OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best has downgraded the Financial Strength Rating (FSR) to A (Excellent) from A+ (Superior) and the Long-Term Issuer Credit Rating (Long-Term ICR) to “a+” from “aa-” of The Wawanesa Mutual Insurance Company (Wawanesa Mutual) (Winnipeg, Manitoba, Canada). The outlook of these Credit Ratings (ratings) has been revised to stable from negative.
Concurrently, A.M. Best has affirmed the FSR of A- (Excellent) and the Long-Term ICR of “a-” of Wawanesa Mutual’s subsidiary, Wawanesa General Insurance Company (WGIC) (San Diego, CA). The outlook of these ratings remains negative. A.M. Best also has affirmed the FSR of A (Excellent) and the Long-Term ICR of “a” of Wawanesa Mutual’s other subsidiary, The Wawanesa Life Insurance Company (Wawanesa Life) (Winnipeg, Manitoba, Canada). The outlook of these ratings remains stable.
The rating downgrades for Wawanesa Mutual reflect its weakened operating performance over the medium term, with underwriting and operating ratios (current, five-year and 10-year), trailing industry averages. The company’s earnings metrics were mixed when compared with the composite and fall short of performance expectations at the current rating level. The performance in 2016 did not cause the negative rating pressure; however, it amplified the problems that had been plaguing Wawanesa Mutual for some time. At the core level, the company’s underwriting is improving, but severe events aren’t being mitigated enough to keep mediocre performance from weakening further.
Wawanesa Mutual is experiencing pricing pressure in its largest premium segment, auto, (approximately 60% of the company’s total net written premium), which is heavily regulated, especially in Ontario and Alberta, where premium makes up over 50% of the total book’s net premium. A.M. Best anticipates continued earnings pressure in the near term on Ontario and Alberta automobile lines. Results on property lines also have been challenged in the Plains provinces by a continuing pattern of more-frequent and severe storm losses. Weather-related losses in Alberta, Manitoba and Saskatchewan, as well as Ontario, recently have been the primary cause of the volatility in results. However, Wawanesa Mutual is making strides to improve pricing through rate increases, product segmentation and product reform. Augmenting these efforts are the new underwriting and claims systems recently put in place.
Further negative rating actions could take place for Wawanesa Mutual in the near to medium term if the company is unable to correct its underwriting profitability issues; incurs material losses in its risk-adjusted capitalization; is unable to contain the group’s exposure to catastrophe events within its underwriting footprint or has substantial adverse reserve development relative to its peers, as well as the industry’s averages. Positive rating movement could occur with sustained and consistent profitable underwriting results, complementing the company’s already sustained operating profitability.
The rating and outlook affirmations reflect WGIC’s improved, but still weak operating performance in 2016. The company’s below-industry average underwriting and operating performance plateaued in 2016 due to its efforts, as well as the explicit and implicit support from its parent, Wawanesa Mutual. Rate taking and product modifications were at the root of these efforts. The newly completed client facing system that quotes and binds, as well as a claims system that takes a more refined look at incoming data has helped the company improve its results somewhat. A recent $50 million infusion into WGIC by Wawanesa Mutual has solidified WGIC’s adequate risk-adjusted capitalization, which is supported by below-average expense structure and long-standing presence in California’s private passenger auto market.
Further negative rating action could occur in the near to midterm if WGIC’s relationship to its parent or its support change in a manner that affects the operational stance of the company; if it incurs further material losses in its risk-adjusted capitalization; has a continued severe reduction in the profitability of its core book of business; or incurs more adverse development within its reserves relative to its peers, as well as the industry’s averages.
The ratings of Wawanesa Life reflect its strategic importance and contributions to its parent, Wawanesa Mutual, strong risk-adjusted capitalization, generally favorable operating trends and overall good credit quality of invested assets. Wawanesa Life also shares various services with its parent, such as distribution, management and operating platforms. The company complements its parent company’s property/casualty offerings by selling life, annuity, and accident and sickness products. Partially offsetting rating factors include operating losses in its non-participating lines of business, modest premium growth, and challenges associated with the low interest rate environment and in expanding its business profile in a highly competitive marketplace that is dominated by a few large insurance groups.
Positive rating actions for Wawanesa Life may occur if there is an upgrade in Wawanesa Mutual’s ratings. Negative rating actions may occur if the Wawanesa Life’s risk-adjusted capitalization decreases because of operating losses or if A.M. Best’s view of the strategic importance of Wawanesa Life relative to its parent declines.
This press release relates to Credit Ratings 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 see A.M. Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Understanding Best’s Credit Ratings.
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