Confederation Life Insurance Company, Toronto, Ontario, was assigned a 1993 Best's Rating of "A" (Excellent). The company's financial strength rating was downgraded from "Superior" to "Excellent" and its rating level was downgraded from "A+" to "A."
This rating reflects Confederation Life's diversified income streams, the strong market positions of its business units, the favorable initiatives implemented by the company's new senior management and the company's improving capitalization. Offsetting these strengths is Confederation Life's poor earnings performance over the past two years and the expectation that earnings and capital generation will be pressured from continuing delinquencies within the commercial mortgage portfolio and from Confederation Life's trust company subsidiary, Confederation Trust Company. The trust has experienced significant difficulties within its commercial loan portfolio, which resulted in substantial asset write-downs in 1991. Meanwhile, delinquencies within the insurance company mortgage portfolio likely will not significantly decline in the next two years, given Confederation Life's considerable exposures.
"Although internal capital generation will likely be modest in the next several years, the strong core earnings of its business units will enable Confederation Life to increase and further strengthen its capital position when investment delinquencies subside," said Larry G. Mayewski, senior vice president of Best's life/health division. Confederation Life's business segments provide the company with diversified sources of strong and stable earnings. The company maintains leading market positions in Canada, the United States and in the United Kingdom. In Canada, the company maintains a dominant position in the large case Canadian group market; in the United Kingdom, it is the second largest pooled pension fund manager; and in the United States, the company has a significant presence in the estate planning, corporate life insurance, structured settlement and corporate pension markets.
Due to its strategic role as a subsidiary of Confederation Life, Confederation Life Insurance and Annuity Company, Atlanta, was assigned a 1993 Best's Rating of "A" (Excellent). The company's financial strength was downgraded from "Superior" to "Excellent" and its rating level was downgraded from "A+" to "A."
Farmers Insurance Group (property/casualty), Los Angeles, was assigned a 1993 Best's Rating of "A" (Excellent). The group's excellent financial strength was affirmed and its rating level of "A" was unchanged. The group's qualified rating modifier was removed, reflecting the immateriality of Farmer's maximum potential exposure to premium rollbacks under the provisions of Proposition 103 in California. The rating applies to the group's nine intercompany pool members, led by Farmers Insurance Exchange (a reciprocal exchange) and five other affiliates that are substantially reinsured by pool members.
This rating reflects the group's dominant personal lines market position in the West and Southwest, its competitive expense advantage and adequate overall capitalization, which should be enhanced by management's renewed commitment to strengthening the group's surplus over the next several years. These positive rating factors are derived from its cost-efficient exclusive agency force, as well as Farmer's strong franchise within its core operating territories. These strengths are offset somewhat by the group's lackluster operating returns, its high underwriting leverage, its business concentration in California and Texas (both difficult operating and regulatory environments) and its sizable exposure to catastrophe losses, as evidenced by nearly $500 million of net catastrophe losses incurred in 1992.
"The group's profitability has been depressed in recent years with a five-year combined ratio of 108 and pretax return on revenue of 4 percent, despite including nearly five points of management income earned by its attorney-in-fact parent, Farmers Group Inc.," said John H. Snyder, senior vice president of Best's property/casualty division. "Farmers' lackluster operating results reflect its increased catastrophe losses, and to a lesser extent, deteriorating results in its non-core commercial lines, which represent approximately 10 percent of its business," he added.
In response to its catastrophe exposures, Farmers has recently renewed its property catastrophe reinsurance program which provides substantial surplus and earnings protection with a consortium of highly rated reinsurers. This substantial reinsurance coverage protects Farmers for $750 million of losses in excess of a loss ratio retention and responds to both frequency and severity of property catastrophe losses.
