A.M. Best has affirmed the financial strength rating (FSR) of A+ (Superior) and issuer credit ratings (ICR) of “aa-” of the life/health subsidiaries of AEGON N.V.’s (AEGON) U.S. operations. AEGON’s U.S. life/health companies are, collectively, referred to as AEGON USA Group. In addition, A.M. Best has affirmed the debt ratings of “aa-” of the outstanding notes issued under the funding agreement-backed securities (FABS) programs sponsored by Monumental Life Insurance Co., a member of AEGON USA. The outlook for all ratings is stable.
The affirmation of AEGON USA’s ratings reflects its favorable earnings performance and risk-adjusted capitalization during 2010. For year-end 2010, AEGON USA recorded U.S. statutory net income of $918 million compared to $865 million for year-end 2009. International Financial Reporting Standards (IFRS) earnings for AEGON Americas (which includes the United States, Canada and Latin America operations) were $1.5 billion for year-end 2010, compared to $697 million for year-end 2009. Going forward, A.M. Best expects IFRS earnings to be more consistent with 2009 results, due to lower realized gains and fewer tax-related benefits. The group’s risk-adjusted capitalization remained strong as its year-end 2010 regulatory capital ratio improved slightly over the previous year and is significantly higher than historical levels.
AEGON USA’s stand-alone credit profile considers the group’s strong market position in a number of U.S. life and annuity market segments, a large multi-channel distribution platform, diversified sources of earnings and a strong positive cash flow. The group also benefits from meaningful economies of scale, strong brand recognition and effective asset/liability and liquidity management. AEGON USA’s ratings recognize A.M. Best’s assessment of the financial strength and support of the parent, AEGON. As a result, the stand-alone ratings of AEGON USA receive rating enhancement in consideration of AEGON’s overall creditworthiness and the strategic and financial importance of the U.S. operations to AEGON.
S&P revised its outlook on Aetna Inc. and its operating subsidiaries to stable from negative. At the same time, S&P affirmed its 'A-' counterparty credit rating on Aetna Inc. and its 'A+' counterparty credit and financial strength ratings on Aetna's core operating company, Aetna Life Insurance Co. (ALIC). In addition, S&P affirmed its 'A' counterparty credit and financial strength ratings on Aetna's strategically important operating companies.
S&P says the rating actions reflect Aetna's improved earnings and an expectation that the improvement will continue. S&P also says pretax GAAP operating earnings increased significantly to $2.4 billion (a 7.0% ROR) in 2010 from $1.9 billion (5.4% ROR) in 2009, which was a significant decline from $3.0 billion (9.0% ROR) in 2008. In 2011, S&P expects operating earnings to improve further to about $2.7 billion (about an 8% ROR), largely as a result of lower-than-expected medical claims trends and favorable prior-period adjustments in medical claims expense.
At year-end 2011, S&P expects revenue to total $33.5 billion and enrollment to decrease by about 3.5% to 18 million members. Pretax GAAP operating income of about $2.7 billion results in an ROR of about 8%, with cash flow (EBITDA) of about $3.3 billion (an ROR of about 10%). If Aetna achieves S&P’s cash flow targets, the company likely would generate EBITDA interest coverage (including imputed interest on operating leases) of about 13x. S&P expects debt leverage (including net present value of operating leases and unfunded post-retirement obligations) to be stable at about 35% by year-end 2011.
Fitch has affirmed the 'AA-' Issuer Default Rating (IDR) on Berkshire Hathaway Inc. (BRK) and the 'AA+' on BRK's key insurance subsidiaries. The rating outlook is stable.
Fitch's ratings on BRK reflect the organization's ability to build book value at a rate exceeding market indices and peer companies. Growth in book value has come from several sources: investing the float and underwriting profits from insurance operations, an investment strategy overweighted in common stock, and earnings from non-insurance acquisitions. Risks facing BRK include volatility in shareholders' equity from equity market investments, speculation in derivative securities and catastrophe exposure at the reinsurance companies. BRK's investment and acquisition strategies also face key-man risk with Warren Buffett.
