Ratings Recap: Frankenmuth, Sooner, Tokio Marine America, Kingstone, Canopius U.S., HDI-Gerling America

May 28, 2014

A.M. Best has revised the outlook to stable from negative and affirmed the issuer credit ratings (ICR) of “a+” of Frankenmuth Mutual Insurance Company and its affiliates, Ansur America Insurance Company, Patriot Insurance Company, based in Yarmouth Maine, ASure Worldwide Insurance Company and Fortuity Insurance Company (collectively referred to as Frankenmuth). Best also affirmed Frankenmuth’s financial strength rating (FSR) of ‘A’ (Excellent) with a stable outlook. In addition Best affirmed the FSR of ‘A’ (Excellent) and ICR of “a” of Patriot Life Insurance Company, a subsidiary of Frankenmuth Mutual Insurance Company, with stable outlooks. All of the companies are headquartered in Frankenmuth, Michigan, unless otherwise noted. Best explained that the “revised outlook for the ICRs reflects Frankenmuth’s improved underwriting results since 2011. Frankenmuth’s management team continues to implement strategies that have driven the improvements, including various underwriting initiatives (such as rate increases, re-underwriting and mitigating its geographic risk concentration) and targeted agency management plans. The affirmation of Frankenmuth’s ratings reflects its strong risk-adjusted capitalization, solid regional market presence and positive after-tax income in eight of the past 10 years. As a partial offsetting factor Best cited “the modest decline in underwriting results experienced in two of the past five years, which were driven by weather-related losses and severity in personal automobile and workers’ compensation.” Best said: “While a change to Frankenmuth’s ratings is unlikely in the near- to mid-term, positive rating actions could be taken if the group’s operating results improve relative to similarly rated peers and are sustained at that level over the long term. Negative rating actions may occur if there is a decline in Frankenmuth’s operating results and/or a considerable deterioration in its risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio. The ratings of Patriot Life reflect the formal guaranty issued by Frankenmuth with respect to Patriot Life’s liabilities, as well as its favorable risk-adjusted and absolute capital, well-managed investment portfolio and high levels of liquidity.” Commenting on the ratings for Patriot Life, Best indicated that its strengths are partially offset by the company’s “operating losses resulting from modest premiums and product development and other related start-up expenses as it establishes a market presence. Patriot Life has a limited business profile given its modest and narrow geographic presence.” Best said it would “continue to monitor the company’s ability to expand geographically, enhance its product profile and demonstrate an ability to generate operating profitability over time.” In addition Best indicated that it “believes positive rating actions for Patriot Life are unlikely in the near term given the start-up nature of its operation and its current limited seasoning of its business model. Downward rating pressure could occur if A.M. Best were to view Patriot Life as having lesser strategic value to its parent company or if there is a significant drop in the reported risk-adjusted capitalization. Rating pressure also may occur if there were negative rating actions taken on its parent company.”

A.M. Best has affirmed the financial strength rating of ‘A’ (Excellent) and the issuer credit rating of “a” of Vermont-based Sooner Insurance Company, both with stable outlooks. The ratings “reflect Sooner’s excellent capitalization, history of consistent operating profitability driven by favorable underwriting results, conservative reserve levels and the position it holds as the captive insurer for its ultimate parent, ConocoPhillips,” Best explained. “The ratings also consider the level of commitment on the part of ConocoPhillips, whose management incorporates Sooner as a core element in its overall risk management program. As a partial offsetting factor Best cited “Sooner’s significant reinsurance credit risk stemming from the large limits offered on its policies and the possible change in the captive’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. Sooner provides property damage, business interruption and general liability insurance to ConocoPhillips and its subsidiaries worldwide.” Best also noted that “Sooner has a history of generally positive underwriting results and strong operating return measures. Over a 10-year period, the company’s loss experience has remained favorable due, in part, to ConocoPhillips’ strong risk management programs. ConocoPhillips’ corporate insurance and health, safety and environmental groups conduct periodic reviews of their potential loss exposures through a specialist in industrial risks. Sooner may have high net retentions based upon the capacity of the overall insurance market from year to year. Nonetheless, Sooner does have the capital to retain these risks, if net retentions were to increase. Although the majority of Sooner’s capital is loaned to ConocoPhillips, it is considered to have relatively low risk due to this affiliation as well as the parent’s strong balance sheet and history of positive earnings.” In conclusion 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 the company’s risk profile. In addition, deterioration in the credit profile of ConocoPhillips could impact Sooner’s ratings.”