As a result of the group's expansion into several new eastern states and increased catastrophe losses in recent years, its premium leverage has increased to 3.0-to-1, which is high relative to its peers. However, A.M. Best expects improvement in the group's underwriting leverage as surplus should build more rapidly due to planned reductions in management fees paid to its parent, combined with better reinsurance protection. The group's capital position is secured by its portfolio of high-quality investments and maintenance of strong loss reserves, supplemented by an additional $700 million of non-affiliated net invested assets held at the parent holding company for the benefit of the property/casualty insurance group. The parent company has considerable financial capacity with modest leverage and a debt-to- equity ratio of less than 10 percent. The Farmers Insurance Group is the third largest property/casualty underwriter in the country with $7.8 billion of premiums supported by $2.6 billion of surplus, and is ultimately owned by B.A.T Industries, a U.K.-based multinational holding company involved in tobacco and financial services.
Health Care Service Corporation, A Mutual Legal Reserve Company, Chicago, was assigned a 1993 Best's Rating of "A" (Excellent). The company's excellent financial strength was affirmed and its rating level of "A" was unchanged.
This rating reflects the company's conservative management practices, excellent balance-sheet quality and favorable capitalization. In addition, this rating recognizes the company's ability to generate strong earnings, as evidenced by the nearly $400 million of statutory profits that have been reported since 1988 -- during the most recent improving phase of the accident and health underwriting cycle.
"Partially offsetting these strengths is the company's concentrated focus within the accident and health lines and the potential long-term growth limitations of its mono-state operating territory," according to Larry G. Mayewski, senior vice president of Best's life/health division. "As a result, the company's operations are somewhat vulnerable to the potential for significant changes within the health care industry on either a national or state level," he added.
In recent years, HCSC has continued the build-up of its capital base primarily through the accumulation of earnings, and has grown its surplus account 174 percent since year-end 1987. The company's conservative investment philosophy enables it to maintain a portfolio of assets that provide excellent liquidity and generate sufficient yields to provide a stable earnings pattern while presenting minimal risks. Additionally, the company benefits from its subsidiaries that provide sufficient returns on investment.
"A.M. Best believes that HCSC is well positioned with its availability of preferred provider organizations and managed care networks to respond to and benefit from changes within national health care," Mr. Mayewski added. "A.M. Best also views favorably the efforts in recent years to emphasize its non-risk and administrative service businesses which should provide greater insulation from the next downturn in the accident and health underwriting cycle," he said.
To further strengthen its position as a premier provider of health insurance in Illinois, and in recognition of the potential changes which health care reform presents to its marketplace, HCSC has recently announced its intention to merge operations with two Blue Cross/Blue Shield organizations located in Iowa and South Dakota. This arrangement is expected to provide a long-term benefit to the organization by expanding its single state focus to a regional presence, enabling it to enhance its already efficient processing capabilities and managed care operations and better compete with national health care providers.
ITT Hartford Insurance Group (property/casualty), Hartford, Conn., was assigned a 1993 Best's Rating of "A+" (Superior). The group's superior financial strength was affirmed and its rating level of "A+" was unchanged. The rating applies to the group's 13 property/casualty intercompany pool members, led by the Hartford Fire Insurance Company.
"This rating reflects the group's strong capitalization, stable underwriting results, a competitive advantage derived from its strong personal, commercial and specialty lines business, and its reorganization announced in September 1992, which should benefit the group's long-term profitability and reduce the volatility of its underlying reserves," said John H. Snyder, senior vice president of Best's property/casualty division. Additionally, the group's financial strength was secured by substantial support provided by its parent, ITT Corporation, in connection with the reorganization. In contrast to many of its peers, Hartford is committed to a diversified commercial, personal, and specialty lines strategy in which it has maintained a strong and consistent presence in its markets, particularly within the large national accounts market and personal lines affinity market which includes its sizable long-term endorsement from the AARP.
These positive rating factors are offset by the company's ongoing exposure to environmental and asbestos claims that remains within the pool, and the group's relatively low investment yields that will continue in the future given its substantial repositioning of its bond portfolio in 1992. In addition, the group has a moderate exposure to catastrophes, and had $283 million of pretax losses in 1992, a majority of which stemmed from Hurricanes Andrew and Iniki.
