OLDWICK, N.J.–(BUSINESS WIRE)–A.M. Best Co. has revised the outlook to stable from negative and affirmed the financial strength rating (FSR) of A- (Excellent) and issuer credit rating (ICR) of “a-” of Cumberland Insurance Company, Inc. (CIC).
“Risk Management and the Rating Process for Insurance Companies”
A.M. Best also has affirmed the FSR of A- (Excellent) and ICRs of “a-” of Cumberland Insurance Group (CIG) and its member, The Cumberland Mutual Fire Insurance Company (Cumberland Mutual). The outlook for these ratings is stable. All companies are headquartered in Bridgeton, NJ.
CIG’s ratings and outlook are based on its strong risk-adjusted capitalization and long-standing market presence as a leading property writer in New Jersey. CIG’s capital position is primarily derived from its modest underwriting leverage, which compares favorably to industry norms. In addition, CIG maintains a sound liquidity position that is enhanced by solid operating cash flows. CIG maintains its established market presence and long-standing relationships through its independent agency force. In an effort to improve underwriting results, CIG is in the process of implementing numerous strategic initiatives to update its technology and processes. These strategic initiatives include implementing rate adjustments, deleveraging unprofitable premium, enhancing pricing tools, implementing stricter underwriting guidelines and improving rate adequacy on coastal accounts. In addition, CIG has continued its strategy of reducing its geographic concentration through the expansion of its core products outside of New Jersey. A comprehensive reinsurance program reduces CIG’s net exposure to a catastrophe event to a manageable level.
Partially offsetting these positive rating factors is CIG’s unfavorable five-year operating performance, which was driven by significant underwriting losses that occurred in 2010, 2009 and 2007, as well as its gradually declining net investment income. The underwriting deficits were primarily attributable to increased storm losses, greater fire loss activity and adverse loss reserve development on its homeowners’ and commercial multi-peril lines of business. Due to its property concentration in the Northeast, CIG is exposed to weather-related losses, as well as adverse judicial and regulatory actions. CIG’s ratings are based on the consolidation of Cumberland Mutual and its wholly owned but separately rated subsidiary, CIC.
CIC’s ratings are based on its solid risk-adjusted capitalization, recently improved earnings and local market knowledge. The revised outlook reflects CIC’s recently improved operating performance and risk-adjusted capitalization. In addition, the ratings recognize the financial and operational support and common management provided by its ultimate parent, Cumberland Mutual, a multi-line carrier writing business primarily in New Jersey. While CIC primarily writes workers’ compensation business in the highly competitive and regulated New Jersey market, its geographic expansion and introduction of new product offerings should serve to reduce its concentration of risk over the near term. In 2010, CIC’s operating earnings significantly increased, driven by favorable underwriting earnings, solid investment income and realized capital gains from the sale of a substantial portion of its common stock portfolio. The improved underwriting results were driven by improved workers’ compensation loss experience and favorable loss reserve development.
Partially offsetting these positive rating factors are CIC’s unfavorable five-year operating results, driven by solid but gradually declining net investment income, which is partially offset by substantial net underwriting losses. The underwriting losses were reflective of an above average underwriting expense ratio primarily due to relatively higher commission expenses from CIC’s independent agency platform, as well as the company’s investment in new products, technologies and the development of new territories. Furthermore, the company’s geographic concentration within New Jersey exposes it to competitive market conditions, as well as adverse judicial and regulatory actions.
The principal methodology used in determining these ratings is Best’s Credit Rating Methodology — Global Life and Non-Life Insurance Edition, which provides a comprehensive explanation of A.M. Best’s rating process and highlights the different rating criteria employed. Additional key criteria utilized include: “Rating Members of Insurance Groups”; “Risk Management and the Rating Process for Insurance Companies”; “Understanding BCAR for Property/Casualty Insurers”; “Natural Catastrophe Stress Test Methodology”; “Catastrophe Risk Management Incorporated Within the Rating Analysis”; and “The Treatment of Terrorism Risk in the Rating Evaluation.” Methodologies can be found at www.ambest.com/ratings/methodology.