Best Downgrades Merchants NH; Rates American European ‘B+’

May 18, 2007

A.M. Best Co. has downgraded the financial strength rating (FSR) to “B+” (Good) from “A-” (Excellent) and issuer credit rating (ICR) to “bbb-” from “a-” of Merchants Insurance Company of New Hampshire, Inc. As a result Best removed the ratings from under review with negative implications and assigned a stable outlook.

Best said it had taken the rating action in connection with Merchants New Hampshire’s newly formed group, American European Insurance Group. Best has assigned an FSR of “B+” (Good) and an ICR of “bbb-” to American European, also with a stable outlook.

In addition Best affirmed the FSR of “B-” (Fair) and assigned ICRs of “bb-” to Rutgers Casualty Insurance Group and its member, Rutgers Casualty Insurance Company, and revise its outlook to stable from negative. Rutgers Casualty Insurance Company is a wholly-owned subsidiary of Merchants New Hampshire. All of the companies are headquartered in Cherry Hill, NJ.

Best explained the downgrade as triggered by its concerns regarding Merchants New Hampshire’s ratings due to “significant execution risk in the management and integration of Merchants New Hampshire on a going forward basis following its March 30, 2007 purchase by American European Group, Inc.”

Merchants New Hampshire’s initial challenge will be to “maintain its premium volume going forward, as the company sold the renewal rights of its in-force policies to a former affiliate, Merchants Mutual Insurance Company, which could terminate its pooling agreement with Merchants New Hampshire as early as December 31, 2009.”

Best also noted that Merchants New Hampshire “maintains a high underwriting expense ratio, primarily due to an above average commission structure, overhead costs and a reduction in premiums due to a lower pooling percentage.”

A further factor concerns Merchant New Hampshire’s underwriting results. Best noted that, although they have improved in recent years, over the long-term they have been “unfavorable due to increased loss severity trends, the use of scheduled credits, localized weather patterns given its heavy northeast orientation and a high expense ratio.”

There are some offsetting factors. These include “Merchants New Hampshire’s moderate underwriting leverage, conservative investment risk profile and improving underwriting results in recent years,” which have recently “benefited from favorable loss reserve development, various underwriting actions implemented to improve profitability and lower than normal storm activity. Furthermore, the ratings acknowledge Merchants New Hampshire’s pooling, underwriting and claims servicing agreements with Merchants Mutual Insurance Company, which should continue until at least 2009.”

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