Ratings Roundup: Commerce, So. Carolina Farm Bureau, Employers Re, American Sterling

June 10, 2008

Fitch Ratings has upgraded its ratings on the Massachusetts-based Commerce Group, Inc. (CGI) and its subsidiaries, and has assigned them a stable outlook: The following ratings are affected: Commerce Group, Inc.: Issuer Default Rating (IDR) to ‘A’ from ‘BBB+’; $300 million 5.95 percent senior notes due Feb. 26, 2013 to ‘A-‘ from ‘BBB’. Fitch’s insurer financial strength (IFS) has been raised to ‘A+’ from ‘A’ for the following companies: Commerce Insurance Company; Citation Insurance Company; Commerce West Insurance Company; American Commerce Insurance Company. Fitch said the actions follow the announcement regarding the completion of the sale of CGI to Spain’s MAPFRE S.A. for $2.211 billion in cash (See IJ web site – https://www.insurancejournal.com/news/international/2008/06/05/90667.htm). Fitch said its decision “to upgrade CGI one notch reflects potential benefits derived from the companies becoming a part of a much larger, multinational organization with a strong commitment to increase its presence in the U.S. market.” However, Fitch also indicated that it has “concerns about the execution and operational risks associated with the transaction.”

A.M. Best Co. has revised the outlook to stable from negative and affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit ratings (ICR) of “a-” of South Carolina Farm Bureau Group (SCFB) and its members – South Carolina Farm Bureau Mutual Insurance Company and Palmetto Casualty Insurance Company. Best said: “The ratings reflect SCFB’s strong risk-adjusted capitalization, comprehensive reinsurance program, consistent investment income and strong local market presence. The ratings also recognize SCFB’s sponsorship by the South Carolina Farm Bureau Federation, which facilitates marketing efforts and enhances customer loyalty and affinity. The stable outlook is based on reduced catastrophe exposure and improved stress tested risk-adjusted capitalization. SCFB’s negative rating attributes include its geographic concentration, exposure to catastrophic storm losses and dependence on reinsurance. In addition, as a result of SCFB’s reduced net premium and high reinsurance costs, its expense ratio has become elevated.”

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A-‘ (Excellent) and issuer credit ratings ICR) of “a-” of Employers Reassurance Corporation (ERAC) and its subsidiary, Union Fidelity Life Insurance Company (UFLIC) with stable outlooks. “The rating affirmations reflect both companies’ run-off market profile and financial strength positions, which are supported by ongoing parental capital contributions ultimately provided by the General Electric Company (GE),” said Best. “In addition to cash infusions, GE contributed the common shares of UFLIC to ERAC in 2007, further bolstering ERAC’s capital position.”

A.M. Best Co. has downgraded the financial strength rating (FSR) to ‘B-‘ (Fair) from ‘B’ (Fair) and issuer credit rating (ICR) to “bb-” from “bb” of American Sterling Insurance Company of Foothill Ranch, Calif. The outlook for both ratings is negative. Best explained: “The ratings reflect American Sterling’s adequate level of risk-adjusted capitalization and recently redefined business strategy resulting in significant premium growth, its aggressive geographic diversification into several states and product concentration of minimum limit liability private passenger automobile.” Best also indicated that the negative outlook “reflects the ongoing challenges faced by management based on the need to balance the company’s underwriting plans against its risk-adjusted capital requirements. American Sterling’s premium writings declined through 2005 due to its decision to run off its homeowners and non-renew its private passenger automobile books of business in California. In 2006 and 2007, based on a redefined strategic direction, the company successfully executed its plan to provide low limit liability insurance in Nevada, Arizona and Kansas and a representations and warrants coverage program to mortgage lenders in several other states, which caused a significant increase in underwriting leverage and accompanying decline in risk-adjusted capitalization.”

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