A.M. Best Affirms Ratings of Employers Mutual Casualty Company and Its Subsidiaries
May 01 2015 - 2:52PM
Business Wire
A.M. Best has affirmed the financial strength rating
(FSR) of A (Excellent) and the issuer credit ratings (ICR) of “a”
of Employers Mutual Casualty Company (EMCC) and its six
property/casualty subsidiaries (collectively referred to as EMC
Insurance Companies), which operate under an inter-company
pooling agreement led by EMCC. In addition, A.M. Best has affirmed
the FSR of A (Excellent) and the ICR of “a” of EMCC's separately
rated, indirectly owned subsidiary, EMC Reinsurance Company
(EMC Re). Furthermore, A.M. Best has affirmed the FSR of A-
(Excellent) and the ICR of “a-” of EMC National Life Company
(EMCNL).
Concurrently, A.M. Best has affirmed the ICR of “bbb” of EMC
Insurance Group Inc. (EMCI) [NASDAQ: EMCI], a downstream
holding company majority owned by EMCC. The outlook for all ratings
is stable. All of the above companies are headquartered in Des
Moines, IA. (See below for a detailed listing of the
companies.)
The ratings of EMC Insurance Companies and EMC Re reflect their
strong level of risk-adjusted capital, which is supported by
generally positive levels of pre-tax operating and net income;
consistently favorable development of prior years’ loss and loss
adjustment expense reserves; favorable core underwriting results as
well as the benefits these companies will continue to derive from
management’s actions over the past several years, which are
associated with pricing and risk selection, claims management and
reserving methodology. The group has developed and implemented
predictive modeling tools and sophisticated monitoring systems as
part of its overall risk management program, which have resulted in
an improved ability to differentiate risk, monitor risk
concentrations and quantify and track the quality of business over
time. These tools are leveraged by the group's extensive regional
network and supported by long-standing agency relationships. These
enhancements were designed to enable management to more effectively
manage the group's business through varying market conditions, and
resulted in improved underwriting performance overall since
2011.
Partially offsetting these positive rating factors are EMC
Insurance Companies’ and EMC Re’s exposure to catastrophe and
weather-related events, above-average levels of common stock
leverage; potential for a lower level of favorable development of
prior years’ loss reserves in the future and continued challenging,
albeit improving, market conditions in the group’s core markets.
Further offsetting EMC Re’s ratings are its significant dependence
on EMCC; its exposure to natural catastrophe and weather events, as
evidenced in 2011; and the competitive challenges associated with
its position as a smaller company in the reinsurance market, which
has grown more competitive on increased capacity driven by the
infusion of capital from alternative markets.
The affirmation of EMCNL’s ratings reflects the synergy and
strong relationship EMCNL has with its parent, EMCC. EMCNL’s
ratings are enhanced through its use of EMCC’s property/casualty
distribution system; shared services; overlapping management; and
the benefit from explicit parental support when needed. EMCNL’s
surplus is of good quality, with minimal use of reinsurance, modest
financial leverage and overall good credit quality of invested
assets. In addition, EMCNL’s risk-adjusted capitalization is
sufficient to support its insurance, business and investment risks.
Lastly, ENCNL also markets its life and annuity products through
life-only agents, and two-thirds of its total direct written
premiums are in products A.M. Best considers as more creditworthy
and of lower risk.
Offsetting factors include elevated interest-sensitive
liabilities, which are somewhat higher than the life industry
average. A significant portion of annuity reserves have high
guaranteed crediting rates in addition to low surrender protection.
However, A.M. Best notes that EMCNL has been able to manage its
annuity spreads effectively, as annuities with higher crediting and
guaranteed rates have been surrendering. While EMCNL considers its
workplace line as a key source of future earnings, there have been
consistent operating losses due to new business strain, and
workplace sales as a percentage of total sales has been modest.
Lastly, EMCNL is considered a regional insurer, with most of its
sales originating from the Midwest states.
While EMCC owns 49% of EMCNL’s voting common stock, they have
economic ownership of 69.34% when factoring in non-voting common
stock. This lack of majority voting control results in a deviation
from A.M. Best’s “Rating Members of Insurance Groups” methodology.
However, this deviation is mitigated by overlapping management on
the EMCNL board of directors, on which both EMCNL’s and EMCC’s
presidents are members. The level of integration between the two
companies due to shared resources (i.e., investment, investment
accounting, marketing and human resources) acts to support both
entities within the group.
The ratings of EMCI recognize the capital strength of its
property/casualty affiliates, the support of EMCC and the absence
of financial leverage, with no outstanding debt.
While A.M. Best believes EMCC and its subsidiaries’ ratings are
well-positioned at the current level, factors that may lead to
negative rating actions include a trend of deteriorating
underwriting and operating performance to a level below their peers
and/or an erosion of surplus to such an extent that it causes a
significant decline in risk-adjusted capitalization.
Positive rating movement for EMCNL is unlikely in the near- to
mid-term. Negative rating actions could result from a significant
decline in risk-adjusted capitalization due to unfavorable trends
in operating performance or a change in A.M. Best’s view of EMCNL’s
role in the enterprise.
The FSR of A (Excellent) and the ICRs of “a” have been affirmed
for Employers Mutual Casualty Company and its following
property/casualty subsidiaries:
- Dakota Fire Insurance
Company
- EMC Property & Casualty
Company
- EMCASCO Insurance Company
- Hamilton Mutual Insurance
Company
- Illinois EMCASCO Insurance
Company
- Union Insurance Company of
Providence
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 can be found at
www.ambest.com/ratings/methodology.
Key insurance criteria reports utilized:
- Catastrophe Analysis in A.M. Best
Ratings
- Equity Credit for Hybrid
Securities
- Evaluating U.S. Surplus Notes
- Insurance Holding Company and Debt
Ratings
- Rating Members of Insurance Groups
- Risk Management and the Rating Process
for Insurance Companies
- The Treatment of Terrorism Risk in the
Rating Evaluation
- Understanding BCAR for
Property/Casualty Insurers
- Understanding BCAR for U.S. and
Canadian Life/Health Insurers
- A.M. Best’s Liquidity Model for U.S.
Life Insurers
This press release relates to rating(s) that have been
published on A.M. Best's website. For all rating information
relating to the release and pertinent disclosures, including
details of the office responsible for issuing each of the
individual ratings referenced in this release, please visit A.M.
Best’s Ratings & Criteria Center.
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 © 2015 by A.M. Best Company,
Inc. ALL RIGHTS RESERVED.
A.M. Best Company, Inc.Michael RussoSenior
Financial Analyst–P/C(908) 439-2200, ext.
5372michael.russo@ambest.comorFrank Walko,
CPAFinancial Analyst–L/H(908) 439-2200, ext.
5072frank.walko@ambest.comorChristopher
SharkeyManager, Public Relations(908) 439-2200, ext.
5159christopher.sharkey@ambest.comorJim
PeavyAssistant Vice President, Public Relations(908)
439-2200, ext. 5644james.peavy@ambest.com
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