A.M. Best has downgraded the issuer credit rating (ICR) to “bbb” from “bbb+” and affirmed the financial strength rating (FSR) of B++ (Good) of Farmers Fire Insurance Company (Farmers) (York, PA). The outlook for the ICR has been revised to stable from negative, while the outlook for the FSR remains stable.
The negative rating action reflects continuation of the upward trend in underwriting leverage and the corresponding decline in risk-adjusted capitalization. In most years, growth in leverage measures was attributed to surplus declines as a result of persistent underwriting losses. The volatile operating performance over the past several years was mostly attributed to frequent and severe weather-related events. Also, the company maintains a high expense structure relative to the composite average; however, the expense ratio has begun to improve in recent time periods. The rating further reflects the company’s high common stock leverage. Despite these rating factors, Farmers’ risk-adjusted capitalization continues to support the current rating level as in past years, but to a lesser degree due to the recent trend in underwriting leverage measures.
Management’s recent corrective initiatives have started to gain traction despite the challenges from weather-related events earlier in the year. Through October 2015, underwriting results began to rebound and reflect the underwriting and pricing actions implemented. Contributing to the recent uptick in underwriting leverage was the premium growth from rate increases that outpaced the change in surplus. According to management, ongoing underwriting and pricing strategies will continue to improve profitability in the near term.
Negative rating action may occur if the company’s operating results remain negative or a material deterioration in its overall risk-adjusted capitalization occurs.
Positive rating action is contingent upon sustained improvement in profitability in the company’s existing profile while maintaining an adequate level of risk-adjusted capitalization that supports the ratings.
This press release relates to rating(s) that have been published on A.M. Best's website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please visit A.M. Best’s Ratings & Criteria Center.
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