OLDWICK, N.J.--(BUSINESS WIRE)--AM Best has downgraded the Financial Strength Rating to B+ (Good) from A- (Excellent) and the Long-Term Issuer Credit Rating to “bbb-” (Good) from “a-” (Excellent) of Badger Mutual Insurance Company (Badger) (Milwaukee, WI). The outlook of these Credit Ratings (ratings) is negative.
The ratings reflect Badger’s balance sheet strength, which AM Best assesses as adequate, as well as its adequate operating performance, neutral business profile and marginal enterprise risk management (ERM).
The rating downgrades reflect material erosion in the company’s capital position, elevated leverage metrics and recent adverse loss development, which weakened the overall balance sheet strength assessment to adequate from strong. The company’s surplus has declined over 40% from year-end 2021 through June 30, 2023, which has led to material erosion in its risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR). The capital erosion can be primarily attributed to outsized volatility in underwriting results in recent periods contributing to significantly negative operating earnings, primarily impacted by weather-related losses and inflationary pressures. Management responded with rate increases, deductible changes, as well as strategic non-renewal of business. While these efforts are expected to generate positive results in the medium-term, the initiatives have yet to gain traction. Further, the downgrade reflects headwinds faced by the company’s current ERM structure to mitigate effectively against the current macroeconomic environment and adequately insulate capital.
The negative outlooks reflect volatility in Badger’s operating performance, which pressures the current adequate assessment. Concurrently, continued severity has the potential to strain capital levels and subsequently risk-adjusted capitalization. Furthermore, while over the long-term the company has proven generally effective at managing the property-exposed portfolio, headwinds presented in the market have challenged the position of the Badger’s business profile.
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