Ratings Recap: State Auto National, Mountain West Farm Bureau

Standard & Poor’s Ratings Services has placed its ‘A-‘ counterparty credit and financial strength ratings on State Auto National Insurance Co. (SA National), a subsidiary of State Auto Financial Corp. and a member of SAG, on CreditWatch with negative implications. S&P explained that the rating action results from the “agreement of SAG with Hallmark Insurance Company (Hallmark) to sell its nonstandard auto subsidiary, SA National. The transaction is expected to close by year-end 2010 and is subject to regulatory and other approvals. SA National writes approximately $37 million in nonstandard automobile insurance coverage through independent agents in 21 states, which represent only 2 percent of SAG’s total annual writings. Since Jan. 1, 2010, 100 percent of SA National’s writings have been ceded to State Auto Mutual Insurance Co., the lead carrier in SAG’s intercompany reinsurance pooling agreement.” S&P added that “SA National has a no participation in the pooling arrangement, so has no insurance liabilities on its balance sheet. SAG will retain all policyholder liabilities stemming from the pre-closing book of business written by SA National. Effectively, SAG is selling a shell insurance company with renewal rights to Hallmark. After the closing, SAG will continue to provide policy and claims administration services to SA National’s new and renewing policyholders in those states where Hallmark does not currently do business until Hallmark can incorporate this business into its own systems. Any business administered by SAG will be ceded by SA National to SAG under a reinsurance agreement. This arrangement is expected to last about six months. Consequently, while some SA National policyholders will benefit from the reinsurance support of SAG, others will not. Ratings analyst John Iten noted: “We expect to resolve the CreditWatch status of the ratings on SA National upon the closing of the transaction by withdrawing these ratings.”

A.M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength rating of ‘A+’ (Superior) and issuer credit rating of “aa-” of Mountain West Farm Bureau Mutual Insurance Company, which is based in Laramie, Wyoming. Best explained that the revised outlook “reflects its poor underwriting performance in 2010 and significant surplus decline, which are not reflective of its current rating level. Mountain West’s poor underwriting performance is attributable to frequent and severe weather events in 2010, which were below the company’s catastrophe retention. In addition, Mountain West’s business concentration in Wyoming and Montana exposes it to changes in the regulatory and legislative environment.” However, Best also indicated that Mountain West “sustains a strong risk-adjusted capitalization, which is derived from its conservative underwriting leverage. Furthermore, Mountain West retains excellent liquidity measures, a favorable expense structure, a long standing local market presence, and benefits from its sponsorship by the Wyoming and Montana Farm Bureau Federations, which facilitate marketing and government relations efforts, as well as enhance customer loyalty and affinity.”