A.M. Best has affirmed the financial strength rating (FSR) of ‘A++’ (Superior) and issuer credit ratings of “aa+” of Tokio Marine America Insurance Company (TMAIC) and its affiliates. TMAIC has separate 100 percent quota share agreements with Trans Pacific Insurance Company (TPI), TM Specialty Insurance Company (TMS), based in Phoenix, and TNUS Insurance Company (TNUS). The outlook for all ratings is stable. All companies are domiciled in New York, NY, unless otherwise specified. They are also wholly owned subsidiaries of Tokio Marine North America Inc., an insurance holding company subsidiary of Japan’s Tokio Marine & Nichido Fire Insurance Co., Ltd. (TMNF), a subsidiary of Tokio Marine Holdings, Inc. (TMHD). Best said the ratings for TMAIC and its affiliates “reflect the status and critical role all have as part of TMNF’s global strategy. The primary strategic focus of TMAIC and its affiliates is to support the insurance needs of TMNF’s clients, which conduct business in the United States. The ratings also reflect the strong risk-adjusted capitalization and excellent overall earnings of TMAIC. The ratings of TMAIC are a direct extension of the ratings of TMNF; as such, any upward or downward movement on the ratings of TMNF would affect the ratings of TMAIC. Negative rating actions for the TMAIC affiliates could occur if the reinsurance support provided by TMAIC was reduced or terminated.”

A.M. Best has revised the outlook to positive from stable and affirmed the financial strength rating of ‘B+’ (Good) and the issuer credit rating (ICR) of “bbb-” of Kingstone Insurance Company and the ICR of “bb-” of the publicly traded holding company of Kingstone, Kingstone Companies, Inc. Both companies are headquartered in Kingston, New York. Best’s report explained that the “revised outlook reflects Kingstone’s recently improved risk-adjusted capitalization and continued favorable operating earnings, which have enabled it to consistently grow its policyholders’ surplus. Kingstone’s risk-adjusted capitalization significantly improved at year-end 2013, driven by a $15.0 million capital contribution from its parent, following an $18.8 million public offering on December 13, 2013. The capital raised in this public offering also enabled management to repay all of its outstanding debt at Kingstone Companies Inc.” Best added that the ratings also “reflect Kingstone’s strong risk-adjusted capitalization, favorable five-year operating performance and local market knowledge in its predominant operating territory of New York State. The company’s favorable operating performance is reflected in its double-digit five-year pre-tax returns on revenue and equity, generated by positive net underwriting income and supplemented by net investment and other income. Kingstone’s policyholders’ surplus growth has been solid over the last five years, increasing at a double-digit average annual rate. Additionally, the ICR for Kingstone Companies, Inc. acknowledges the standard notching off of the ICR for the operating company.” As partial offsetting factors Best cited Kingstone’s “dependence on reinsurance and its concentration of risk, primarily in downstate New York, which exposes it to weather-related events as well as to market, regulatory and judicial issues. Kingstone also has reported adverse loss reserve development in recent calendar and accident years, driven in part by historical lead paint claims. Furthermore, Kingstone is projecting substantial growth in net premiums written in 2014, driven by increased retention on its quota share reinsurance contracts and new policy growth. However, Kingstone’s increased capital position should comfortably support management’s growth plans. While Kingstone’s single-state concentration exposes it to weather-related events, catastrophe exposure is partially mitigated through catastrophe reinsurance, which it purchased increased limits in recent years, as well as the use of hurricane deductibles, visual risk inspections, distance-from-shore restrictions and surcharges. In addition, the company has been expanding its operating territory to regions beyond the New York metropolitan area. In conclusion Best said the “potential for rating upgrades exists if Kingstone maintains the favorable operating performance that it has demonstrated in recent years and maintains its risk-adjusted capitalization. There could be negative pressure on Kingstone’s ratings going forward if its favorable operating performance were to deteriorate or its risk-adjusted capitalization were to materially weaken.”

