A.M. Best Revises Outlook to Negative for Germania Mutual Group’s Members

A.M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength rating (FSR) of A- (Excellent) and issuer credit ratings (ICR) of "a-" of Germania Mutual Group's (Germania) property/casualty members.

Concurrently, A.M. Best has affirmed the FSR of B++ (Good) and ICR of "bbb" of Texas Heritage Insurance Company (Texas Heritage), an affiliate of Germania.

Additionally, A.M. Best has affirmed the FSR of B++ (Good) and ICR of "bbb+" of Germania Life Insurance Company (Germania Life). The outlook for these ratings is stable. All companies are domiciled in Brenham, TX. (See below for a detailed listing of the companies.)

The revised outlook for Germania's ratings reflects the continuation of its volatile operating results as well as its declining risk-adjusted capitalization trend in recent years, in conjunction with its elevated underwriting leverage measures. This is due primarily to Germania's unfavorable underwriting performance driven by a variety of frequent and severe weather-related events, which included hurricane, hail and windstorm events. As a result, Germania has reported significant underwriting losses over the last five years that has continued into 2013. In response, management has been tightening underwriting guidelines, de-emphasizing unprofitable business and increasing rates in order to return to a profitable status. However, as a single state writer, Germania's overall results will continue to be exposed to frequent and severe weather- related events as well as economic, judicial and regulatory issues.

The affirmation of Germania's ratings recognizes its adequate risk-adjusted capitalization, long-time experience and expertise in the Texas marketplAce and conservative investment philosophy, which continues to produce favorable net investment income.

The ratings may be downgraded if Germania has a continuation of adverse operating results and declining risk-adjusted capitalization. Removal of the negative outlook is contingent upon Germania's ability to reverse its adverse operating performance and improve its overall risk-adjusted capitalization.

The ratings and outlook of Texas Heritage acknowledge its adequate risk-adjusted capitalization, favorable underwriting leverage measures and the financial and operational support it receives from Germania. Partially offsetting these positive rating factors is Texas Heritage's tight geographic concentration of risk, limited product offerings and elevated expense structure.

Negative pressure may be put on the ratings if Texas Heritage's operating performance deteriorates and/or there is a material deterioration in its capital strength as measured by Best's Capital Adequacy Ratio (BCAR).

The ratings of Germania Life acknowledge continuing programs to expand its market profile through its ordinary life insurance distribution and its continued strong level of risk-adjusted capitalization. Offsetting these positive rating factors are Germania Life's generally small size relative to its affiliated companies, along with its narrow business profile and operating losses as a result of new business strain.

The ratings for Germania Life are viewed as stable over the near term. Positive rating movements could occur if sustainable positive earnings trends emerge while maintaining strong capitalization levels. Factors that could lead to downward rating pressures are Germania Life losing its ability to maintain its market presence, realization of significant operating losses or a material decline in its risk-adjusted capitalization. Additionally, negative rating actions on its parent could result in negative rating pressures on Germania Life's ratings.

The FSR of A- (Excellent) and ICRs of "a-" have been affirmed for the following members of Germania Mutual Group:

-Germania Farm Mutual Insurance Association

-Germania Insurance Company

-Germania Select Insurance Company

-Germania Fire & Casualty 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. Best's Credit Rating Methodology: ambest.com/ratings/methodology.

A.M. Best Company is an insurance rating and information source.

((Comments on this story may be sent to [email protected]))