OLDWICK, N.J.--(BUSINESS WIRE)--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 ARI Mutual Insurance Company (ARI) (headquartered in Newtown, PA). The outlook for the FSR has been revised to negative from stable, while the outlook for the ICR remains negative.
The rating action reflects ARI’s weak underwriting and operating performance in recent years, which has impacted risk-adjusted capitalization, as well as variability of the company’s loss reserve position, as evidenced by areas of adverse loss reserve development reported on prior accident years. Still, underwriting results should benefit from the currently favorable pricing trend and improving economy. In addition, ARI’s investment yield continues to decline, and since 2011, investment income has not offset underwriting losses.
The ratings reflect good risk-adjusted capitalization, historical operating profitability (prior to 2011), and local presence in the New Jersey commercial auto insurance market. Partially offsetting these positive rating factors are the weak operating results in recent years, the variability of ARI’s loss reserve position, as evidenced by areas of adverse loss reserve development, as well as the narrow geographic and product spread of risk, which exposes the company to changes in the regulatory, legislative and competitive landscape.
The negative outlook reflects A.M. Best’s concern that ARI’s underwriting results may be slow to improve given the level of adverse development recorded in recent years, including in the first half of 2014. As a result, weak earnings may make it more difficult for the company to significantly improve its level of risk-adjusted capitalization in the near term.
Factors that may lead to negative rating actions include deterioration in underwriting and operating performance, continued adverse loss reserve development and erosion of surplus that could consequently cause a decline in the company’s risk-adjusted capitalization. Improvement in risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio or sustained profitable operations supported by an appropriate level of risk-adjusted capital could lead to positive rating actions.
The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
Key insurance criteria reports utilized:
- Risk Management and the Rating Process for Insurance Companies
- Understanding BCAR for Property/Casualty Insurers
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