Ratings Roundup: Harford Mutual, Hallmark, Rural Mutual, Salem

May 5, 2009

A.M. Best Co. has revised the outlook to positive from stable and affirmed the financial strength rating (FSR) of ‘A-‘ (Excellent) and issuer credit ratings (ICR) of The Harford Mutual Insurance Companies and its two P/C pool members, The Harford Mutual Insurance Company and Firstline National Insurance Company. Both companies are domiciled in Bel Air, MD. Best said the “ratings reflect Harford’s excellent risk-adjusted capitalization, conservative underwriting leverage and strong liquidity. The ratings also reflect management’s greater focus and discipline in terms of underwriting, price monitoring, risk aggregation, reserving methodology, internal controls and technology to better service its agents and customers, which combined with improved loss experience, the reporting of favorable loss reserve development on recent accident years and the absence of major weather-related losses, have contributed to substantially improved underwriting and overall operating performance.” Best also indicated that “offsetting these positive factors are Harford’s higher expense ratio relative to its peers, elevated common stock leverage, which exposes Harford’s net income and surplus to the vagaries of the equity market as evidenced in recent quarters, exposure to weather-related losses due to its Mid-Atlantic concentration and the near-term challenges associated with a highly competitive property/casualty environment.”

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A-‘ (Excellent) and issuer credit ratings (ICR) of “a-” of the Texas-based Hallmark Insurance Group and its operating members. Best also affirmed the ICR of “bbb-” of the group’s holding company parent, Nevada-based Hallmark Financial Services, Inc. The outlook for all ratings is stable. “The affirmation of the ratings reflects Hallmark Group’s favorable risk-adjusted capitalization, sustained operating profitability and the financial flexibility afforded by Hallmark Financial,” best explained. “Furthermore, the ratings consider Hallmark Group’s organic surplus growth through profitable underwriting performance in recent years and consistent favorable loss reserve development. In addition, the acquisitions of various agency production sources by Hallmark Financial have resulted in a greater geographic and product spread of risk for the group. These rating factors are partially offset by Hallmark Group’s above average net underwriting leverage and continued execution risk associated with the development of various parent company acquisitions. Since more than half of Hallmark Group’s direct written premium is concentrated in three key states, earnings remain susceptible to increased competition and changes in the regulatory, judicial and legislative environments.”

A.M. Best Co. has revised the outlook to positive from stable and affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of Wisconsin-based Rural Mutual Insurance Company. Best said the “ratings reflect Rural Mutual’s strong capitalization, improved operating performance in recent years and historic local market presence as the leading provider of farm-related insurance coverages in Wisconsin.” However, best also indicated that these “positive rating factors are partially offset by Rural Mutual’s historically fluctuating operating results due to its geographic concentration, which exposes its performance to weather-related losses, as well as to potential changes in the regulatory and legislative environment.” Best added that its outlook is based on the Company’s “improved operating performance in the most recent five-year period despite a generally softening underwriting cycle, due primarily to improvements in underwriting standards along with somewhat milder weather patterns. This favorable operating trend has enabled Rural Mutual to nearly double the level of policyholders’ surplus over the last four years and has resulted in solid risk-based capitalization, which strongly supports the current ratings.”

A.M. Best Co. has upgraded the financial strength rating to ‘B++’ (Good) from ‘B+’ (Good) and issuer credit rating to “a” from “bbb” of Farmers Mutual Fire Insurance Company of Salem County, both with stable outlooks. “The rating actions reflect Salem’s improved operating performance along with its favorable risk-adjusted capitalization, which solidly supports the current ratings,” said Best. “These positive rating factors are partially offset by the company’s geographic concentration of risk in New Jersey, which in the past has resulted in an inconsistent operating performance. Salem’s previous unfavorable operating performance was related to underground storage tank (UST) losses and weakened risk-adjusted capitalization due to increases in modeled probable maximum loss from its concentration of business along the New Jersey coast.” However, Best added that “Salem has managed to significantly lessen these accumulated risk exposures by reducing writings along catastrophe-exposed areas. The company also has witnessed a significant decrease in claims relating to UST losses due partly to application of stricter underwriting standards. The combination of these favorable trends in accumulated risk exposures has improved Salem’s operating performance and has resulted in stronger risk-adjusted capitalization.”

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