OLDWICK, N.J.--(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.
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