BRK's book value per share over the 46-year term of its current management team has grown by an annual compound rate of more than 20%, relative to a 9.4% rate for the S&P 500 index. A solid foundation of growth comes from investing the insurance float, which currently funds about $66 billion in investments. Common stock investments, residing primarily in the insurance operations, were responsible for net unrealized investment gains of $26 billion at Dec. 31, 2010, which represented a 73% appreciation. Finally, as a source of growth, BRK's strategy going forward will focus on earnings from non-insurance operations, numbering 68 at year-end 2010.
A.M. Best has downgraded the financial strength rating to A (Excellent) from A+ (Superior) and issuer credit ratings to “a+” from “aa-” of Central Insurance Cos. (Central) and its members, Central Mutual Insurance Co., All America Insurance Co. and CMI Lloyds. The outlook for all ratings has been revised to stable from negative.
The rating actions are a result of the deterioration in Central’s operating performance in recent years, driven by underwriting losses primarily attributable to consecutive years of weather claims that were well above historical averages. The impacts of Hurricane Ike (2008) in Texas and Ohio, and two significant hailstorms in Oklahoma that generated nearly $30 million in net losses, are reflected in Central’s weather losses. As a result, underwriting and pre-tax operating and losses have been reported for three consecutive years. In addition, net income has been unfavorable during the same time.
Partially offsetting these negative rating factors is Central’s risk-adjusted capitalization, which remains strong despite the recent reduction in surplus, and its geographic spread of risk. Also, Central maintains competitive advantages within its core personal and commercial segments, which have promoted excellent business persistency. These advantages include high-quality customer service, strong agency relationships and enhanced internet technology. Although Central has coastal exposure, management maintains a comprehensive reinsurance program in order to mitigate the impact of catastrophic events on surplus.
A.M. Best has revised the outlook to negative from stable and affirmed the financial strength rating of A- (Excellent) and issuer credit rating of “a-” of Colina Insurance Ltd. (Colina). Colina is a wholly owned subsidiary of its publicly traded parent, Colina Holdings Bahamas Ltd., which is majority owned by AF Holdings Ltd.
The revised outlook reflects A.M. Best’s concerns regarding the risks associated with Colina’s high concentration in real estate investments, relative to the total equity of the company and the continued delinquencies in its mortgage loan portfolio that are attributable to the current weak economic environment in the Bahamas. A.M. Best notes that Colina’s overall mortgage delinquency exposure relative to its consolidated stockholders’ equity remains high, although somewhat improved in 2010 from prior years. While the company’s earnings performance has improved in recent years, A.M. Best believes that Colina could face operating challenges in its core life/health insurance, due to the weak economy in the Bahamas.
Colina maintains a leading market share in the life/health market in the Bahamas and sustains good risk-adjusted capitalization and conservative reserving practices. As a life/health market leader, Colina continues to leverage its competitive advantages by expanding within the islands of the Bahamas.
Elwood Insurance Ltd.
A.M. Best has upgraded the issuer credit rating (ICR) to “bbb+” from “bbb” and affirmed the financial strength rating (FSR) of B++ (Good) of Elwood Insurance Ltd. (Elwood). The outlook for the ICR has been revised to stable from positive, while the outlook for the FSR is stable.
Elwood’s capitalization and operating performance have been and continue to be robust. However, its ratings are the result of its ultimate parent, Celanese Corp.’s balance sheet leverage, which acts as a constraint on Elwood’s rating profile. Nevertheless, Elwood’s ICR upgrade reflects Celanese’s improved operating performance, evidenced by an increase in Elwood’s operating results at year-end 2010.
