OLDWICK, N.J.–(BUSINESS WIRE)–A.M. Best Co. has downgraded the financial strength rating to A- (Excellent) from A (Excellent) and issuer credit rating to “a-” from “a” of FFVA Mutual Insurance Co. (FFVA) (Maitland, FL). The outlook for both ratings has been revised to negative from stable.
The rating actions reflect FFVA’s substantial underwriting losses in the first nine months of 2011, which resulted in combined ratios and operating ratios that compare very unfavorably with the workers’ compensation composite. The significant decline in underwriting results was largely driven by greater frequency of losses, particularly in states outside of Florida where the company has substantially grown in recent years, inadequate workers’ compensation premium rates, the soft market environment, a weak economy, as well as the need for strengthening of prior accident year loss reserves. FFVA’s substantial underwriting losses, in conjunction with unrealized capital losses on its equity portfolio, resulted in a 27% reduction in policyholders’ surplus and weakening in risk-adjusted capital through nine months of 2011; however, risk-adjusted capital remains well supportive of FFVA’s current ratings.
FFVA management has implemented substantive re-underwriting initiatives to improve the profitability of its workers’ compensation business that include modest rate increases, canceling or non-renewing unprofitable classes of business, reducing credits offered and increasing loss cost multipliers. However, necessary adjustments to restore acceptable profitability will likely take time, particularly in a soft market environment and highly regulated insurance line. While FFVA’s management anticipates operating performance will improve in 2012, in part, due to the substantial strengthening of its reserves in 2011, the degree of improvement is uncertain, partially due to the change in FFVA’s business profile in recent years, with a substantially greater portion of its business written in contiguous states outside of Florida (approximately 44% in 2011 as compared with just 10% in 2005), where FFVA has less underwriting experience and where recent underwriting losses have been particularly severe.
While aggressive corrective actions have been taken, FFVA’s ratings could be negatively impacted should soft market conditions, a lack of underwriting discipline or further adverse loss reserve development result in underwriting and overall profitability measures continuing to underperform the composite, or should there be a material decline in the company’s risk-adjusted capitalization. Key rating triggers that could result in the removal of the negative outlook include a sustained improvement in the company’s underwriting and overall operating performance that compares favorably with peers, while exhibiting stabilization in loss reserves and maintaining strong risk-adjusted capitalization.