Ratings Recap: Frankenmuth, Oregon Dental, Sooner, Commercial Casualty

A.M. Best Co. has downgraded the financial strength rating to ‘A’ (Excellent) from’ A+’ (Superior) and issuer credit ratings to “a+” from “aa-” of Frankenmuth Insurance and its member companies, and has revised its outlook on the rating to stable from negative. The ratings apply to and are based upon the consolidated position of Frankenmuth Mutual Insurance Company and its four pooling members, Ansur America Insurance Company, Patriot Insurance Company, ASure Worldwide Insurance Company and Fortuity Insurance Company. All Frankenmuth pool members are domiciled in Frankenmuth, MI, except for Patriot, which is domiciled in Yarmouth ME. Best said the rating downgrades reflect “Frankenmuth’s declining operating performance over a five-year period. Although Frankenmuth’s return measures have significantly improved in 2009, over an unusually poor 2008, and have remained largely positive over a five-year period, they have trailed their commercial casualty peer composite.” Best noted that the organization’s “underwriting expense ratio has increased in recent years, primarily due to its incurring short-term costs for its long-term benefit, including expansion into the Southeast, acquisition of Patriot in 2007 and one time, pension related charges, which included the curtailment of its pension plan. Although the organization has expanded its geographic footprint in recent years, premiums remain concentrated in the Midwest, exposing Frankenmuth to regional competition and storm losses.” In addition, Best said that “60 percent of Frankenmuth’s premiums are written in Michigan, and the group remains somewhat exposed to that state’s weakened economic conditions, regulatory issues and weather-related loss activity.” However, Best pointed to Frankenmuth’s “very strong capitalization, historically favorable loss ratios (primarily due to its conservative underwriting philosophy), significantly improved 2009 operating results, solid regional market presence and management’s effort to improve its geographic concentration,” as positive factors. “Frankenmuth’s leverage improved in 2009 on modest underwriting earnings, positive capital gains and a deferred tax benefit.” Best also noted that the group has “expanded its geographic footprint via broadening its commercial lines products into the Southeast and acquisition of Patriot, which provided for expansion of commercial lines products in the Northeast to complement Patriot’s existing personal lines business. In addition, Frankenmuth has leveraged its strong capitalization and solid market presence to expand the distribution of its personal lines business in Michigan and Ohio, with the addition of new independent agencies. The organization’s expansion has been cautious, and to date, its new writings have been largely profitable. The outlook reflects the group’s strong capitalization and largely positive operating results, which has led to overall surplus growth on a five- and ten-year basis.”

