OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best has revised the outlook to negative from stable and affirmed the financial strength rating (FSR) of A (Excellent) and issuer credit rating (ICR) of “a” of National Lloyds Insurance Company (National Lloyds).
Additionally, A.M. Best has affirmed the FSR of A (Excellent) and ICR of “a” of National Lloyds’ affiliate, American Summit Insurance Company (American Summit). The outlook for both ratings is stable. National Lloyds and American Summit are subsidiaries of their ultimate parent, Hilltop Holdings Inc. (headquartered in Dallas, TX) [NYSE: HTH]. All companies are domiciled in Waco, TX, unless otherwise specified.
The revised outlook for National Lloyds’ ratings reflects its volatile operating results primarily due to continuation of adverse underwriting performance, as well as its declining risk-adjusted capitalization trend in recent years. The unfavorable underwriting performance was driven by a variety of frequent and severe weather-related events, particularly tornado, hail and windstorm losses that occurred in recent years. As a result, National Lloyds has reported sizable underwriting losses during the last three years through 2013. In response, management has increased rates, tightened underwriting guidelines; non-renewed unprofitable business and reduced exposure in geographical regions that are more catastrophe-prone. However, as the majority of its business is conducted in Texas, National Lloyds’ 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 National Lloyds’ ratings recognizes its adequate risk-adjusted capitalization, conservative investment strategy and local market expertise within its niche market of personal property insurance. Furthermore, despite the unfavorable underwriting performance, National Lloyds’ net income earnings have been positive over the last five years driven by other income, net investment income and capital gains. National Lloyds benefits from the financial flexibility of its immediate parent holding company, National Lloyds Corporation (formally known as NLASCO Inc.), which was evidenced in 2012 by its explicit support in the form of a capital contribution to offset underwriting losses.
The ratings may be downgraded if National Lloyds has a continuation of adverse underwriting results and declining risk-adjusted capitalization. Removal of the negative outlook is contingent upon National Lloyds’ ability to reverse its adverse underwriting performance and improve its overall risk-adjusted capitalization.
The ratings of American Summit acknowledge its favorable risk-adjusted capitalization, conservative investment strategy and generally positive net income earnings primarily driven by a steady stream of net investment income, other income and capital gains over the last five years. In addition, American Summit maintains moderate underwriting leverage measures and favorable balance sheet liquidity. American Summit has reported generally favorable loss reserve development on both an accident and calendar years basis in most years.
These positive rating factors are partially offset by American Summit’s varying underwriting performance that resulted in underwriting losses in three of the last five years. The unfavorable underwriting performance was driven by increased weather-related events and elevated losses from an affiliated quota share reinsurance agreement with National Lloyds. American Summit maintains a prudent catastrophe reinsurance program in conjunction with National Lloyds to mitigate losses associated with severe weather-related catastrophe events. American Summit’s product offerings are somewhat limited as it is primarily a provider of insurance for the mobile home market with most of its business conducted in Arizona.
Negative rating pressure may be put on American Summit’s ratings and/or its outlook could be revised should its unfavorable underwriting performance continue, which may lead to weaker risk-adjusted capitalization.
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.
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