OLDWICK, N.J.--(BUSINESS WIRE)--AM Best has revised the outlook to negative from stable for the Financial Strength Rating (FSR) and affirmed the FSR of B++ (Good) and the Long-Term Issuer Credit Rating (Long-Term ICR) of “bbb” of First Mutual Insurance Company (First Mutual) (Smithfield, NC). The outlook of the Long-Term ICR has been revised to negative from positive. Concurrently, AM Best has withdrawn the Credit Ratings (ratings) of First Mutual at the company’s request to no longer participate in AM Best’s interactive rating process.
The ratings reflect First Mutual’s balance sheet strength, which AM Best categorizes as adequate, as well as its strong operating performance, limited business profile and marginal enterprise risk management (ERM).
The revised outlooks to negative reflect the significant downturn in underwriting and operating results that pressure the strong operating performance assessment. In 2018, First Mutual’s operating results were negatively affected by Hurricane Florence’s impact on Eastern North Carolina. While estimated storm losses were incorporated into last year’s rating review, the actual results were not in line with management’s expectations at that time.
Operating performance also was impacted by an accounting change in Q4 2018, in that fully earned policy fees were removed from written premiums and moved to other income on the statement of income, thus reducing the total net written premium. The outlook changes further reflect continued volatility through third-quarter 2019 results, mainly due to changes in reinsurance terms; whereby the company began in 2019 paying reinsurance on a net cost basis in lieu of the company receiving a ceding commission, resulting in higher premiums and underwriting expenses, which adversely impacted the company’s combined ratio. While management expects year-end 2019 results to benefit from additional income in the fourth quarter based on this restructuring, and can rely on a loss-carryforward credit to off-set any future losses beyond company expectations, the current strong assessment on operating performance will continue to face pressure.
First Mutual’s balance sheet strength reflects the strongest level of risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR) and its highly liquid investment portfolio, partially offset by high reinsurance dependence, as well as limited financial flexibility and scale of operations.
The limited business profile assessment reflects the company’s product and geographic spread, which is focused on property business primarily written in North Carolina. This concentration risk exposes the company to weather-related losses, which are offset by a high quality reinsurance program. AM Best views First Mutual’s ERM as marginal as recent enhancements, including more robust reinsurance, have not yet benefitted operating results. First Mutual also has significant tail risk exposure as measured by the sharp decline in BCAR.
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