A.M. Best Revises Outlook to Negative of Penn National Insurance Companies' Members

OLDWICK, N.J. --(Business Wire)--

A.M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength rating (FSR) of A- (Excellent) and issuer credit ratings (ICR) of "a-" of Pennsylvania National Mutual Casualty Insurance Company (Penn National Mutual), Penn National Security Insurance Company (Penn National Security) (both domiciled in Harrisburg, PA) and Founders Insurance Company (Founders) (Lawrenceville, NJ).

A.M. Best also has revised the outlook to negative from stable and affirmed the FSR of A- (Excellent) and ICR of "a-" of Partners Mutual Insurance Company (Partners) (Waukesha, WI). Partners' operates through a pooling agreement with Penn National Mutual, Penn National Security and Founders. Additionally, A.M. Best has revised the outlook to negative from stable and affirmed the debt rating of "bbb" on $50 million 9.5% 30-year surplus notes due 2034 issued by Penn National Mutual.

The ratings reflect the group's excellent risk-adjusted capitalization, modestly improving underwriting performance in 2011 and 2012 and generally profitable operating results during the recent five-year period. The ratings also reflect management's initiatives to improve underwriting performance by eliminating the earnings drag of lead-based paint claims through reinsurance covering all existing and future claims up to a predetermined limit, while seeking to limit the impact of weather-related losses through various underwriting initiatives.

Thenegative outlook reflects A.M. Best's concerns with regard to the overall trend in the group's results in recent years and the potential for a continuation of that trend to adversely impact future operating results and risk-adjusted capitalization.

Partially offsetting these positive rating factors are the significant deterioration in Penn National Mutual, Penn National Security, Founders and Partners' underwriting results during 2010 through 2012 relative to the group's historical performance due to adverse development of lead paint claims, significant weather-related losses and soft market conditions, as well as the weak returns on revenue and equity, which trail peer composites over the long term. Additionally, the group remains geographically concentrated, which exposes its results to the potential for weather-related claims as approximately 40% of premium is written in Pennsylvania.

Factors that could result in downward rating pressure on the group include ongoing weak operating earnings over the mid-term; a material increase in catastrophe losses beyond A.M. Best's expectations, which weakens overall capitalization; the emergence of unanticipated lead paint claims that negatively impact results or a material deterioration in performance or risk-adjusted capitalization.

Factors that could result in upward movement of the ratings include a significant and sustained improvement in the group's operating earnings, leading to improved organic surplus growth.

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. Key criteria utilized include: "Understanding BCAR for Property/Casualty Insurers"; "Equity Credit for Hybrid Securities"; "Catastrophe Analysis in A.M. Best Ratings"; "Insurance Holding Company and Debt Ratings"; "Rating Members of Insurance Groups"; "Risk Management and the Rating Process for Insurance Companies"; and "The Treatment of Terrorism Risk in the Rating Evaluation." Best's Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

Founded in 1899, A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.