A.M. Best Co. has affirmed the financial strength ratings (FSR) of A- (Excellent) and issuer credit ratings (ICR) of “a-” of EMC Insurance Companies (EMC), its property/casualty pool members and EMC Reinsurance Company (EMC Re). In addition, A.M. Best has affirmed the ICR of “bbb-” of the group’s publicly traded, downstream holding company, EMC Insurance Group Inc. (NASDAQ: EMCI). The outlook for all ratings is stable. All the above named companies are domiciled in Des Moines, IA. (See below for a detailed listing of the companies and ratings.)
The affirmation of EMC’s ratings reflects its excellent risk-adjusted capitalization, significantly improved operating profitability in years 2005-2007 and the continued benefits it will derive from management’s positive actions over the past several years associated with pricing and risk selection, claims management and reserving methodology. EMC’s surplus has increased at a compound annual rate of 18% over the past five years, and the group maintains capitalization well in excess of levels required for its ratings.
Over the past few years, EMC has developed and implemented predictive modeling tools and premium rate monitoring systems designed to better price and select its business and quantify and track its quality over time. In addition, improvements in its claims systems and monitoring also have been implemented to ensure greater consistency of claims handling and reserving and to help manage its business through varying market conditions.
Partially offsetting these positive rating factors is the group’s earnings variability in recent years (largely due to fluctuations in its prior year loss reserve development), above average expense ratio and the anticipated near-term pressures on profitability related to continued soft property/casualty market conditions and the likelihood of less favorable prior year loss reserve development than in 2007.
Management attributes much of EMC’s $100 million of unfavorable reserve development in 2004 to aggressive actions taken on individual case reserves as a result of diligent and extensive claim file review and improved communication between branch offices and the home office. The aggressiveness of the 2004 reserving actions is demonstrated by $79 million of subsequent favorable development on year-end 2004 case reserves. The group’s reserves appear to have stabilized in years 2005-2007 as evidenced by its reported favorable reserve development emanating largely from closed claim files. A.M. Best believes EMC’s reserve position provides for a sufficient risk margin.