Elwood’s ratings recognize its excellent capitalization level, history of positive operating performance, conservative loss-reserving practices and effective management of exposures. During the past five years, return on surplus has averaged 19.4%, while surplus levels have increased at a compound annual growth rate of 15.4% through the accumulation of net profits.
Partially offsetting these positive rating factors is the balance sheet leverage of the parent, which could negatively impact the operations of its captive. Additional offsetting rating factors are Elwood’s exposure to some low-frequency, high-severity hazards in its risk profile, coupled with high gross limits and high net retentions.
A.M. Best has revised the outlook to stable from positive and affirmed the financial strength rating of A (Excellent) and issuer credit rating of “a+” of Farmers Mutual Insurance Co. of Nebraska (Farmers of Nebraska).
Farmers of Nebraska’s ratings reflect its excellent risk-adjusted capitalization, solid liquidity position and long-standing market presence as a major farmowners’ insurance writer in Nebraska. These positive rating factors are offset by the company’s geographic concentration of risk in the Midwest and exposure to localized storm losses, since 85% of its business is concentrated in Nebraska.
Farmers of Nebraska has experienced a significant increase in the frequency and severity of wind and hail storm losses in the past three years. The revised outlook reflects A.M. Best’s prospective viewpoint that Farmers of Nebraska’s pre-tax operating returns and underwriting results over the next several years likely will lag the industry (if the recent weather patterns continue), especially since the company has a concentration of property business in Nebraska and South Dakota. Although management has undertaken corrective actions to improve underwriting performance, the inherent risk associated with a geographic concentration in the Midwest, coupled with competitive market conditions, may continue to strain profitability over the near term.
A.M. Best has commented that the financial strength rating of A- (Excellent) and issuer credit rating of “a-” of Greenlight Reinsurance Ltd. are unchanged after announcement of a change in top management. The outlook for both ratings is stable.
A.M. Best believes that any potential concerns regarding the recent management change announced by Greenlight Re are mitigated by the depth of experience and continuity of the management team. Bart Hedges, who will succeed Len Goldberg as CEO of Greenlight Re, has been with the company since January 2006 and, currently, is president and chief underwriting officer. Goldberg, who retires as Greenlight Re’s CEO, effective Aug. 15, 2011, will remain a board member of Greenlight Re and Greenlight Reinsurance Ireland Ltd.
A.M. Best has affirmed the financial strength rating (FSR) of A (Excellent) and issuer credit ratings (ICR) of “a” of Harleysville Insurance (Harleysville) and its property/casualty pooling members, including the lead company, Harleysville Mutual Insurance Co.
Concurrently, A.M. Best has affirmed the FSR of A- (Excellent) and ICR of “a-” of Harleysville Life Insurance Co., a direct life/health subsidiary of Harleysville Mutual. In addition, A.M. Best has affirmed the ICR of “bbb” and debt rating of “bbb” of the 46% publicly traded downstream holding company, Harleysville Group Inc. (HGIC). The outlook for all ratings is stable.
The ratings reflect Harleysville’s excellent level of risk-adjusted capitalization, sound operating performance over the long term and strong regional market franchise. The group also benefits from the financial flexibility afforded through HGIC.
Fitch has affirmed the 'BBB' Issuer Default Rating (IDR) on HGIC and the 'BBB-' rating on HGIC's senior unsecured notes, due July 15, 2013. Fitch also has affirmed the 'A-' Insurer Financial Strength (IFS) rating on the Harleysville. HGIC's rating outlook is stable.
HGIC's ratings reflect its solid capitalization, conservative investment portfolio and good fixed-charge coverage. Rating concerns principally are related to the challenges posed by competitive market conditions and an unfavorable economic climate. Harleysville's most material source of earnings volatility is tied to regional natural catastrophe exposures, particularly winter storms in the Northeast and tornado and hail events in the Midwest.
A.M. Best has downgraded the financial strength rating (FSR) to E (Under Regulatory Supervision) from B (Fair) and issuer credit rating (ICR) to “rs” from “bb+” of Majestic Insurance Co. (Majestic). The ratings have been removed from under review with negative implications.
