Ratings Roundup: First Colonial, Mount Carroll, Cherokee

December 15, 2009

A.M. Best Co. has downgraded the financial strength rating to ‘A-‘ (Excellent) from ‘A’ (Excellent) and issuer credit rating to “a-” from “a” of Florida-based First Colonial Insurance Company, both with stable outlooks. First Colonial’s ultimate parent is The Allstate Corporation. Best explained that the rating downgrades “are based on First Colonial’s recent deterioration in operating performance, driven by underwriting losses in 2008 and 2009. The underwriting losses in 2008 were primarily reflective of an unearned premium reserve increase, and to a lesser extent, from a decrease in premium volume from the economic decline in automobile sales nationwide. Underwriting results have continued to be unfavorable in 2009 due to reduced premium volume from lower automobile sales, consumers purchasing fewer coverages, as well as moderately adverse loss reserve development.” The overall ratings are based on First Colonial’s “solid risk-adjusted capitalization and the ultimate ownership and financial support provided by Allstate,” Best continued. “As a subsidiary of Allstate, First Colonial benefits from Allstate Insurance Group’s expansive market presence and brand name recognition. First Colonial’s capital position reflects its conservative investment risk profile and historical record of financial support from Allstate. This was demonstrated by capital contributions of $27 million in 2006 and $44 million in 2005, as well as currently maintaining modest underwriting leverage.”

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘B’ (Fair) and issuer credit rating (ICR) of “bb” of Illinois-based Mount Carroll Mutual Insurance Company, both with stable outlooks. Best concurrently withdrew the ratings and assigned a category NR-4 to the FSR and an “nr” to the ICR, as result of the Company’s decision to withdraw from Best’s interactive rating process. “The ratings reflect Mount Carroll’s historically poor operating performance, above average underwriting expense structure and ongoing exposure to weather-related events due to its business concentration in Illinois, which exposes the company’s surplus to significant storm and catastrophe losses,” Best explained. “Offsetting these negative rating factors is Mount Carroll’s adequate risk-adjusted capitalization driven primarily by its low underwriting leverage and longstanding local market presence.

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 Cherokee Insurance Company Best also revised the outlook to positive from stable and affirmed the ICR of “bbb-” of Cherokee’s parent company, Oakland Financial Corporation. Both companies are domiciled in Sterling Heights, Mich. Best explained that the revised outlook reflects Cherokee’s “improvement in risk-adjusted capitalization through September 30, 2009, continued solid underwriting and operating performance, despite the negative impact that recessionary pressures and ongoing competitive pressures are having on its core trucking book of business, as well as its historically conservative loss reserving practices.” The ratings reflect Cherokee’s “solid risk-adjusted capitalization, profitable operating earnings and the financial support provided by Oakland, as evidenced by historical capital contributions and reinsurance support through an affiliated entity. The financial support demonstrated by Oakland enabled Cherokee to grow its premium volume in the commercial auto, group accident and health and workers’ compensation lines of business in earlier years.” Best added that Oakland’s financial leverage is in line with its expectations at current rating levels.” However, Cherokee’s slightly elevated underwriting leverage (driven by its significant growth in earlier years) and highly elevated common stock leverage, which exposes the company to the volatility of equity markets, as evidenced in 2008,” should be considered as offsetting factors. Despite the potential for fluctuating market values, Best said it “believes that Cherokee’s risk-adjusted capitalization is adequate to absorb potential volatility over the near term.”

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