A.M. Best has removed from under review with developing implications and affirmed the financial strength rating of ‘A-‘(Excellent) and issuer credit rating of “a-” of Delaware-based Canopius US Insurance, Inc., and has assigned both ratings a stable outlook. Best said the rating actions “follow the completion of the acquisition on May 1, 2014 of Canopius US’ parent, Guernsey-based Canopius Group Limited, by Sompo Japan Insurance Inc., a subsidiary of NKSJ Holdings Inc. and one of the largest insurers in Japan. Best explained that the ratings are based on its criteria – “‘Rating Members of Insurance Groups,’ and take into consideration the expected implicit and explicit support that Canopius US could receive as a member of a much larger and stronger group. While the exact role and strategic importance that Canopius US will have is still to be fully determined, A.M. Best expects that this acquisition should further strengthen Sompo Japan’s U.S. business footprint going forward. Further details regarding the new organization’s management, new business initiatives, governance, reinsurance and other forms of capital support including capital management plans will be key factors that can influence these ratings positively or negatively in the future.” Best also noted that the rating actions “consider Canopius US’ historically favorable attritional loss experience (prior to 2013), solid level of risk-adjusted capitalization and the benefits from additional actuarial and catastrophe modeling support through Canopius. Offsetting these positive rating factors are the inherent challenges associated with Canopius US being a predominant binding facility writer, its sub-par earnings performance in 2013 due to adverse development in its liability book of business and its history of heavy overhead expenses under previous ownership, which impeded earnings through its earlier years of operation.” In conclusion Best said: “Positive rating actions could occur if Canopius US records an operating profit and receives full implicit and explicit support from Sompo Japan, including committing to using Canopius US as its primary surplus lines delivery platform. Negative rating actions could occur if there is a significant decline in the company’s risk-adjusted capitalization and/or any wavering of implicit and explicit support by Sompo Japan, including the cessation of new business writing at Canopius US.”

A.M. Best has upgraded the issuer credit rating (ICR) to “a+” from “a” and affirmed the financial strength rating (FSR) of ‘A’ (Excellent) of Chicago-based HDI-Gerling America Insurance Company (HDI-GAIC), and has revised the outlook for the ICR to stable from positive, while the outlook for the FSR is stable. “The ratings of HDI-GAIC largely reflect its strong risk-adjusted capitalization and the benefit of the explicit support provided through substantial internal reinsurance by its immediate parent, HDI-Gerling Welt Service AG (HG-WS), and the immediate parent of HG-WS, HDI-Gerling Industrie Versicherung AG (HG-I),” Best explained. “The ratings also acknowledge the additional support provided by a retroactive reinsurance cover with HG-I that covers any net adverse development on policies incepting prior to January 1, 2000, in addition to the implied support of future parental commitment. HDI-GAIC principally markets global-linked commercial lines business to HG-I clients that have operations in the United States, in addition to participating as an underwriter of business produced by two affiliated underwriting agencies.” Best’s report also noted that the “upgrading of the ICR of HDI-GAIC mirrors the upgrading of the ratings of HDI Haftpflichtverband der Deutschen Industrie V.a.G. (HDI V.a.G.), the ultimate mutual parent company of Talanx AG and its various subsidiaries including HG-WS and HG-I. The upgrading of these ratings reflects solid earnings in recent years, the improved financial flexibility since the completion of Talanx AG’s initial public offering in October 2012 and the successful integration of its acquisitions in Poland. The ratings also take into account Talanx AG’s strong enterprise risk management culture, which has contributed to the group’s stability through soft market conditions and the global financial crisis. Given the substantial explicit support HDI-GAIC has with HG-WS and HG-I, any upward or downward movement on the ratings of either company would influence HDI-GAIC’s ratings. In addition, if HDI-GAIC’s capitalization and/or operating performance falls markedly short of Best’s expectations, negative rating actions could ensue.”

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