A.M. Best also has downgraded the FSR to C+ (Marginal) from B (Fair) and ICR to “b-” from “bb+” of Twin Bridges (Bermuda) Ltd. Concurrently, A.M. Best has downgraded the ICRs to “c” from “b” of both companies’ ultimate parent, Majestic Capital Ltd. (Majestic Capital), as well as Majestic Capital’s intermediate holding companies, Embarcadero Insurance Holdings Inc. (Embarcadero) and Majestic USA Capital Inc. (Majestic USA). Additionally, A.M. Best has downgraded the debt ratings to “d” from “ccc+” on the trust preferred securities of Majestic USA and Embarcadero. All the above ratings are under review with negative implications, with the exception of Majestic, until further discussions are held with management or future business plans are finalized.
A.M. Best has revised the outlook to stable from negative and affirmed the financial strength rating (FSR) of B+ (Good) and issuer credit rating (ICR) of “bbb-” of Mid-Continent Insurance Co. (Mid-Continent).
A.M. Best also has affirmed the FSR of B++ (Good) and ICR of “bbb+" of Conifer Insurance Co. (Conifer), an affiliate of Mid-Continent. The outlook for these ratings is stable. Both companies are wholly owned subsidiaries of Conifer Holdings Inc. (CHI), a property/casualty insurance holding company.
The revised outlook for Mid-Continent reflects its adequate capitalization, improved, albeit still unprofitable, operating performance in 2010, favorable liquidity, and the immediate and near-term benefits gained under its new ownership, new (seasoned) management and the significant quota share reinsurance support provided by Conifer, effective Jan. 1, 2011. The executive team of CHI also manages the daily operations of Mid-Continent and has vast experience writing property/casualty coverage for small- to medium-sized commercial businesses similar to that written by Mid-Continent, specifically restaurant, bar and tavern business and other Main Street types of exposures. The ratings of Mid-Continent also consider a number of underwriting initiatives implemented by Mid-Continent in 2009 and 2010, including multiple-rate increases, coverage exclusions and restrictions to specifically address those areas, which contributed to the company’s unprofitable underwriting results in recent years and loss reserve strengthening. However, despite the aforementioned actions that have been taken, it remains to be seen whether these actions will culminate into improved underwriting trends going forward.
S&P placed its 'B+' counterparty credit rating on Prodigy Health Group Inc. on CreditWatch with positive implications.
S&P says the CreditWatch placement reflects Prodigy's anticipated acquisition by a higher rated entity, which, likely, will result in an upgrade of up to six notches, depending on the amount of debt reduction and how S&P views Prodigy's group status within Aetna's group of companies when the transaction closes.
The acquisition is expected to close in the second half of 2011. The purchase price is about $600 million, which Aetna expects to finance with available resources.
Fitch has affirmed The Progressive Corp.'s (PGR) ratings as follows:
•Issuer Default Rating (IDR) at 'A+'•Senior debt ratings at 'A'•Junior subordinated debt 'BBB+'.•Issuer Default Rating (IDR) at 'A+'•Senior debt ratings at 'A'•Junior subordinated debt 'BBB+'.
The rating outlook is stable for all ratings.
Fitch also has affirmed Progressive's operating subsidiaries Insurer Financial Strength (IFS) rating of 'AA'. The rating outlook is stable for all ratings.
Fitch's ratings are based on PGR's excellent operating performance, pricing and underwriting expertise, personal auto insurance franchise, modest catastrophe risk, conservative investment allocation, and strong risk-based capital position. Progressive's overall GAAP combined ratios for three months ended March 31, 2011 and 2010, were 90.3% and 90.9%, respectively.
The ratings also reflect the limited product diversification and high notional leverage of the company. Fitch notes that it would be short sighted for Progressive, or any company, to diversify its product offerings without a sound business justification. Fitch unfavorably views diversification for the sake of diversification.
