Ratings Recap: Arbella, Wayne Mutual, Arrowhead, Unique, Oswego County

November 4, 2009

A.M. Best Co. has upgraded the financial strength rating to ‘A-‘ (Excellent) from’ B++’ (Good) and issuer credit ratings to “a-” from “bbb+” of Arbella Insurance Group and its members. Arbella consists of Arbella Mutual Insurance Company, majority-owned subsidiaries Arbella Protection Insurance Company, Arbella Indemnity Insurance Company, Commonwealth Reinsurance Company, Connecticut-based Covenant Insurance Company and reinsured affiliate Commonwealth Mutual Insurance Company. All of the companies, except Covenant, are domiciled in Quincy, Mass. Best also revised its outlook on all of the ratings to stable from positive. “The rating upgrades reflect Arbella’s surplus growth and strong risk-adjusted capitalization following its improved underwriting performance, which is due mainly to favorable loss experience and reduced underwriting leverage over the past several years,” Best explained. However the rating agency also indicated that “Arbella maintains elevated underwriting expenses relative to its composite peers and other Massachusetts personal automobile writers, as well as substantial property catastrophe exposure, which is closely managed and mitigated through reinsurance and coverage limitations.” Arbella is primarily engaged in writing personal lines and commercial insurance products in Massachusetts, Connecticut and Rhode Island. It has an established market presence as the third leading writer of personal automobile insurance under the Massachusetts system of managed competition.

A.M. Best Co. has downgraded the financial strength rating to ‘B++’ (Good) from ‘A-‘ (Excellent) and issuer credit rating to “bbb” from “a-” of Ohio’s Wayne Mutual Insurance Company with a stable outlook. Best said the “rating actions follow Wayne’s continued decline in risk-adjusted capitalization due to a recent affiliation with Washington Mutual Insurance Association, combined with deteriorating underwriting results, primarily driven by weather-related events.” Best added that the affiliation with WaMu Insurance had “resulted in an increased risk profile and elevated leverage measures for Wayne, as it is assuming 100 percent of Washington’s business, via a quota share agreement. It is anticipated that this will result in Wayne’s net written premium increasing by as much as 40 percent in the near term.” Best also noted that the “operating results of the assumed business from Washington have been negatively impacted by weather-related events in recent years. While Wayne has implemented various initiatives to streamline underwriting and claims processes, as well as re-underwriting the Washington book to meet its own criteria, certain execution risk exists regarding the integration of this property business.” However, best did note that “Wayne’s well established expertise and market presence in Ohio with its long-term agency relationships” should be considered as positive factors. “In addition, the company has consistently reported favorable loss reserve development, both on an accident and calendar year basis.”

Standard & Poor’s Ratings Services has assigned its ‘B-‘ counterparty credit rating and negative outlook to San Diego, Calif.-based Arrowhead General Insurance Agency Inc. S&P also assigned ‘B-‘ ratings to Arrowhead’s first-lien senior secured bank loan and first-lien revolving credit facility as well as its ‘CCC’ rating to the company’s second-lien secured debt. “The first-lien recovery rating is ‘3’, indicating our expectation of meaningful (50 percent-70 percent) recovery in the event of a payment default,” S&P explained. “The second-lien recovery rating is ‘6’, indicating our expectation of negligible (0 percent-10 percent) recovery in the event of a payment default.” Credit analyst Jieqiu Fan added that the ratings on Arrowhead reflect its “strained cash flow and diluted capital quality following the leveraged majority investment in Arrowhead by California-based Spectrum Equity Investors in 2006.” In addition, S&P explained that the company operates in an industry segment, which “exhibits somewhat high revenue and earnings cyclicality, high fragmentation, and constraints to carrier access. Another challenge is lower commission and fee income, reflecting ongoing insurance premium rate pressure by carriers and altered insurance purchases by clients as a result of the economic downturn. Moreover, the company has streamlined its product programs to 18 from 26. These weaknesses are partly mitigated by the company’s experienced management team and its competitive and focused business platform. Arrowhead has a strong track record of producing low loss ratios, solidifying carriers’ interest in programs. Moreover, the company generates favorable EBITDA margins.”

A.M. Best Co. has upgraded the issuer credit rating (ICR) to “bb+” from “bb” and affirmed the financial strength rating (FSR) of ‘B’ (Fair) of Chicago-based Unique Insurance Company with stable outlooks. “The upgrading of Unique’s ICR reflects its consistently favorable operating results and surplus growth,” said Best. “The company’s FSR recognizes its elevated expense and underwriting leverage ratios and concentration of risk in Illinois, writing non-standard automobile insurance. The outlook is based on the long-term consistency of Unique’s operating results.”

A.M. Best Co. has upgraded the financial strength rating to ‘A-‘ (Excellent) from ‘B++’ (Good) and issuer credit rating to “a-” from “bbb+” of New York’s Oswego County Mutual Insurance Company, and has revised its outlook on the ratings to stable from positive. Best said the ratings reflect “Oswego’s strong capitalization and favorable operating performance over several years. Oswego’s capital position is the outcome of consistent investment income coupled with improved underwriting results derived from management’s corrective strategies and strict risk selection guidelines. As a result of these initiatives, surplus has grown to record levels. The ratings also acknowledge Oswego’s more than 130-year tenure in northern central New York, which has led to significant knowledge of the upstate New York property market.” However Best cited “Oswego’s geographic concentration of property risk and elevated expense ratio” as offsetting factors. “Being a single state property writer, Oswego’s earnings are susceptible to weather-related events and competitive market conditions,” best noted. “However, a comprehensive reinsurance program is maintained to address the exposure to high severity events.”

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