OLDWICK, N.J.--(BUSINESS WIRE)--AM Best has downgraded the Financial Strength Rating (FSR) to B++ (Good) from A- (Excellent) and the Long-Term Issuer Credit Rating (Long-Term ICR) to “bbb+” (Good) from “a-” (Excellent) of Independent Mutual Fire Insurance Company (IMFCO) (Chicago, IL). The outlook of the Long-Term ICR has been revised to negative from stable, while the outlook of the FSR is stable.
The Credit Ratings (ratings) reflect IMFCO’s balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management (ERM).
The downgrade of the IMFCO’s ratings is based on a deterioration in its balance sheet strength, as measured by Best’s Capital Adequacy Ratio (BCAR). The deterioration was driven by a substantial decline in policyholders’ surplus in conjunction with a significant increase in premium writings through second quarter 2021 due to IMFCO becoming a participant on an assumed property reinsurance agreement effective Jan. 1, 2021 to Dec. 31, 2021 and renewable annually, with a predominantly Texas homeowners insurance writer. This quota share agreement exposed IMFCO to significant assumed Texas homeowners storm losses from Winter Storm Uri in first quarter 2021 and significant Texas homeowners wind/hail losses in second quarter 2021. IMFCO also reported to a lesser extent, correlated Texas homeowners storm losses on its direct Texas homeowners writings, which are currently in runoff.
However, IMFCO’s balance sheet strength assessment remains at the very strong level, supported by its strongest level of risk-adjusted capitalization as measured by BCAR, moderate underwriting leverage and solid liquidity measures. IMFCO also increased its catastrophe reinsurance coverage effective June 1, 2021, to mitigate partially the increased loss exposure.
The revised Long-Term ICR outlook to negative from stable is based on a significant deterioration in operating performance reported by IMFCO through second quarter 2021, primarily due to becoming a participant on the assumed property reinsurance agreement, which exposes it to significant Texas homeowners storm losses. Additionally, IMFCO’s underwriting results continue to be impacted by an elevated underwriting expense ratio relative to its industry composite average. Furthermore, the negative outlook of the Long-Term ICR is based on AM Best’s ERM concerns, as IMFCO significantly increased its risk profile in 2021 by becoming primarily an assumed property reinsurance writer through its participation in the homeowners quota share agreement. The FSR outlook of stable reflects AM Best’s expectation that IMFCO will maintain a balance sheet strength assessment in the very strong range over the intermediate term.
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