PGR's high notional operating leverage potentially exposes capital to unexpected pricing errors. This exposure is further exacerbated by the company's monoline nature, which exposes the company in a highly concentrated manner to auto industry specific risks. Thus, a sudden change in fortunes for auto writers, particularly in a manner that is currently difficult to predict or model, would potentially have a greater negative impact on PGR's capital than it would for less-leveraged and more-diversified companies.
A.M. Best Europe has affirmed the financial strength rating (FSR) of A (Excellent) and the issuer credit rating (ICR) of “a” of SCOR SE and its subsidiaries. Concurrently, A.M. Best has affirmed the subordinated debt ratings on SCOR. The outlook for all ratings remains stable.
The acquisition of Transamerica Re’s life portfolio is likely to strengthen SCOR’s global reinsurance profile and raise its prominence in the U.S. life reinsurance market. The transaction will provide international portfolios that are complementary to SCOR’s existing profile, focused mainly on traditional life mortality business, which will assist future development of SCOR’s life business. The acquired business also conforms to SCOR’s performance targets.
Risk-adjusted capitalization, following completion of the acquisition, is expected to remain supportive of SCOR’s current ratings, and financial leverage also will remain within A.M. Best’s tolerance level. Furthermore, SCOR’s capital position is sufficient to absorb the catastrophe losses experienced in the first quarter of 2011 arising from Australia, New Zealand and Japan. A.M. Best will monitor closely implementation of the acquisition plans to ensure that execution is in line with expectation.
A.M. Best has downgraded the financial strength rating (FSR) to D (Poor) from B- (Fair) and issuer credit rating (ICR) to “c” from “bb-” of Universal Casualty Co. (UCC). The outlook for both ratings is negative.
Concurrently, A.M. Best has placed under review with negative implications the ICRs of “ccc” and senior debt ratings of “ccc” of Kingsway Financial Services Inc. (KFSI) and Kingsway America Inc. (KAI). A.M. Best also has placed under review with negative implications the FSR of B- (Fair) and ICR of “bb-” of Kingsway Reinsurance Corp. (KRC).
The FSR of B- (Fair) and ICRs of “bb-” will remain under review with negative implications for Mendota Group and its members, Mendota Insurance Co. and its wholly owned subsidiary, Mendakota Insurance Co.
The rating actions on UCC, KFSI, KAI and KRC follow A.M. Best’s discussions with KFSI, regarding its strategic plans in response to the holding company’s year-end 2010 loss in equity of more than $55 million. The ratings of KFSI, KAI, Mendota Group and KRC will remain under review as management continues to pursue pending recapitalization plans of these entities, along with A.M. Best’s assessment of the impact of these initiatives on the companies’ various ratings.
Vitality Re II Ltd.
S&P assigned its 'BBB (sf)' and 'BB+ (sf)' ratings to the Series 2011-1 Class A and B notes, respectively, issued by Vitality Re II Ltd.
Vitality Re II Ltd.'s Series 2011-1 note issuance is a securitization covering medical benefit claims. The notes cover claims payments of Health Re Inc. and, ultimately, Aetna Life Insurance Co. (ALIC), relating to the covered insurance business to the extent that the medical benefits ratio (MBR) exceeds the class-specific MBR attachment levels. The MBR will be calculated on an annual, aggregate basis. Vitality Re II is a Cayman Islands-exempted company, licensed as a restricted Class B insurer in the Cayman Islands.
The ratings are based on the lower of the implied ratings on the ceded risk; the rating on ALIC, the underlying ceding insurer; and the rating on The Goldman Sachs Group Inc., the guarantor of Goldman Sachs & Co., the repurchase counterparty. The ratings on the ceded risk currently are the lowest of the three ratings. However, if ALIC or Goldman Sachs Group were to be rated lower than the ceded risk, S&P would lower the rating on the notes accordingly.
