A.M. Best Co. has downgraded the financial strength rating to B++ (Good) from A- (Excellent) and issuer credit ratings to “bbb” from “a-” of Columbia Lloyds Insurance Co. (Columbia Lloyds) and its wholly owned and 100 percent reinsured subsidiary, MDOW Insurance Co. (MDOW). Both companies are headquartered in both domiciled in Houston and are members of the Columbia Lloyds Cos. group.
The outlook for all ratings is negative.
Best said the rating actions reflect Columbia Lloyds’ declining surplus as a result of its ongoing unfavorable underwriting performance due to adverse weather-related events, fire losses and sharp increase in reinsurance costs driven by Hurricane Ike.
In addition, recent growth in Arkansas and Oklahoma has adversely impacted the group’s results as most of the recent significant losses in 2012 occurred in these two states.
Consistent underwriting losses and an increase in net premiums written due to rapid growth in Arkansas and Oklahoma have resulted in a surplus decline through the first half of 2012.
Columbia Lloyds is significantly dependent upon reinsurance as it has increased its quota share from 33 percent to 70 percent in 2011.
As a property writer with most of its business risks currently concentrated in Texas, Columbia Lloyds has been subjected to weather-related activity and strong competition. While growth in Arkansas and Oklahoma has expanded Columbia Lloyds’ market presence outside of Texas, exposure to additional weather-related exposures remains.
Negative rating factors are partially offset by Columbia Lloyds’ adequate risk-adjusted capitalization, conservative investment philosophy and favorable balance sheet liquidity.
The losses from Hurricane Ike have been settled and should not impact the companies’ future financial results.
Management has implemented several corrective actions and initiatives to improve performance and reduce volatility, which include significant rate increases especially in Arkansas and Oklahoma, minimum deductibles as well as lowering the concentration of risk in the Harris County area of Texas. In addition, Columbia Lloyds has developed an innovative fee structure that targets problematic risks.
In future rating cycles, the ratings may be downgraded if Columbia Lloyds has a continuation of adverse operating results and declining risk-adjusted capitalization. Removal of the negative outlook is contingent upon the company’s ability to reverse its adverse operating performance trend and improve its overall risk-adjusted capitalization.
Source: A.M. Best Co.