Ratings Recap: Zenith, BancInsure, First Chicago, Town & Country, Rural Community

May 17, 2010

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and issuer credit ratings (ICR) of “a” of Zenith National Insurance Group and its members, Zenith Insurance Company and its wholly owned subsidiary, ZNAT Insurance Company. Best also affirmed the ICR of “bbb” of the group’s parent, Delaware-based Zenith National Insurance Corp. as well as the debt rating of “bb+” on $58.4 million 8.55 percent capital securities, due 2028 of Zenith National Insurance Capital Trust I. The outlook for all ratings is stable. All companies are domiciled in Woodland Hills, CA, except where specified. Best said the ratings reflect Zenith’s “excellent risk-adjusted capitalization, historically strong operating performance and management’s expertise and commitment to maintain underwriting discipline throughout market cycles. The group also benefits from the financial flexibility of Zenith National, which provides the group access to capital as needed. As offsetting factors, Best noted the “recent reduction in the company’s operating profitability, reflective of the competitive market conditions in California, as well as the state mandated rate reductions in Florida over the past five years. Additionally, the concentration of written premiums within these two states exposes Zenith to regulatory and legislative changes. However, Best added that despite these concerns, “the outlook recognizes Zenith’s strong capital position, historically strong underwriting performance and demonstrated experience in underwriting the workers’ compensation line over the long term.”

A.M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Oklahoma-based BancInsure, Inc. The ratings reflect BancInsure’s “favorable operating performance, capitalization that supports its rating level and its strong niche market focus,” Best explained. However “BancInsure’s fluctuating return measures over a five-year period and the risks associated with the debt issued at the parent company” should be considered as offsetting factors. “While surplus levels rose by 36 percent in 2009, surplus levels declined more significantly in 2008,” Best continued. “In addition, the company results reflect continued unfavorable claims experience in BancInsure’s bond and directors and officers (D&O) product lines.” Best explained that the revised outlook reflects “BancInsure’s variability in underwriting results in recent years attributed to losses in its D&O and fidelity bond book of business, coupled with the current weak economic environment. BancInsure’s primary lines focus on the currently volatile financial services sector.” In addition Best said the negative outlook reflects its “ongoing concerns with the significant deterioration in underwriting margins.” Despite a slight improvement in 2009 from 2008, Best said it “believes that management will be challenged to demonstrate consistent quality earnings and cash flow, and will continue to closely monitor BancInsure’s progress toward improving underwriting performance. The ratings also recognize BancInsure’s excellent business position with its continued close ties to community banks that include endorsement agreements with 20 separate bankers associations, 14 of which are exclusive. Financing through trust preferred securities at BancInsure’s holding company followed a management buy-out in January 2003. Although this debt has been serviced for six years by a marketing entity for BancInsure’s products, there remains the risk that the company could be used to partially service this debt should its marketing entity’s cash flows deteriorate. Revenue stream of the marketing entity is derived from fee and commission for servicing client’s products.”

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 First Chicago Insurance Company, both with negative outlooks. “The rating downgrades reflect First Chicago’s elevated leverage as a result of its premium growth, which has far outpaced surplus growth,” Best explained. “In addition, underwriting losses have virtually negated almost $6.5 million in capital contributions from its parent, J and P Holdings, Inc. Furthermore, First Chicago operates with an elevated expense position and has poor reserve development trends. Partially offsetting these negative rating factors are First Chicago’s favorable loss experience and increasing investment income.”

A.M. Best Co. has downgraded the financial strength rating (FSR) to ‘C++’ (Marginal) from ‘B’ (Fair) and issuer credit rating (ICR) to “b+” from “bb” of Arkansas-based Town and Country Mutual Insurance Company, and has revised its outlook on the Company’s ICR to negative from stable, while the outlook for the FSR is stable. Best then withdrew the ratings and assigned an NR-4 to the FSR and an “nr” to the ICR. “These withdrawals are in response to management’s request to be removed from A.M. Best’s interactive rating process,” said the bulletin. “Town and Country’s rating downgrades are due in part to continuation in its underwriting losses in 2009 and the erosion of its capital,” Best continued. “Town and Country experienced a surplus loss of 38.0 percent in 2009, following a 40.5 percent surplus decline in 2008. This is the result of frequent and severe storm losses from wind, hail and tornadoes in 2008 and 2009, resulting in almost $2 million in underwriting losses over the last two years. At year-end 2009, Town and Country’s surplus was below $1 million.” Best also noted that, although Town and Country “entered into a 25 percent quota share reinsurance agreement to improve the company’s net premium leverage,” Best remains concerned with the Company’s “poor operating performance and its ability to generate surplus growth.”

A.M. Best Co. has affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit ratings of “a” of Minneapolis-based Rural Community Insurance Company (RCIC), both with stable outlooks. The ratings reflect RCIC’s “superior capitalization, historically solid operating performance and the benefits derived from its leading presence within the multi-peril crop insurance (MPCI) industry,” best explained. “In addition, significant financial flexibility and operating liquidity is afforded through the company’s ultimate parent, Wells Fargo & Company, one of the largest publicly-traded financial services organizations in the United States.” Best also indicated that the ratings also “recognize the added balance sheet protection provided by an aggregate stop loss reinsurance treaty, which minimizes the potential impact from severe underwriting losses, and management’s knowledge and expertise in the highly specialized MPCI marketplace.” As offsetting factors, Best cited “RCIC’s reliance on reinsurance, narrow product mix and the potential for underwriting volatility with continued exposure to weather-related catastrophic events. Somewhat mitigating RCIC’s reinsurance dependence is the high credit quality of its reinsurers.” Best said the stable outlook reflects its expectation that “strong underwriting and operating results will be sustained over the near term, and capitalization will remain well supportive of RCIC’s ratings.”

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