State National Companies, Inc. (NASDAQ: SNC) today announced that A.M. Best has revised the issuer credit rating (ICR) outlook to positive from stable and affirmed the financial strength rating (FSR) of A (Excellent) and the ICRs of "a" of State National Insurance Company, Inc. and its subsidiaries, National Specialty Insurance Company and United Specialty Insurance Company, which operate under a pooling agreement and are collectively referred to as State National Group (State National). The outlook for the FSR remains stable.
A.M. Best stated the following in a press release dated August 25, 2016:
"The revised ICR outlook reflects State National's strong risk-adjusted capitalization, extended history of sustained operating profitability driven by its core collateral protection insurance business and dominant market position providing fronting services. Additional favorable rating factors include the group's extensive enterprise risk management programs tailored to its business model and capability managing collateralized counter-party relationships.
"These positive rating factors are partially tempered by the elevated ceded leverage from the extensive use of reinsurance. This risk is somewhat mitigated by the long-standing and successful process to maintain collateral to support recoverable amounts. Furthermore, this risk is controlled by indemnification agreements contained within the reinsurance contracts. In recent years, the program business has grown significantly, and this portfolio includes participation from third-party capital providers.
"The ratings of State National Companies are based on its role as the ultimate parent holding company of State National. As of Dec. 31, 2015, debt-to-capital and debt-to-tangible capital ratios (excluding other comprehensive income/loss) were 14.5% and 14.8%, respectively. Furthermore, interest coverage and cash flow for the parent is exceptionally strong.
"The ratings of State National and State National Companies could receive positive support from improved operating results or further advancements in overall profitability. Key factors that could result in negative rating action include a significant decline in stand-alone risk-adjusted capitalization, operating performance over a sustained period that does not meet A.M. Best's expectations, significant adjustments to the organization's business model, including provisions in the reinsurance treaties, or a dispute regarding reinsurance recoverable amounts."