Ratings Recap: Berkley (Notes), Selective, Fire Districts, Crestbrook

September 23, 2009

A.M. Best Co. has assigned a debt rating of “a-” to the new issuance of $300 million 7.35 percent 10-year senior unsecured notes of W. R. Berkley Corporation, and has assigned them a stable outlook. Proceeds from the current offering will be used for general corporate purposes, including the repayment of indebtedness. “At June 30, 2009, W. R. Berkley’s unadjusted debt-to-capital (including trust preferred securities) stood at 28 percent, near the low end of its target range of 25 percent to 35 percent,” said Best. “The company’s financial leverage has moderated in this range over the last couple of years, a noted decrease from several years ago. However, leverage has remained above industry peers. With the inclusion of W. R. Berkley’s $300 million senior note issuance, and the expected repayment of indebtedness coming due in 2010, its pro forma debt-to-capital at year-end 2009 will increase to approximately 30 percent. While the competitive property/casualty operating environment is still likely to place some pressure on 2009 underwriting results, W. R. Berkley’s earnings are expected to remain solid, and its cash coverage ratios should remain supportive of the rating. W. R. Berkley has historically maintained above average financial leverage, which consistently remains a negative rating factor. Offsetting the concerns associated with financial leverage are the company’s strong earnings, excellent financial flexibility and carefully managed capital structure.” W. R. Berkley’s debt includes no short-term securities or bank debt, which Best view favorably.

Standard & Poor’s Ratings Services today said it assigned its preliminary ‘BBB’ senior unsecured debt, ‘BBB-‘ subordinated debt, and ‘BB+’ preferred stock ratings on Selective Insurance Group Inc.’s universal shelf registration filed with the SEC on June 18, 2009. This shelf replaces an existing universal shelf registration filed in September 2006. “The ratings reflect Selective’s strong competitive position in its core Mid-Atlantic market, well-developed predictive modeling capabilities, and strong financial flexibility,” S&P said. “Partially mitigating some of these strengths are the company’s relatively weak operating performance in recent years, a significant decline in capital adequacy as per Standard & Poor’s capital adequacy model, the continuing challenges in personal lines, and the geographic concentration in the Mid-Atlantic region. The company’s pretax earnings in the first half of 2009 were a loss of $8.3 million, compared with a pretax profit of $62.7 million during the same period in 2008. The GAAP combined ratio was 99.6 percent in the first half of 2009, while the return on revenue was very modest at 3.6 percent.” S&P also noted that “Selective’s financial leverage remains conservative and its liquidity remains strong. As of June 30, 2009, the company’s financial leverage was conservative at about 23.8 percent, compared with 24.5 percent at year-end 2008. Also, Selective’s GAAP fixed-charge coverage was 3.5x, compared with 5.0x at year-end 2008.”

A.M. Best Co. has assigned a financial strength rating (FSR) of ‘B’ (Fair) and issuer credit ratings (ICR) of “bb+” to Fire Districts Insurance Group (FDI) and two members. The ratings apply to FDM Preferred Insurance Company, Inc. and Fire Districts Insurance Company, Inc. Best also affirmed the FSR of ‘B’ (Fair) and ICR of “bb+” of Fire Districts of New York Mutual Insurance Company, Inc. All companies are domiciled in Chestnut Ridge, NY. The outlook for all the ratings is stable. “The ratings reflect FDI’s adequate capitalization, high member retention, implementation of strict underwriting and loss control guidelines, along with above average operating returns from its relatively small and closely monitored direct book of business,” Best explained. “Partially offsetting these positive rating factors are FDI’s elevated underwriting leverage, its current geographic concentration and a small amount of matured open claims from the out-of-state program that was discontinued over six years ago. The ratings also reflect the company’s niche focus and market leadership position in underwriting workers’ compensation coverage for volunteer emergency services organizations. FDI estimates that it insures approximately one-third of all volunteer firefighters in New York State. Furthermore, the ratings take into consideration FDI’s return to its core business, which has resulted in increasing profitability and operating stability. One important aspect of the company’s risk management program is the training and certification of health and safety officers, which was implemented in 2005. The program has been successful with the certification of over 300 new officers.”

A.M. Best Co. has assigned a financial strength rating of ‘A+’ (Superior) and issuer credit rating of “aa-” to Crestbrook Insurance Company, but has assigned both ratings a negative outlook. Crestbrook is a wholly owned, reinsured subsidiary of Nationwide Mutual Insurance Company. Both Crestbrook and Nationwide Mutual are members of the Nationwide Group, and are domiciled in Columbus, Ohio. “Crestbrook’s ratings reflect its projected levels of risk-adjusted capitalization and operating performance in addition to its reinsured affiliation with Nationwide Mutual,” said Best. “The outlook reflects the potential impact on Crestbrook’s ratings from the challenges faced by Nationwide’s management to rebuild surplus in the wake of historical storm losses and the decline in risk-adjusted capitalization associated with the early 2009 privatization of Nationwide Financial Services, Inc. Beginning September 2009, Nationwide plans to write personal lines coverages through Crestbrook to high net worth clientele in California under its new Allied Private Client program.”

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