A.M. Best Co. has affirmed the financial strength rating of A- (Excellent) and issuer crediting rating “a-” of Standard Casualty Company (Standard Casualty) (New Braunfels, TX). The outlook for all ratings is stable. Standard Casualty is a subsidiary of Cavco Industries Inc. (Delaware Corporation) [NASDAQ: CVCO], a manufacturer of factory-built homes.
The rating actions reflect Standard Casualty’s adequate risk-adjusted capitalization, excellent local market knowledge and generally favorable operating results. Standard Casualty has shown a historical pattern of net earnings driven by its conservative underwriting philosophy and a steady stream of investment income. As a result, the company has reported positive pre-tax operating gains in four of the last five years (2007 – 2011). The exception being 2011, in which the company was adversely impacted by weather-related events and wildfire losses. Furthermore, Standard Casualty’s investment portfolio is fairly conservative and has been the primary driver of pre-tax operating gains. In addition, balance sheet liquidity is excellent and the company has generated positive operating cash flow in most years.
These positive rating factors are partially offset by Standard Casualty’s aggressive growth mainly in Arizona and New Mexico and its recent operating losses driven by frequent and severe weather-related events. As a result, underwriting losses were reported in 2011 and have continued into 2012. A.M. Best anticipates that Standard Casualty may experience underwriting volatility due to its anticipated aggressive growth and inherent exposure to frequent and severe weather-related events. In addition, as a predominate Texas writer, Standard Casualty is exposed to potential judicial, regulatory and economic concerns. However, these risks are partially mitigated as the company historically has adhered to strict underwriting guidelines and a conservative operating philosophy.
In future rating cycles, pressure may be put on Standard Casualty’s ratings and outlook should its growth strategy result in operating losses and loss of surplus, which may lead to weaker risk-adjusted capitalization.
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