OLDWICK, N.J.--(BUSINESS WIRE)--AM Best has downgraded the Long-Term Issuer Credit Rating (Long-Term ICR) to “bbb” (Good) from “bbb+” (Good) and affirmed the Financial Strength Rating (FSR) of B++ (Good) of American Surety Company (ASC) (Indianapolis, IN). The outlook of these Credit Ratings (ratings) has been revised to negative from stable.
The ratings reflect ASC’s balance sheet strength, which AM Best assesses as strong, as well as its marginal operating performance, limited business profile and appropriate enterprise risk management (ERM).
The rating downgrades reflect the company’s weakened capital position following surplus erosion in four of the last five years. The negative outlooks reflect further erosion in overall balance sheet strength, marked by a continued decline in policyholders’ surplus as of first-quarter 2023, and subsequent decline in risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio (BCAR). Marginal operating performance continues to erode ASC’s capital position due to underwriting losses driven by its elevated expense position.
ASC’s overall balance sheet assessment of strong is supported by very strong, albeit deteriorating risk-adjusted capitalization, as measured by BCAR, along with its conservative investment portfolio, which is anchored in high-quality bonds, cash and short-term investments with solid liquidity. These positive attributes are partially offset by continued capital erosion, elevated underwriting leverage and negative cash flows in recent years.
ASC’s marginal operating performance has been attributed to increased underwriting expenses related to the launch of its new Miscellaneous Surety Division in an effort to diversify the company’s revenue stream and volatility in loss experience. Management has been challenged by the company’s limited business profile, as strategic plans are heavily influenced by adverse judicial, legislative and regulatory decisions related to bail bond reform. Due to ASC’s recent diversification efforts, it faces certain execution risks associated with the new commercial surety program launched in the June 2022. ERM practices are considered appropriate for the company’s size and scope of operations.
While ASC’s management continues to explore various options to strengthen its capital position, in the absence of sustained improvement in risk-adjusted capitalization over the near term, the ratings will likely be downgraded.
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