A.M. Best Co. has affirmed the financial strength rating (FSR) of A (Excellent) and issuer credit ratings (ICR) of "a" of the property/ casualty subsidiaries of United Fire Group, Inc. (UFG) [NASDAQ: UFCS] (collectively known as United Fire), which operate under an inter-company pooling agreement led by United Fire and Casualty Company.
Concurrently, A.M. Best has affirmed the ICR of "bbb" of UFG. The outlook for these ratings is negative.
At the same time, A.M. Best has affirmed the FSR of A- (Excellent) and ICR of "a-" of United Life Insurance Company (United Life), a wholly owned subsidiary of UFG. The outlook for these ratings is stable. All companies are domiciled in Cedar Rapids, IA, except where specified. (See below for a detailed listing of the companies and ratings.)
The ratings of United Fire reflect its solid risk-adjusted capitalization, diversified commercial product offerings, historically favorable core reserve levels and the financial flexibility afforded by UFG. United Fire's ratings also reflect the continued advantages of its long-standing agency relationships and solid regional franchise, which was enhanced by the acquisition of Mercer Insurance Group, Inc. and its property/casualty insurance subsidiaries (Mercer) in March 2011.
These positive rating factors are partially offset by the variability in United Fire's underwriting and operating results in recent years, driven by adverse loss reserve development from Hurricane Katrina-related claims (in 2008 and 2009) and catastrophe and weather-related losses (in 2008 and 2011), the continuing challenging conditions in the organization's key target markets and execution risk associated with the integration of Mercer into its operations.
The rating of UFG recognizes the capital strength of its insurance subsidiaries, its modest financial leverage and adequate interest coverage measures.
While A.M. Best believes UFG and United Fire's ratings are well positioned at their current levels, factors that may lead to negative rating actions include a trend of deteriorating underwriting and operating performance to a level below peers, an erosion of surplus that causes a decline in risk-adjusted capital to a level that no longer supports the current ratings or if the group were to experience any adverse impacts with its ongoing integration of Mercer's operations. However, factors that may lead to positive rating actions include maintaining strong risk-adjusted capitalization while reporting improved operating and underwriting results and the continued smooth integration of Mercer's operations.
The ratings of United Life acknowledge its adequate level of risk- adjusted capitalization, consistently positive operating results and improved growth trends in life insurance premiums. The ratings also recognize the five-year growth in capital, despite paying $27 million in dividends over this period to UFG.
These positive rating factors are partially offset by United Life's continued exposure to interest rate volatility as a majority of its product reserves are still concentrated in interest- sensitive annuity and life products. A.M. Best will continue to monitor the company's ability to improve profitability along with growth in the ordinary life market and manage controlled growth in annuity business.
A.M. Best believes United Life is well positioned at its current rating level. Future negative rating actions could occur should United Life experience significant impairments in its investment portfolio, a material decline in capitalization or significantly increased spread compression in its interest sensitive life insurance and fixed annuity business.
The FSR of A (Excellent) and ICRs of "a" have been affirmed for United Fire and Casualty Company and its following property/ casualty subsidiaries:
-Lafayette Insurance Company
-Addison Insurance Company
-United Fire & Indemnity Company
-United Fire Lloyds
-Mercer Insurance Company
-Financial Pacific Insurance Company
-Mercer Insurance Company of New Jersey, Inc.
-Franklin Insurance Company
The methodology used in determining these ratings is Best's Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best's rating process and contains the different rating criteria employed in the rating process. Key criteria utilized include: "Catastrophe Analysis in A.M. Best Ratings"; "Equity Credit for Hybrid Securities"; "Insurance Holding Company and Debt Ratings"; "The Treatment of Terrorism Risk in the Rating Evaluation"; "Risk Management and the Rating Process for Insurance Companies"; "Understanding BCAR for Property/Casualty Insurers"; and "Rating Members of Insurance Groups." Best's Credit Rating Methodology can be found at ambest.com/ratings/methodology.
A.M. Best Company is an insurance rating and information source.
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