OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best has downgraded the financial strength rating (FSR) to B+ (Good) from B++ (Good) and the issuer credit rating (ICR) to “bbb-” from “bbb+” of Delta Lloyds Insurance Company of Houston Texas (Delta Lloyds) (Houston, TX). The outlook for the FSR has been revised to negative from stable, while the outlook for the ICR remains negative.
The rating downgrades primarily reflect Delta Lloyds’ volatile operating results due to continuing unfavorable underwriting performance. Delta Lloyds has reported underwriting losses in four of the past five years with the trend continuing in 2014, driven by a series of frequent and severe weather-related events. In particular, hail events resulted in the majority of underwriting losses, particularly in 2011, 2013 and 2014, with 2014 being the worst underwriting year for the period. Unfavorable underwriting performance has also resulted in declining risk-adjusted capitalization over the past five years.
In response to underwriting losses, Delta Lloyds’ management has ongoing initiatives, which include but are not limited to, de-emphasis of the unprofitable book of business, significant rate increases, increased deductibles, frequent inspections and tighter policy verbiage.
As Delta Lloyds is a single state property writer in Texas with limited product offerings, A.M. Best anticipates continued volatility in its underwriting performance due to the inherent exposure to frequent and severe weather-related events, as well as judicial, economic and legislative concerns. However, Delta Lloyds maintains a prudent reinsurance program to partially mitigate this risk.
The negative rating factors are partially offset by Delta Lloyds’ adequate risk-adjusted capitalization, moderate underwriting leverages, generally positive realized capital gains and favorable balance sheet liquidity. In addition, despite an unfavorable underwriting performance, Delta Lloyds has reported favorable reserve development in most of the past five years.
Pressure may be put on the ratings if Delta Lloyds has a continuation of underwriting losses and adverse operating results, which also could lead to weaker risk-adjusted capitalization. Removal of the negative outlook is contingent upon Delta Lloyds’ ability to reverse its adverse operating and underwriting performance for a sustained period of time while maintaining supportive risk-adjusted capitalization.
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:
- Catastrophe Analysis in A.M. Best Ratings
- Equity Credit for Hybrid Securities
- Insurance Holding Company and Debt Ratings
- Risk Management and the Rating Process for Insurance Companies
- Understanding BCAR for Property/Casualty Insurers
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