Rating Recaps: PrimeOne, Berkshire Hathaway (Notes), Safety National

December 17, 2010

A.M. Best Co. has assigned a financial strength rating of ‘B+’ (Good) and issuer credit rating of “bbb-” to Michigan-based PrimeOne Insurance Company, both with stable outlooks. The ratings of PrimeOne “largely reflect its adequate initial capitalization and the track record of the senior management team in critical functional areas,” said Best. The rating agency also explained that the ratings reflect its “expectation concerning the company’s ability to successfully execute its business plan targeting property, general liability and liquor liability coverage for hospitality risks, restaurants, bars, taverns, convenience stores and other similar classes in Michigan.” Best’s review of PrimeOne’s business plan “appeared reasonable, considering prevailing market conditions.” The ratings also acknowledge the “considerable challenges and execution risk associated with a start-up company. While PrimeOne hopes to take advantage of some potential market dislocation in Michigan concerning its targeted classes of business, it will still have to compete with other more established competitors for the opportunity to secure an appreciable share of that business.”

Standard & Poor’s Ratings Services has assigned its ‘AA+’ senior debt rating to Berkshire Hathaway Finance Corp.’s (BHFC) $500 million senior notes. The notes will have a maturity of five years. The assigned rating is” based on the ratings on Berkshire Hathaway Inc. (BRK; AA+/Stable/A-1+), BHFC’s ultimate parent, reflecting BRK’s extremely strong competitive position, very strong earnings, very strong liquidity position, and conservative financial leverage and coverage metrics,” S&P explained. As offsetting factors S&P cited the company’s “high tolerance for equity investment risk and resulting volatility in insurance company statutory capital; the insurance group’s capital adequacy–as measured by Standard & Poor’s capital model–below what we typically expect to see for the current rating category; exposure to adverse development of reserves held for long-term insurance liabilities; concerns about risk-tolerance levels; and the issue of management succession.” S&P also noted that “BRK fully guarantees BHFC’s new note issuance. BHFC will use the net proceeds of this issuance to repay $500 million of notes maturing on Dec. 15, 2010. BHFC’s borrowings are used to fund the finance operations of Vanderbilt Mortgage & Finance Inc., a wholly owned subsidiary of Clayton Homes Inc. The debt associated with these operations is treated as operating leverage. Clayton is a vertically integrated manufactured housing company. BRK’s adjusted debt leverage and interest coverage (excluding the separately rated subsidiaries MidAmerican Energy Holdings Co. and Burlington Northern Santa Fe Corp.) are conservative. Debt leverage was 12.4 percent as of Sept. 30, 2010. Interest coverage was 23.8x in the first nine months of 2010.”

A.M. Best Co. has affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit ratings of “a” of Safety National Group, whose members include Safety National Casualty Corporation (SNCC) of St. Louis, MO and its reinsured affiliate, Safety First Insurance Company (SFIC) of Chicago. The outlook for all ratings is stable. The affirmations reflect the group’s “strong operating performance, solid capitalization achieved in part through explicit capital support from its parent, Delphi Financial Group, Inc. and its established market presence within the excess workers’ compensation market,” said Best. As offsetting factors Best cited “areas of ongoing, yet declining, adverse loss release development occurring on prior accident years and the impact of investment market fluctuations, which has hampered the group’s ability to internally generate capital.” However, Best indicated that despite these concerns, the outlook recognizes the group’s historically solid profitability levels, which outperform its peer composite, and Best’s expectation that “SNCC should generate surplus growth through strong earnings over the near term. The positive rating attributes reflect SNCC’s disciplined underwriting standards, service-oriented business approach and experienced management team. Furthermore, Delphi Financial is fully committed to supporting SNCC’s operations, while maintaining a moderate level of financial leverage with solid interest coverage ratios and historically excellent earnings produced by its insurance subsidiaries. The ratings also acknowledge the inherent synergies between Delphi Financial’s insurance entities, which include the sharing of management expertise, client bases, products, distribution and expenses.”

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