The ratings are based on the group's good market position, improved operating results, and diversified revenue stream. The company has a narrow but good core market in small to medium-sized commercial risks that is complemented by diversification in personal lines products and annuities and life insurance products sold by United Life. Partially offsetting these positive factors are uncertainties associated with company's profitability being influenced by catastrophe exposure and soft markets. In addition, the company's capital is lower than desirable. The estimated capital adequacy ratio, as measured by Standard & Poor's model, at year-end 2003 is 110%-115%, which is considered good but falls short of the level expected for an 'A' rating.
Outlook
Standard & Poor's expects that the group's capital adequacy ratio will improve to a minimum of 125%, which is considered strong. Standard & Poor's does not expect property/casualty operations' solid earnings performance to extend through 2005, as rate increase and earnings growth will decrease resulting, in an ROR of about 5%. The company benefits from a good business mix and earnings mix, with consistent contributions from the life company. The temporary withdrawal from the annuity market in the second half of 2003 adds uncertainty to the quality of future earnings. Standard & Poor's believes contributions from United Life in terms of profitability should be about 12%-15% of the total group in 2004, down from 16.2% in 2003.
Major Rating Factors
-- Improved profitability. At year-end 2003, net income totaled $47 million (excluding earnings from United Life that totaled almost $8.5 million), supported by a solid combined ratio of 93%. However, Standard & Poor's believes the company will be challenged to sustain this solid performance. This view is based on the expectations that property/casualty rate increases in the company's core market will begin to taper as competitors begin pressuring pricing.
-- Diversified revenue stream. The company's property/casualty revenues are weighted toward commercial products and complemented by personal lines products and annuities as well as life insurance products sold by United Life. Nevertheless, United Life's temporary withdrawal from the annuity market might change the quality of the revenue stream. In addition, the company is focused on a narrow but good core market. The company's longevity in its core market of small to medium-sized commercial risks in rural and suburban areas is good.
-- Good financial flexibility. The company maintains access to the capital markets. The company's debt plus preferred stock to equity ratio was 14.9% at year-end 2003, and its fixed-coverage ratio was more than 19x. Both of these ratios are well within the tolerance level expected for the rating.
-- Weaker-than-expected capitalization. The group's consolidated capital adequacy ratio, based on Standard & Poor's model, was an estimated 110%-115% at year-end 2003. This level, though considered good under Standard & Poor's criteria, falls short of the level expected for 'A' ratings. In 2002, the company enhanced its capitalization with the proceeds from a convertible preferred stock offering of $65 million. This significantly helped support its capital adequacy at the current level.
-- Irregular earnings. Historically, catastrophe exposure and soft markets influenced earnings. The company does maintain a good reinsurance