Ratings Roundup: Upland Mutual, American Community

November 9, 2009

A.M. Best Co. has revised the outlook to stable from positive and affirmed the issuer credit rating (ICR) of “bbb” of Upland Mutual Insurance, Inc. of Junction City, Kansas. Best also affirmed Upland’s financial strength rating (FSR) of ‘B++.’ The outlook for the FSR is stable. “The positive outlook previously assigned to Upland’s ICR was revised to stable following the decline in surplus from underwriting and investment losses,” Best noted. “Underwriting losses resulted from increased frequency of wind and hail storms and the impact of the EF-3 tornado in Chapman, KS. Investment losses resulted from the unprecedented decline in the capital markets, which impacted Upland’s fixed income and equity investments.” Best added that Upland’s ratings reflect its “adequate level of risk-adjusted capitalization, driven by moderate underwriting leverage and conservative reserving practices. The ratings also recognize the company’s long-standing market presence in Kansas and favorable overall liquidity measures. However, “Upland’s elevated ceded reinsurance leverage measure, limited financial flexibility and current business profile, as a single-state, property writer, expose it to increased competitive market conditions and regulatory and judicial changes.” These should be taken into account as partially offsetting factors.

A.M. Best Co. has downgraded the financial strength rating to ‘C+’ (Marginal) from ‘B’ (Fair) and issuer credit rating to “b-” from “bb” of American Community Mutual Insurance Company of Livonia, Minn. The outlook for both ratings is negative. Best explained that then downgrades reflect “an expected material net operating loss resulting from reserve strengthening, which will occur in third quarter 2009, with a corresponding decrease in surplus. An anticipated reduction in the company’s deferred tax asset in third quarter 2009 is expected to further decrease surplus. In addition, two surplus notes represent a significant portion of total surplus.” In addition Best noted that American Community’s premium revenue and net income “are derived primarily from marketing major medical products to individuals and employer groups, chiefly in seven Midwestern states and Arizona. Although American Community intends in the near term to reduce its premium revenue to match its surplus base by eliminating or reducing unprofitable segments in certain states, A.M. Best believes its future operating results will continue to be challenged by an increasingly competitive major medical market dominated by larger managed care carriers with deeper network discounts.”

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