Ratings Roundup: Plymouth Rock, American Sterling, Mercer, Iron Horse, Agrinational, Intrepid

June 25, 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 Plymouth Rock Assurance Group (PRAC), which includes the operations of Plymouth Rock Assurance Corporation (both of Boston, Mass.) and PRAC’s reinsured member, Mt. Washington Assurance Corporation of Concord, NH. Best explained that the “negative outlook reflects PRAC’s recent trend of underwriting losses, its decline in net investment income, elevated underwriting and unaffiliated investment leverage ratios and its concentration of business in the increasingly competitive Massachusetts private passenger automobile marketplace.” The rating agency also indicated that although the group produced positive pre-tax operating income over the latest five year period, “underwriting losses were reported in the latest two year period as a result of increased loss costs and mandated premium rate reductions by the Massachusetts Division of Insurance. Elevated net written premium and net liability leverage ratios expose PRAC to pricing errors and reserve deficiencies over the near term. Additionally, elevated unaffiliated investment leverage exposes a significant amount of PRAC’s surplus to continued equity market fluctuations. As one of the top 10 private passenger automobile carriers in Massachusetts, the group’s operating results will continue to be pressured by the increased competition from new entrants in the marketplace.”

A.M. Best Co. has downgraded the financial strength rating to ‘C++’ (Marginal) from ‘B-‘ (Fair) and issuer credit rating (ICR) to “b” from “bb-” of Calif.-based American Sterling Insurance Company and has assigned them a negative outlook. Best said the “ratings reflect American Sterling’s reduced level of risk-adjusted capitalization following its redefined business strategy, which has resulted in significant premium growth and the company’s product concentration of minimum limit liability on private passenger automobile insurance. The rating 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.” Best also pointed out that “American Sterling’s premium writings declined through 2005 due to its decision to run off its homeowners’ insurance and non-renew its private passenger automobile books of business in California. Beginning in 2006, the company successfully executed its plan to provide minimum limit liability insurance in Kansas, Nevada and Arizona, which caused a significant increase in underwriting leverage and an accompanying decline in risk-adjusted capitalization.

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 (ICR) of “a” of New Jersey-based Mercer Insurance Group. The ratings apply to the following four inter-company reinsurance pool members: Mercer Insurance Company (Lock Haven, PA), Mercer Insurance Company of New Jersey, Inc. (Pennington, NJ), Franklin Insurance Company (Lock Haven, PA) and Financial Pacific Insurance Company (FPIC) (Rocklin, Calif.). Best has also revised the outlook to negative from stable and affirmed the ICR “bbb” of Mercer Insurance Group, Inc. Best explained that the “revised outlook reflects the group’s diminished level of capitalization in 2008 and A.M. Best’s viewpoint that management will be pressed to restore capitalization to previously strong levels in the medium term. Risk-adjusted capitalization has decreased since 2004 due to increasing underwriting leverage, the ongoing drain on earnings from west coast construction defect claims and the 2005 acquisition of FPIC.” In addition “both realized and unrealized capital losses” impacted surplus growth in 2008 on Mercer’s investment portfolio, stockholder dividends and an increase in the group’s non-admitted deferred tax asset. Best added that the “ratings reflect Mercer’s adequate capitalization, its solid operating performance and conservative management philosophy. The group continues to record favorable underwriting results, which have been an important driver of strong pre-tax returns on both revenue and surplus that either meet or exceed industry peers.” However, these “positive rating factors are partially offset by Mercer’s declining level of risk-adjusted capitalization, elevated expense structure and the risks associated with possible further adverse development on its construction defect liabilities,” Best continued. “These concerns are partially mitigated by the historically strong reserve positions taken on more recent accident years. With the October 1, 2005 acquisition of FPIC by Mercer’s publicly-traded parent, Mercer, Inc., Mercer reduced its geographic concentration from nearly 80 percent in New Jersey (prior to the acquisition) to nearly 30 percent and roughly 55 percent in California (post acquisition).”

A.M. Best Co. has affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit rating of “a+” of Iron Horse Insurance Company, a captive of the Chevron Corporation located in Burlington, Vermont, with a stable outlook. “The ratings reflect Iron Horse’s superior risk-adjusted capitalization, experienced management team and the role that the company serves as a captive insurance company for Chevron Corporation,” said Best. However, the rating agency also noted that “the company’s high net loss exposures, as the coverages provided tend to result in claims that are characterized as low frequency but high severity,” is an offsetting factor. “This is somewhat mitigated,” Best continued, “by Iron Horse’s ability to secure capital from Chevron in the event of a covered shock loss. Iron Horse directly benefits from the attention of Chevron’s experienced risk management team and also gains from its global operations, which provide favorable geographic spread of risk and line of business diversification. In its role as a captive insurer, Iron Horse provides broad and competitive global insurance products for Chevron and its subsidiaries. Structurally, Iron Horse is a direct subsidiary of Chevron. Chevron owns four other active captives: Traders Insurance Ltd., which merged with Bermaco Insurance Company Ltd. in December 2006, Heddington Insurance Limited, Heddington Insurance (U.K.) Limited [See “international” ratings article] and Puritan Assurance Ltd. A portion of the insurance needs of Chevron are supplied through these captive operations, where appropriate, and the commercial market, with many of the insurance arrangements rationalized among captives to enhance operating efficiencies. Iron Horse, along with other Chevron captives, provides comprehensive coverage above Chevron’s internal retentions, while its reinsurance is placed through a corporate-wide plan with the world’s significant providers of capacity, resulting in a diversified and balanced distribution of reinsurers.”

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Agrinational Insurance Company, a captive insurer of Archer Daniels Midland (ADM) Company, headquartered in Vermont, with stable outlooks. “The ratings reflect Agrinational Insurance Company’s strong capitalization, overall favorable operating performance and strategic role” as a captive of ADM, said Best. In addition the Company’s net written premium and policyholder surplus “have exhibited significant growth over the last five years due primarily to the growth of ADM. As a partial n offsetting factor, Best cited “the high net retention on property exposures, which has produced some variability in operating results. Also, as a single parent captive, Agrinational is exposed to concentration risk since its primary source of business is from one company. It also provides insurance for a limited amount of third-party business sourced through an industry pooling arrangement.” Best did note that, as a means of diversifying its investment portfolio, “Agrinational has invested in the leasing of railcars and barges. Management considers these investments as long term and a better alignment of the company’s capital structure, while providing stability in investment returns.”

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 “a-” of Michigan’s Intrepid Insurance Company. “The ratings reflect Intrepid’s solid capitalization, favorable loss ratios, effective management of exposures and strong synergies with its ultimate parent, Daimler AG,” said Best. “As a part of Daimler AG, Intrepid takes an enterprise-wide approach to managing its risk. Partially offsetting these positive factors is Intrepid’s narrow business focus and dependency on Daimler AG’s business. Furthermore, its business underwriting results in automotive physical damage is subject to volatility due to weather related events impacting vehicle inventories, particularly hail and hurricane related events.”

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