OLDWICK, N.J.--(BUSINESS WIRE)--AM Best has downgraded the Financial Strength Rating (FSR) to A (Excellent) from A+ (Superior) and the Long-Term Issuer Credit Ratings (Long-Term ICR) to “a+” from “aa-” of the members of Andover Companies Pool (Andover), which consists of Merrimack Mutual Fire Insurance Company and its majority-owned subsidiary, Bay State Insurance Company, and its affiliate, Cambridge Mutual Fire Insurance Company. The outlook of the FSR has been revised to stable from negative while the outlook of the Long-Term ICRs remains negative. All companies are domiciled in Andover, MA.
The ratings reflect Andover’s balance sheet strength, which AM Best categorizes as very strong, as well as its adequate operating performance, favorable business profile and appropriate enterprise risk management (ERM).
The rating downgrades reflect a downward trend to an adequate operating performance over the most recent five-year period, marked by elevated underwriting volatility associated with more-frequent direct and assumed weather losses. While material net investment income has helped offset underwriting volatility, performance metrics are more in line with the composite, differing from previous years when Andover’s performance outperformed the composite.
The negative Long-Term ICR outlook reflects observed sensitivity in risk-adjusted capitalization to unfavorable shifts in the equity markets, as experienced in recent periods, due to Andover’s materially elevated common stock leverage. The interim impact of associated unrealized capital losses pressures the current balance sheet strength assessment. Offsetting balance sheet considerations include low underwriting leverage and consistently favorable overall loss reserve development. Andover’s business profile has benefited from the historically favorable diversification achieved by its assumed catastrophe property treaties. However, the performance of these programs has deteriorated over the past few years due to losses associated with U.S. hurricanes, California wildfires and foreign typhoons, which pressures the favorable assessment. ERM is considered appropriate for the pool’s risk profile.
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