A.M. Best has downgraded the Financial Strength Rating (FSR) to A- (Excellent) from A (Excellent) and the Long-Term Issuer Credit Rating (Long-Term ICR) to “a-” from “a” of Kansas Medical Mutual Insurance Co. (KaMMCO) in Topeka, Kan.
The outlook of these ratings has been revised to negative from stable.
In addition, A.M. Best has assigned an FSR of A- (Excellent) and a Long-Term ICR of “a-” to KaMMCO’s wholly owned subsidiary, KaMMCO Casualty Co. Inc. (KaMMCO Casualty), also based in Topeka.
The outlook assigned to these ratings is negative. The two companies comprise the Kansas Medical Mutual Group.
The rating downgrades of KaMMCO are based on the company’s unfavorable underwriting performance since 2014, and below average investment returns, which have adversely impacted overall earnings performance.
Despite the company’s strong balance sheet, profitability falls significantly below the medical professional liability (MPL) composite averages.
This is further compounded by the company’s mono-line concentration in underwriting MPL lines, primarily in Kansas.
Market conditions for MPL insurers are highly competitive, pricing is soft and significant changes in health care delivery and shifts in the legal environment have presented KaMMCO with challenges to achieving underwriting profitability.
To counter these headwinds, KaMMCO is expanding its business profile by providing MPL clients with services and information technology solutions to generate more non-risk revenue through a subsidiary.
However, this operation has not achieved the scale it needs to reach break-even profitability. A.M. Best is concerned about the group’s ability to expand subsidiary operations to reach the economy of scale needed to make a profitable product in the near term, and that the operation will continue to be a drag on earnings.
KaMMCO is the leading provider of MPL and hospital professional liability coverage in Kansas. The company had historically produced strong earnings that were better than the MPL composite averages.
The rating outlooks are negative given the current weak earnings trend, the difficult market conditions and the company’s concentration of risk. The ratings may be downgraded again if management is unable to show improving and sustainable profitability.
The ratings of KaMMCO have been assigned to KaMMCO Casualty due to a 100 percent intercompany quota share reinsurance agreement. The ratings also take into consideration the challenges associated with expanding products and services to non-traditional business sources, offset by its strong alliance with the group, including board membership, and the role KaMMCO Casualty plays in providing the ability to diversify the group’s product line inside and outside of Kansas.
A.M. Best believes that positive rating movement for Kansas Medical Mutual Group may occur should operating performance trends through the insurance operations improve significantly and consistently meet or exceed MPL composite averages.
Negative rating action could occur if there is a continued deterioration in operating performance. Negative rating action also could occur if there is a significant decline in risk-adjusted capitalization.
Source: A.M. Best
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