Ratings Roundup: Mountain States, HMSC, Woodbrook, Gateway, Fremont, Michigan Millers’

January 21, 2009

A.M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit ratings of “a-” of Mountain States Mutual Casualty Company and its wholly owned subsidiary, Mountain States Indemnity Company. The two Companies comprise Mountain States Insurance Group of Albuquerque, NM. Best said the “rating actions reflect the group’s solid risk-adjusted capitalization, historically positive operating performance (prior to 2008), strong local market presence and recent initiatives being implemented to improve core earnings.” However, “the decline in risk-adjusted capitalization during 2008 due to underwriting and investment losses, as well as some diminution in market values related to the group’s investment grade bond portfolio,” should be considered as offsetting factors. Best noted that the “group’s strong liquidity, both in terms of other investments not subject to the current liquidity crises (i.e., ‘underwater’ bonds do not appear to be at risk of being sold prior to maturity in order to meet current obligations), as well as positive underwriting and operating cash flows,” improved the Group’s capital position. Best said the negative rating outlook reflects its “concern that capitalization may deteriorate further if operating performance does not improve in the near term.”

Standard & Poor’s Ratings Services has lowered its counterparty credit rating on HMSC Corp., the intermediate holding company of Swett & Crawford Group Inc., to ‘B-‘ from ‘B’. The outlook is stable. S&P also lowered its senior secured debt rating on HMSC’s first-lien term loan to ‘B-‘ (the same as the counterparty credit rating) from ‘B’. “The recovery rating on this debt remains unchanged at ‘3’, indicating the expectation for meaningful (50 percent-70 percent) recovery in the event of a payment default,” said S&P. “We also lowered our rating on the company’s second-lien term loan to ‘CCC’ (two notches lower than the counterparty credit rating) from ‘CCC+’. The recovery rating remains unchanged at ‘6’, indicating the expectation for negligible (0 percent-10 percent) recovery in the event of a payment default.” Credit analyst Tracy Dolin explained: “The downgrade contemplates the company’s high debt-servicing needs in conjunction with top-line pressure that may translate into another year of weak EBITDA fixed-charge coverage of about 1.5x, which is below our expectation of 1.9x. The rating actions also reflect our expectation for another year of competitive pricing, negative effects from the recession, and less financial flexibility.”

A.M. Best Co. said it has noted the recent merger of Woodbrook Casualty Insurance, Inc. with and into its former affiliate, The Medical Assurance Company, Inc. with Medical Assurance being the surviving insurer. As a result Best has withdrawn the financial strength rating (FSR) of ‘B’ (Fair) and issuer credit rating (ICR) of “bb+” and assigned a category NR-5 (Not Formally Followed) to the FSR and an “nr” to the ICR of Woodbrook. Best also noted that Medical Assurance’s name was changed to ProAssurance Indemnity Company, Inc. and said that its “ratings are unaffected by this merger. All of the above companies are insurance subsidiaries of ProAssurance and are located in Birmingham, AL.”

A.M. Best Co. has revised the outlook to positive from stable and affirmed the financial strength rating of ‘B+’ (Good) and issuer credit rating of “bbb-” of Gateway Insurance Company of St. Louis, Mo. “The ratings reflect Gateway’s solid risk-adjusted capitalization, sound historical operating results on its core book of business, improved consolidated operating results in recent years and the financial flexibility provided by its owner, Hendricks Holdings Company, Inc,” said Best. “These strengths are offset by losses driven by the run off of various lines of business entered into by prior ownership (albeit lower in recent years) as well as the execution risk associated with Gateway’s planned growth into new territories and new lines of business, especially at a time of increased competitive pressures throughout the commercial lines sector.” Best added that the positive outlook reflects its “expectation that Gateway’s improved operating results and risk-adjusted capitalization will continue to trend favorably as management implements new products and continues its geographical expansion.”

A.M. Best Co. has upgraded the issuer credit rating (ICR) to “bbb+” from “bbb” and affirmed the financial strength rating (FSR) of ‘B++’ (Good) of Fremont Insurance Company. The outlook for the ICR is positive, and Best has also revised the outlook for the FSR to positive from stable. In addition Best upgraded the ICR to “bb+” from “bb” of Fremont’s holding company, Fremont Michigan InsuraCorp, Inc. The outlook for this rating is positive. Both companies are domiciled in Fremont, Mich. “The ratings reflect Fremont’s well-established presence as a writer of personal lines insurance in its home state of Michigan, strong capitalization, consistently strong operating profits driven by positive underwriting results, ongoing agency management/improvement strategies, tightened underwriting guidelines and expansion into less catastrophe-prone areas of Michigan.” However, Best indicated that these “favorable rating factors are offset by Fremont’s somewhat elevated net premium leverage and the risks inherent in its geographic concentration in the state of Michigan, which may subject the company to weather-related loss exposure, potentially adverse legal and regulatory conditions, as well as competitive market pressures. Management’s current strategies to temper the company’s exposure to these risks support its current rating outlook.”

A.M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Michigan Millers Mutual Insurance Company. “These rating actions reflect Michigan Millers’ strong risk-adjusted capitalization, historical operating performance, niche market expertise and management’s actions to improve future underwriting results,” Best explained. “Offsetting these positive rating factors are the company’s weak underwriting results posted since 2007, the drop in its risk-adjusted capitalization during 2008 and the execution risk associated with management’s various initiatives to return the company to a profitable footing. Furthermore, results remain exposed to both weather-related losses and the weak economic conditions in its primary operating state, Michigan.” Best added that, “although risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), significantly deteriorated in 2008 due to underwriting and investment losses, it continues to support Michigan Millers’ current rating level. Management is committed to returning the company to underwriting profitability through tighter pricing and underwriting strategies with a focus on more profitable business segments.” It also noted that the Company “writes various property/casualty insurance products mainly across the Midwest, New York and (to a lesser degree) the Southwest. Michigan Millers’ operations are organized into two segments: general business and agribusiness, with general business including both commercial and personal lines.”

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