Ratings: Toyota Motor, First Mercury, Eastern Alliance, Southern Farm

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Iowa-based Toyota Motor Insurance Company (TMIC), both with stable outlooks. The ratings reflect the company’s “adequate capitalization and improved operating performance,” said Best. The rating agency also noted that TMIC’s ultimate parent has “consistently provided financial support to its subsidiary in order for it to maintain its current rating level. TMIC plays a strategic role as the insurer to providers of vehicle service agreements and guaranteed auto protection sold through Toyota, Lexus and affiliated dealerships throughout the United States.” As offsetting factors, Best cited “TMIC’s leverage measures within the most recent five-year period. To improve underwriting results, management instituted rate increases on its vehicle service agreements program (VSA program) in both 2004 and 2009. Rate increases to its guaranteed auto protection program (GAP program) went into effect in 2005. As its re-priced policies continue to earn out, results have improved. Beginning in 2005, it changed the payment method of its administrative expenses from up front to as incurred. This change has lowered overall expense ratios.”

A.M. Best Co. has revised the outlook to positive from stable and affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit ratings (ICR) of “a-” of Chicago-based First Mercury Group and its members. Best also revised the outlook to positive from stable and affirmed the ICR of “bbb-” of the parent holding company, First Mercury Financial Corporation (FMFC), headquartered in Southfield, Mich. The revised outlook reflects First Mercury’s “sustained improvement in underwriting and operating profitability in recent years within a very competitive surplus lines marketplace,” Best explained. The ratings and outlook also recognize First Mercury’s “specialty niche business strategy and the complementary benefits derived from its affiliated general agent, CoverX Corporation, which serves as the group’s wholesale general agent.” Best described First Mercury’s capitalization as “solid,” and indicated that is expected “to remain supportive of its business risks, despite planned top line premium growth and the accompanying increase in attendant loss reserves. FMFC’s financial leverage remained relatively modest as reflected in its adjusted debt-to-capital ratio of 18.2 percent as of March 31, 2010.” Best also pointed out that FMFC “relies on its non-insurance subsidiaries to meet its debt obligations and other holding company requirements. However, dividend support from the operating companies is expected to help fund FMFC’s share repurchases, if any are made during the year. Additionally, a small dividend is expected to be paid by the operating companies to the parent in connection with the special cash dividend paid at the end of first quarter 2010.” However, Best said the “remaining, although lessening, concerns over First Mercury’s loss reserve development and the inherent risks associated with sizeable growth in premium production”, should be considered as partially offsetting factors. Notwithstanding these challenges, Best said it believes “overall reserve development should continue to trend more favorably, while premium growth is expected to be generated through FMFC’s distribution subsidiaries.” The FSR of ‘A-‘ (Excellent) and ICRs of “a-” have been affirmed for First Mercury Group and its following members: First Mercury Insurance Company; First Mercury Casualty Company; American Underwriters Insurance Company.

A.M. Best Co. has upgraded the financial strength rating (FSR) to ‘A’ (Excellent) from ‘A-‘ (Excellent) and issuer credit ratings (ICR) to “a” from “a-” of Eastern Alliance Insurance Group (EAIG) and its members. EAIG consists of Eastern Alliance Insurance Company (EAIC), Allied Eastern Indemnity Company (AEIC), Eastern Advantage Assurance Company (EAAC) and Employers Security Insurance Company (ESIC) (Indianapolis, IN), which operate under an intercompany pooling agreement. Best has also upgraded the ICR to “bbb” from “bbb-” of the holding company, Eastern Insurance Holdings, Inc. (EIHI). The outlook for all ratings has been revised to stable from positive. All companies are domiciled in Lancaster, PA, unless otherwise specified. Best said the ratings recognize “EAIG’s strong operating results, excellent capitalization, conservative reserving practices and the financial flexibility afforded by EIHI. The cultivation of a loyal agency base within preferred territories has produced profitable growth as evidenced by the group’s five-year average combined ratio, which outperforms the workers’ compensation composite by a wide margin.” Best added that the “strong underwriting performance reflects management’s commitment to maintain sound pricing, a proactive return to work program and utilization of “compromise and release” agreements. This approach has allowed EAIG to close claims more quickly and at a lower average cost than the typical workers’ compensation writer.” As offsetting factors Best cited “EAIG’s product concentration as a monoline workers’ compensation writer, which potentially exposes it to increased risk of regulatory or legislative changes. In addition, adverse development isolated to EIHI’s run-off specialty reinsurance segment, Eastern Re Ltd. S.P.C., required a reallocation of capital within the organization in 2009 to strengthen the run-off operation.”

A.M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength rating of ‘A+’ (Superior) and issuer credit of “aa-” of Southern Farm Bureau Casualty Group and its members, Southern Farm Bureau Casualty Insurance Company (Ridgeland, MS) and Louisiana Farm Bureau Casualty Insurance Company (Baton Rouge, LA). Best explained that the negative outlook reflects “Southern’s decline in underwriting and operating earnings in recent years associated with weather-related losses and a deterioration in its core book of business. The lead member of the group, Southern Farm Bureau Casualty Insurance Company, maintains aggregate excess of loss ratio reinsurance agreements with three Farm Bureau Mutual insurance companies. During the recent five-year period, severe weather and catastrophe events contributed to the volatility in Southern’s underwriting results through loss ratio reinsurance agreements. In addition, ongoing competitive pressures have resulted in deterioration in Southern’s core automobile book of business and an increase in the expense ratio.” Best added, however, that despite the negative outlook, it believes “Southern continues to maintain superior capitalization. The ratings further reflect Southern’s local market expertise and strong personal lines market position in its selected operating territories. These positive rating attributes are derived from management’s adherence to sound operating fundamentals, as demonstrated by modest underwriting leverage, consistently favorable loss reserve development and a conservative investment philosophy. Southern also benefits from its favorable expense position and sponsorship by the Farm Bureau Federations in each of the six states that comprise its operating territory, which enhances customer loyalty and affinity.”