As part of the reorganization in 1992, ownership of the Cameron and Colby group was transferred on a fully funded basis from the insurance group to ITT Corporation, where it was placed in run-off at year-end. Related to this transaction, Hartford Fire added $900 million to Cameron and Colby's reserves to fund expected adverse loss reserve development in surplus lines and reinsurance business before 1986. In addition, the group added reserves of $250 million for expected legal defense costs associated with environmental-related claims. These charges primarily stemmed from adverse loss reserve development in asbestos and pollution-related business, and uncollectible reinsurance. To offset the $760 million after-tax charge incurred by the group and replenish its depleted surplus following these transactions, ITT Corporation contributed $680 million of capital into the group, a clear demonstration of its commitment to the property/casualty group and its ongoing core strategies.
The group's profitability (excluding Cameron and Colby business) continued to exhibit a stable trend with a five-year average combined ratio of 109, one point better than the industry. A.M. Best expects that the group's underwriting results should improve in the future given the group's solid operating fundamentals, its expense reduction initiatives, its commercial lines strategy of focusing on more profitable markets and products, and the absence of an earnings drag from Cameron and Colby's very unprofitable pre-1986 business. The group's capitalization is superior with lower-than-average underwriting leverage measures relative to its peers, while balance-sheet liquidity remains sound with nearly $700 million of average annual operating cash flow in the last five years. ITT Hartford ranks among the 10 largest property/casualty insurers in the U.S. with $4.5 billion of net writings supported by $3.0 billion in surplus.
Knights of Columbus, New Haven, Conn., was assigned a 1993 Best's Rating of "A++" (Superior). The society's superior financial strength was affirmed and its rating level of "A++" was unchanged.
"This rating reflects the fraternal benefit society's conservative management practices, strong earnings performance, high-quality balance sheet and exceptionally strong capitalization," said Larry G. Mayewski, senior vice president of Best's life/health division. This rating also acknowledges the strong and growing niche presence that the society has maintained in the individual life and annuity markets, where its sales are confined to its nationwide membership base. This sales practice has resulted in very strong persistency of its policyholders and its agents (who also are members of the society), and has provided the society with a favorable distribution cost advantage relative to many commercial life insurers. In addition, growth in the number of local councils has contributed to greater penetration of its target market, and has resulted in the consistent expansion of new sales activity.
The society maintains a strong liquidity position and very high- quality investment portfolio that is supported by over $4 billion in investment-grade bonds, cash and short-term investments (84 percent of invested assets). Knights of Columbus ranks among the 70 largest life/health insurers in the U.S. when measured by total assets.
Lutheran Brotherhood, Minneapolis, Minn., was assigned a 1993 Best's Rating of "A++" (Superior). The company's superior financial strength was affirmed and its rating level of "A++" was unchanged.
"This rating reflects the fraternal benefit society's exceptionally strong capitalization, high-quality balance sheet and conservative management practices," said Larry G. Mayewski, senior vice president of Best's life/health division. In addition, this rating acknowledges the society's strong position in the fraternal community which, through its stable membership base, has contributed to its generally strong growth in sales activity -- much of which has recently been derived from the expanded variable annuity activities of its subsidiary, Lutheran Brotherhood Variable Insurance Products Company.
Partially offsetting these strengths is the society's exposure to mortgage investments. However, the nature of the society's mortgage portfolio differs somewhat from many commercial life insurers, as evidenced in the small average loan size and the considerable portion of such investments that represent loans to churches. As a result, the performance of Lutheran Brotherhood's mortgage investments has fared very favorably relative to recent industry-wide experience.
Lutheran Brotherhood maintains a very strong liquidity position and high-quality investment portfolio that is supported by over $5 billion in investment-grade bonds and cash and short-term investments (two-thirds of invested assets). At year-end 1992, problem mortgage investments (including restructured loans) comprised a modest 1 percent of its assets. Lutheran Brotherhood ranks among the 40 largest life/health insurers in the U.S. when measured by total assets.
Due to its strategic role as a subsidiary of Lutheran Brotherhood, Lutheran Brotherhood Variable Insurance Products Company, Minneapolis, MN, was assigned a 1993 Best's Rating of "A++" (Superior). This rating is based on the consolidated performance of the parent and this subsidiary. The activities of Lutheran Brotherhood Variable are principally confined to the sale of individual variable annuities.