuring to the ratings is incorporation of a favorable business plan, which is used as a basis for the profitability and liquidity metrics of the rating.” As partial offsetting factors Best cited AGIC’s “exposure to large losses due to the limits offered on its policies, limited market scope/business profile, product mix and dependence on third parties for processing, servicing and administration.” Best also noted, however, that “the ratings recognize the AGIC’s excellent business position and relationship with its parent, AES Corporation (AES Corp.), a global power company that owns a diverse and growing portfolio of electricity generation and distribution businesses operating in 21 countries. AGIC insures the global property and business interruption coverage for AES Corp., its subsidiaries and affiliates. The program is fronted by AIG Europe Ltd. Somewhat offsetting these positive rating factors is the company’s sole dependency on the parent company’s business opportunities for its growth prospects.” In addition Best pointed out that “AGIC has consistently produced profitable net operating income resulting from favorable underwriting experience and investment income in each year of the past decade. Over the past five years, it has exhibited significant growth in total assets and policyholders’ surplus despite dividend payments each year of the same period totaling $42.1 million to its parent/sole shareholder and additional $20 million distributed in early 2013. Best added, however, that it would “closely monitor quarterly performance of AGIC against its stated operating plan. The ratings further consider the extensive experience and level of commitment on the part of its parent, whose management incorporates the captive as a core element in the overall risk management program of AES Corp. and utilizes the captive as an integral part in this process. AES Corp. continually evaluates the use of AGIC for other risk management objectives of the group as they arise. The company’s ratings are not expected to be upgraded and/or its outlook revised within the near term as its operating performance and capital position have already been considered in A.M. Best’s ratings process. Conversely, any material adverse deviations with regard to management, earnings, capitalization or risk profile could potentially undermine the stability of the company’s ratings. In addition, deterioration in the credit profile of AES Corp. could impact AGIC’s ratings,” the report concluded.

A.M. Best Co. has revised the issuer credit rating (ICR) outlook to stable from negative and affirmed the financial strength rating (FSR) of A (Excellent) and the ICRs of “a+” of the Alfa Insurance Group members. The outlook for the FSR is stable. In addition, Best has affirmed the FSR of ‘A’ (Excellent) and ICR of “a+” of Alfa Life Insurance Corporation, both with stable outlooks. All of the companies are headquartered in Montgomery, Alabama. The ratings and outlook of the group reflect its “supportive risk-adjusted capitalization, improved earnings over the last two years, excellent business profile in Alabama and the risk management and profitability initiatives underway to reduce exposure to loss from catastrophic weather conditions and improved earnings on its core homeowners, farm owners and private passenger automobile lines of business,” Best explained. “The ratings also benefit from management’s strong enterprise risk management focus, multi-channel distribution network, sponsorship of the Alabama Farmers Federation and the ability to cross-sell property/casualty and life insurance products.” As partial offsetting factors Best cited “Alfa’s below average earnings, exposure to hurricane and other severe windstorm activity in the southern and southeastern United States, and the prolonged period of low interest rates that are creating investment income growth challenges and putting pressure on underwriting performance.” Best indicated that the group’s ratings “may be downgraded if operating performance significantly falters or there is a material decline in capitalization. The ratings would be further stabilized by a continuation of a favorable earnings trend that leads to sustained capital appreciation.” Best said the “ratings of Alfa Life recognize its strong risk-adjusted capital, historically favorable operating performance and its strategic importance to the group. Alfa Life has a close marketing relationship with the group’s property/casualty distribution network, both captive and independent agents, and the majority of its new sales are tied to the property/casualty distribution network. While Alfa Life has a strong market position in Alabama, its life operations outside of Alabama remain modest and its operating profile has contracted somewhat due to lower portfolio reinvestment yields, IT-related capital investments and some reversion to mean mortality, which has been favorable for years.” In addition best said it “believes Alfa Life is well positioned at its current rating level. Potential for future negative rating actions could be possible should Alfa Life’s first-year life premiums continue to decline or it experiences a material decline in operating results or risk-adjusted capitalization levels, or loss of strategic value to Alfa’s property/casualty operations.” In summary Best said: “The FSR of A (Excellent) and ICRs of “a+” have been affirmed for the following members of the Alfa Insurance Group:
Alfa Mutual Insurance Company
Alfa Mutual Fire Insurance Company
Alfa Mutual General Insurance Company
Alfa Alliance Insurance Corporation
Alfa General Insurance Corporation
Alfa Insurance Corporation
Alfa Specialty Insurance Corporation
Alfa Vision Insurance Corporation

A.M. Best Co. has revised the outlook for the issuer credit rating (ICR) to negative from stable and affirmed the financial strength rating (FSR) of ‘B++’ (Good) and ICR of “bbb+” of Pennsylvania-based ARI Mutual Insurance Company; however, the outlook for the FSR remains stable. Best said the negative outlook on the ICR reflects its “concerns that underwriting results may be slow to improve given the level of adverse loss reserve development recorded in recent years, including 2013. As a result, weak earnings may make it more difficult for the company to significantly improve its level of risk-adjusted capitalization in the near term. Should the ICR be downgraded to “bbb,” the FSR would remain at ‘B++’ (Good). As a result, the current outlook for the FSR is stable.” Best also explained that the ratings “reflect good risk-adjusted capitalization, historical operating profitability (prior to 2011), and local presence in the New Jersey commercial auto insurance market.” As partial offsetting factors Best cited ARI’s “weak, albeit improving, operating results in recent years; the variability of the group’s loss reserve position, as evidenced by areas of adverse loss reserve development reported on prior accident years; as well as the narrow geographic and product spread of risk, which exposes the group to changes in the regulatory, legislative and competitive landscape.” Best concluded: “Factors that may lead to negative rating actions include deterioration in underwriting and operating performance, continued adverse loss reserve development and erosion of surplus that could consequently cause a decline in the group’s risk-adjusted capitalization.”

A.M. Best Co. has downgraded the financial strength rating (FSR) to ‘B’ (Fair) from ‘B+’ (Good) and issuer credit rating (ICR) to “bb+” from “bbb-” of California-based Springfield Insurance Company. The outlook for the FSR is stable, while the outlook for the ICR has been revised to negative from stable. Best said the “rating actions are based on Springfield’s declining risk-adjusted capitalization during 2012 and through the first nine months of 2013. The deterioration in the company’s risk-adjusted capitalization was primarily driven by adverse loss reserve development on the more recent accident years, which drove underwriting losses and increased underwriting and loss reserve leverage. In addition, Springfield has a large premium dependence on California workers’ compensation, where pricing and regulatory reform volatility can cause adverse results.” More positive factors cited by Best include “management’s expertise and knowledge of the grocery marketplace, Springfield’s conservative underwriting strategy and the initiatives management has taken to improve both rate and loss reserve adequacy.” Best said the negative outlook on the ICR reflects its view that “Springfield faces execution risk in returning to a profitable footing, without which capital could continue to erode through losses. Should the ICR be downgraded to “bb”, the FSR would remain at B (Fair). As a result, the current outlook for the FSR is stable. Further negative rating actions could occur if Springfield continues to experience weakened combined and operating ratios, further material adverse development or capital adequacy declines materially as measured by Best’s Capital Adequacy Ratio (BCAR).”

Topics Alabama AM Best

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