OLDWICK, N.J.--()--A.M. Best Co. has affirmed the financial strength rating of A (Excellent) and issuer credit rating of “a” of Grain Insurance and Guarantee Company (Grain). The company is domiciled in Manitoba, Canada. The outlook for both ratings has been revised to negative from stable.
“Risk Management and the Ratings Process for Insurance Companies”
The rating affirmations are supported by Grain's consistently solid operating performance, favorable reserve development, on both an accident and calendar year basis, its long-standing market presence, historically steady investment stream and seasoned management team.
Partially offsetting these positive rating factors and reflecting the current outlook are the recent drop in Grain’s surplus, the continued competitive pricing pressures throughout Canada, particularly in commercial lines, affecting rate adequacy in the market, as well as the company's susceptibility to catastrophic events in the territories in which it writes.
Management continues to monitor and improve performance, underwriting guidelines and rate adequacy. Indications are favorable as the company’s book of business provides balance with steady performance in several key financial measures, including operating earnings, net investment income and reserve development. The management team continues to demonstrate its ability to effectively operate through various insurance cycles and a rapidly changing investment market.
However, Grain does maintain high investment leverage, as its equity holdings represent approximately 50% of invested assets and 90% of surplus. The recent market value downturn in the portfolio led to an 8% drop in surplus in 2011. While values surged back somewhat in 2009 after the prior year's downturn, the current equity market has not rebounded as quickly from the 2011 result. This situation was further exacerbated by an 11% drop in surplus caused by a material adjustment in Grain's capitalization due to the recent accounting change affecting the valuation of pension assets. As a result of these circumstances, surplus fell by over 20% and underwriting leverage rose by a third. While year-end 2012 projections indicate a roughly 50% recoupment of the 2011 surplus shortfall, the current improved rate taking environment will hold net underwriting leverage, as well as other leverage measures at 2011 levels. This, in concert with other capital adequacy measures, alludes to a continued weakened capital position out into the mid term. Any additional capital deterioration could lead to further negative rating movement in the near to mid term. Management remains confident, however, in Grain's ability to regain its surplus organically over time supported by its historically excellent operating position.
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: “Risk Management and the Rating Process for Insurance Companies”; “Catastrophe Analysis in A.M. Best Ratings”; “Evaluating Non-Insurance Ultimate Parents”; “Risk Management and the Ratings Process for Insurance Companies”; and “Understanding BCAR for Canadian Property/Casualty Insurers.” Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
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