Perception Playing a Starring Role in Ratings?

With the company slated to report its Q1 earnings late today, investors are wondering how Principal Financial Group will fare in light of several other downgrades issued. Shortly after Moody's downgraded Principal Financial's senior debt rating to A3 from A2 on March 18, Barron’s reported that the insurer had been “unduly punished for the sins of its peers,” noting that the company’s stock had seen a larger drop than its competitors, chiefly due to fears of dilution over possible infusion of federal funds.

And noting its connection to structured securities, including residential and commercial mortgage-backed securities, A.M. Best Co. has revised the outlook for Gerber Life Insurance Co., White Plaines, N.Y., to negative from stable, and affirmed the financial strength rating (FSR) of “A” (excellent) and issuer credit rating (ICR) of "a." The agency said the rating also was due to the deteriorating levels of statutory profitability within its ordinary life line of business. Nestle SA, Switzerland, acquired Gerber Life in August 2007 from Novartis. Nestle is a food and beverage conglomerate with operations in almost every country around the world.

In its report, A.M. Best noted a decline in Gerber's risk-based capital resulting from substantial realized losses in its investment portfolio, and a modest decline in new business sales during the second half of 2008.

In spite of the Nestle connection, along with worldwide brand recognition (Gerber), A.M. Best notes that the company has some exposure to structured securities, including residential and commercial mortgage-backed securities and other asset-backed securities. Although the majority of these securities are in the higher-rated tranches, A.M. Best believes that some of these securitized investments, especially within the commercial mortgage-backed sector, could be at risk of impairment over the near term.

On a positive note, A.M. Best revised the outlook to positive from stable and affirmed the financial strength rating (FSR) of A- (Excellent) and issuer credit ratings (ICR) of “a-” for The Harford Mutual Insurance Cos. and its two property/casualty pool members, The Harford Mutual Insurance Co. and Firstline National Insurance Co. Both companies are domiciled in Bel Air, MD.

The Harford’s excellent risk-adjusted capitalization, conservative underwriting leverage and strong liquidity contributed to the ratings, said A.M. Best.