A.M. Best Co. has downgraded the issuer credit rating (ICR) to “bbb” from “bbb+” and affirmed the financial strength rating (FSR) of ‘B++’ (Good) of Oregon Dental Service (ODS). Best also affirmed the FSR of ‘B+’ (Good) and ICR of “bbb-” of ODS Health Plan, Inc. (ODSHP). The outlook on all ratings has been revised to negative from stable. Both companies are domiciled in Portland, Oregon. Concurrently, Best downgraded the ICR to “bbb” from “bbb+” and affirmed the FSR of’ B++’ (Good) of Dentists Benefits Insurance Company (DBIC), the P/C subsidiary of ODSHP. The outlook for these ratings is stable. Best has also affirmed the FSR of ‘B++’ (Good) and the ICR of “bbb” of Northwest Dentists Insurance Company (NORDIC), the P/C subsidiary of ODS, also with stable outlooks. The downgrading of the ICR of ODS reflects the “declined level of capital and surplus, when surplus notes issued by ODS’s subsidiary, ODSHP, are excluded,” Best explained. “ODSHP issued $23 million of short-term surplus notes in December 2009 and received a capital contribution from Health Services Group Inc., a subsidiary of ODS, to improve its capital position following significant underwriting losses. The negative outlook for ODSHP reflects underwriting losses and a reliance on external surplus notes to help strengthen capital. Although the financial results at ODSHP have improved during the first quarter of 2010, the high level of membership concentration and predominance of Administrative Service Only (ASO) and minimum premium business may limit organic capital growth in the near to medium term.” Best said the negative outlook for ODS reflects its concern that “continued underwriting losses, if any, or substantial growth could result in additional capital requirements for ODSHP, which would have to be obtained either internally or externally, and at some point in the future could place pressure on the organization. The offsetting factors for ODS and ODSHP’s ratings include strong market share, increased business diversification, improved operations and transition to more conservative investment allocation. ODS’ share of the dental insurance market in Oregon is approximately 50 percent, with the nearest competitor’s share below 25 percent. ODSHP’s membership almost doubled in 2008 and 2009, mainly attributable to the addition of a large group with 120,000 eligible members, as well as rapid expansion into the Alaska market. ODS and ODSHP have completed a major systems conversion that significantly improved the companies’ operational efficiencies and auto-adjudication rates as well as provided better flexibility for benefits and products design. Additionally, during 2008 and 2009, ODS reversed its long-term investment strategy by reducing the share of equity holdings.” Best noted that the “new more conservative allocation better protects the company from stock market fluctuations and supports the liquidity needs for the short-term nature of dental insurance obligations.” Best explained that the downgrading of the ICR of DBIC is “reflective of the recent deterioration in the financial strength of its ultimate parent, as this is a limiting factor for the smaller property and casualty operations. DBIC maintains supportive capitalization, low underwriting leverage, a leadership position in providing professional liability coverage to Oregon dentists, and overall favorable operating performance. Partially offsetting these positive factors are DBIC’s concentration risks both geographically and by product, and the recent increases in claims frequency and severity. The outlook contemplates the expectation of continued supportive capitalization and favorable operating experience within its market niche.”

A.M. Best Co. has affirmed the financial strength rating of ‘A’ (Excellent) and issuer credit rating of “a” of Vermont-based Sooner Insurance Company, both with stable outlooks. The ratings are based on Sooner’s “excellent capitalization, history of profitable operating results and the position it holds as the captive insurer for its ultimate parent, ConocoPhillips,” Best explained. The ratings also consider “the level of commitment on the part of ConocoPhillips, whose management incorporates Sooner as a core element in its overall risk management program.” As offsetting factors Best cited “Sooner’s exposure to large losses due to the high limits offered on its policies and the resulting significant dependence on reinsurance protection.” Best added that the captive has “a history of strong underwriting results and operating returns. Sooner’s loss experience has remained favorable, due in part, to ConocoPhillips’ strong loss control programs.” ConocoPhillips’ corporate insurance commission’s conducts periodic reviews of its potential large loss exposures through a specialist in industrial risks. “Based on this analysis, a single occurrence could result in a large loss that approaches Sooner’s treaty limits,” Best observed. “Nonetheless, Sooner has the capital to fund claims in the event of a reinsurance recovery problem, and it does participate in the U.S. federal program for terrorism coverage, the Terrorism Risk Insurance Program Reauthorization Act of 2007. Although the majority of Sooner’s capital is loaned to its parent, there is limited counterparty risk due to the affiliation. Additionally, ConocoPhillips has a strong balance sheet, a history of favorable earnings and is required to fund annually the loan from its captive.”

A.M. Best Co. has removed from under review with negative implications and affirmed the financial strength rating of ‘B+’ (Good) and issuer credit rating of “bbb-” of Omaha-based Commercial Casualty Insurance Company (CCIC), is a subsidiary of Berkshire Hathaway, and has assigned a stable outlook to the ratings. Best noted that on November 6, 2009, it had “placed the ratings of all rated members of Berkshire under review with negative implications, due to the Berkshire acquisition of the balance of the Burlington Northern Santa Fe railroad.” Best explained that it was “concerned with the potential liquidity impact that the acquisition would have on Berkshire’s insurance and reinsurance operations. CCIC was not impacted by this transaction; and consequently, the ratings have been removed from under review.”