Oldwick, NJ -(BUSINESS WIRE)- A.M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength rating of A- (Excellent) and issuer credit rating of “a-” of Kentucky Employers’ Mutual Insurance (KEMI) (Lexington, KY).
The revised outlook for KEMI largely reflects the greater uncertainty of its operating performance going forward given current competitive market conditions and its weakened current accident year underwriting performance over the past several years. Additionally, the revised outlook is based on the company’s reserve strengthening in 2010 and 2011 related to increasing black lung claims as a result of the Byrd Amendment attached to the Obama health care legislation.
The affirmation of KEMI’s ratings recognizes its solid risk-adjusted capitalization and historically strong profitability and positive cash flow measures achieved through its leading market share position as a provider of workers’ compensation coverage in Kentucky. The ratings also acknowledge the company’s prudent risk selection, diversified clientele and application of effective loss control services, which historically have sustained earnings despite soft market conditions. As both a competitive marketer and writer of last resort in Kentucky, KEMI maintains the ability to command sufficient rate structure while retaining cancellation provisions subject to non-compliance of underwriting guidelines. KEMI remains focused on client service while writing business through a combination of in-house and field underwriters.
Offsetting these positive rating factors is the deterioration in KEMI’s underwriting results over the past three years, as well as areas of adverse prior year loss reserve development, particularly in 2010 and 2011 related to the Byrd Amendment. Additionally, KEMI maintains limited spread of risk as a mono-line, mono-state workers’ compensation writer, which inherently exposes the company to potential changes within the economic, competitive and regulatory environment.
Movements in Washington focused on tax-exempt organizations could potentially impact the federal tax-exempt status of certain state funds such as KEMI.
KEMI’s ratings could come under pressure should soft market conditions and a lack of underwriting discipline, or continued prior year loss reserve development, result in the company’s underwriting and overall profitability underperforming its peers; should there be a material decline in the company’s risk-adjusted capitalization; or should it lose its federal tax-exempt status.