Ratings Roundup: Reserve National, Alaska Timber, State Farm (NJ)

April 29, 2010

Standard & Poor’s Ratings Services is keeping its ‘A’ counterparty credit and financial strength ratings on Reserve National Insurance Co. on CreditWatch with negative implications. “We had placed these ratings on CreditWatch negative after Unitrin Inc. announced that it had reached an agreement in principle to sell Reserve National to Physicians Mutual Insurance Co.,” noted credit analyst Ferris Joanis. S&P said that, “specifically, there were uncertainties about Reserve National’s capital levels after the proposed transaction and the strategic plans of its acquirer. Unitrin has since announced that negotiations related to this transaction have ceased. We are keeping the ratings on CreditWatch because those uncertainties remain. Unitrin is seeking a new buyer for Reserve National.” S&P said it expects to resolve the CreditWatch status of the ratings following the completion of Unitrin’s search for a buyer of Reserve National and the closing of any related transaction. When that happens the rating agency said it would “evaluate the impact on Reserve National’s business and financial profile as well as the financial strength and strategic plans of the acquirer. Based on this evaluation, we could lower the ratings by one or more notches. Alternatively, we could affirm the ratings if the company’s business and financial profile are unchanged.”

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 Alaska Timber Insurance Exchange (ATIE). The outlook on both ratings is stable. “The ratings reflect ATIE’s sound capitalization, low cost operating platform and high member retention,” said best. “Partially offsetting these positive rating factors are ATIE’s limited business profile and relatively high retention level. As a single state, single line writer, ATIE is susceptible to economic and legislative changes. There also exists significant premium and surplus concentration among certain members. This limitation should be somewhat mitigated as the company increases its membership base by building premium volume outside of the timber industry. In prior years, premium volumes decreased due to restrictions on logging in national forest lands and poor market conditions for lumber products. The company’s structure as an exchange allows ATIE to dividend the majority of its earnings to its subscribers. The dividend provides the company with a high member retention level, and because it is based on the company’s profitability members, these members are encouraged to become effective risk managers.

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 State Farm Indemnity Group and its member, State Farm Indemnity Company, both of which are headquartered in Bloomington, Ill. Best said the ratings reflect State Farm Indemnity’s “strong risk-adjusted capitalization and market presence as one of the leading private passenger automobile writers in New Jersey. The negative outlook is based on State Farm Indemnity’s continued significant deterioration in operating performance in recent years. Best further explained that State Farm Indemnity’s strong risk-adjusted capitalization is derived from its “modest underwriting leverage, conservative investment risk profile and sound liquidity position, as well as minimal catastrophe exposure. In addition, State Farm Indemnity maintains minimal dependence on reinsurance as it retains all of its direct premium writings. Furthermore, State Farm Indemnity has produced an above average five-year net investment yield relative to industry norms, despite its significant holdings in tax-exempt municipal bonds, which generally produce lower pre-tax yields than taxable bonds. However the Company’s “geographic and product concentration, which exposes its results to regulatory and judicial decisions, as well as competitive market conditions,” should be considered as partially offsetting factors. In addition, operating results “have significantly deteriorated in recent years, as investment and other income were more than offset by substantial underwriting losses,” Best continued. “These underwriting losses were driven by policyholder dividends of approximately $190 million, higher personal injury protection and bodily injury claim severities, increased loss adjustment expenses on the settlement of these claims and materially adverse loss reserve development. However, State Farm Indemnity has implemented private passenger automobile rate increases in 2009 and 2010, which should help to improve underwriting profitability going forward. The ratings are based on the consolidation of State Farm Indemnity Company and its wholly-owned and unrated subsidiary, State Farm Guaranty Insurance Company.”

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