A.M. Best Upgrades Ratings of Partners Mutual Insurance Company and Affirms Ratings of Penn National Insurance and Its Members

A.M. Best Co. has removed from under review with positive implications and upgraded the financial strength rating (FSR) to A- (Excellent) from C++ (Marginal) and issuer credit rating (ICR) to "a-" from "b" of Partners Mutual Insurance Company (Partners) (Waukesha, WI).

Concurrently, A.M. Best has affirmed the FSR of A- (Excellent) and ICRs of "a-" of Penn National Insurance (Penn National) and its members, Pennsylvania National Mutual Casualty Insurance Company (Penn Mutual), Penn National Security Insurance Company (both domiciled in Harrisburg, PA) and Founders Insurance Company (Lawrenceville, NJ). Additionally, A.M. Best affirmed the debt rating of "bbb" on $50 million 9.5% 30-year surplus notes, due 2034 issued by Penn Mutual. The outlook for all ratings is stable.

Partners' ratings were upgraded following receipt of an executed affiliation agreement and confirmation of an approved reinsurance pooling agreement that includes Penn Mutual, Penn National Security and Partners as reinsurance pool members. Under the terms of the pooling agreement, these companies will participate in the consolidated results of their proportional share as follows: Penn Mutual (49%), Penn National Security (49%) and Partners (2%). The reinsurance pooling agreement provides the companies with increased diversification through additional spread of risk, closely aligns the results of their consolidated operations and provides Penn National with access to the territories in Wisconsin and Iowa through Partners independent agency base. Partners will continue to operate as a separate entity writing commercial and personal lines in Wisconsin and Iowa. Going forward, the affiliation will provide Partners with greater economies of scale and product enhancements.

The affirmation of Penn National's ratings reflects the group's excellent risk-adjusted capitalization, generally sound operating performance and history of organic surplus growth achieved through retained earnings, which has improved leverage measures during the recent five-year period. The ratings also consider management's initiatives to eliminate the earnings drag of lead-based paint claims through reinsurance covering all existing and future claims up to a predetermined limit.

Partially offsetting these positive rating factors are the significant deterioration in underwriting results in recent years reflective of adverse development on lead-based paint claims and significant weather-related losses, the resulting downturn in the group's pre-tax return on revenue measures, which trail the peer composite over the long term, and the geographic risk concentration that exposes results to the potential for weather-related claims.

Despite these concerns, the outlook reflects A.M. Best's expectation that earnings should improve over the near term, given the elimination of lead-based paint claims, and that overall capitalization will remain fully supportive of management's conservative operating and investment philosophy.

Factors that could result in upward movement of the group's ratings include a significant improvement in operating earnings and resulting return on revenue measures that can be sustained over a period of time. Accordingly, this would enhance the group's ability to generate surplus growth, which has been impacted in recent years due to operating losses.

However, factors that could result in downward rating pressure over the near term include additional weakening in operating earnings due to deteriorating underwriting performance or a material increase in catastrophe losses beyond expectations, which weakens overall capitalization.

The principal methodology used in determining these ratings is Best's Credit Rating Methodology -- Global Life and Non-Life Insurance Edition, which provides a comprehensive explanation of A.M. Best's rating process and highlights the different rating criteria employed. Additional key criteria utilized include: "Risk Management and the Rating Process for Insurance Companies"; "Understanding BCAR for Property/Casualty Insurers"; "A.M. Best's Ratings & The Treatment of Debt"; "Equity Credit for Hybrid Securities"; and "Catastrophe Analysis in A.M. Best Ratings." Methodologies can be found at www.ambest.com/ratings/methodology. Founded in 1899, A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com. Copyright © 2012 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.