AM Best has downgraded the Financial Strength Rating to A (Excellent) from A+ (Superior) and the Long-Term Issuer Credit Ratings to “a+” (Excellent) from “aa-” (Superior) of Vermont Mutual Insurance Co. and its fully reinsured subsidiaries, Northern Security Insurance Co., Inc., and Granite Security Insurance Co. These companies are domiciled in Montpelier, Vermont and are members of Vermont Mutual Group.
The outlook of these credit ratings has been revised to stable from negative.
Last March, AM Best had affirmed Vermont Mutual’s Financial Strength Rating of A+ (Superior) and the Long-Term Issuer Credit Ratings of “aa-” (Superior). for the tenth year in a row. At that time, the ratings firm revised its outlooks to negative from stable.
AM Best said the current ratings reflect Vermont Mutual’s balance sheet strength, which its analysts assess as strong, as well as its strong operating performance, favorable business profile and appropriate enterprise risk management (ERM).
However, the downgrading of the ratings is based on a “strategic shift in Vermont Mutual’s management of its risk-adjusted capitalization.” With it resolved, AM Best has determined that the risk-adjusted capitalization has settled into the “strong position” as opposed to “very strong” as measured by Best’s Capital Adequacy Ratio (BCAR).
“Considering potential volatility in tail periods and restrictive reinsurance pricing, management elected to shift its target level of risk-adjusted capitalization to a level commensurate of a balance sheet strength assessment of strong,” AM Best explained.
“Coinciding with this shift, Vermont Mutual has been diligent in addressing insurance to value within its portfolio amid the inflationary environment, and actions resulted in a material increase in modeled probable maximum losses. Despite increased catastrophe reinsurance purchases annually, increases in capacity did not keep pace with increases in modeled losses from a return period coverage perspective,” the credit rating agency continued.
Weather and Inflation Have Not Been Kind to Vermont Mutual
Vermont Mutual has not yet publicly released its 2024 results. But according to AM Best, the company has been able to improve on the situation it faced in 2022 and 2023.
According to AM Best, Vermont Mutual reported a “return to strong operating performance in 2024,” following deterioration in its underwriting results in 2022 and 2023, due to rising inflationary trends, and increased freeze losses caused by an historic Polar Vortex that impacted the Northeast in 2023.
AM Best said that the insurer’s “strong underwriting results and growing investment income in 2024, coupled with capital gains from favorable equity market conditions,” resulted in record net earnings and surplus growth for the year.
Consequently, AM Best said, Vermont Mutual’s “operating performance assessment of strong” continues to align with strong assessed rating units within its industry composite, on both a five- and 10-year average basis.
AM Best added that while Vermont Mutual has geographic and product concentrations, its effective risk selection and pricing strategies support its business profile assessment of favorable. Vermont Mutual utilizes a comprehensive and formalized ERM process, which is appropriate for its risk profile, the agency noted.
Tough Stretch
In December, Vermont Mutual finalized its leadership succession plan with Mark J. McDonnell, president, adding the role of CEO. McDonnell replaced outgoing CEO Daniel C. Bridge, who retired.
For Vermont Mutual, which has been around since 1828, the years 2022 and 2023 were among the most challenging in its history. Supply chain delays, high inflation, climate change, expensive reinsurance — Vermont Mutual felt the effects of them all. It even had to deal with the flooding of its own headquarters in Montpelier.
AM Best took note of the challenges facing the insurer last March when it revised its outlooks to negative from stable. At that time, AM Best cited recent “volatility in its operating performance,” influenced by material property exposure that was at odds with the group’s historically favorable results.
In his review of 2023, then-CEO Bridge acknowledged that inflation and supply chain delays caused by the global pandemic and geopolitical conflicts drove up the cost of property and automobile claims, while weather events were “more frequent and more severe.” Also, the reinsurance protection it needed grew significantly more expensive.
Vermont Mutual is represented by more than 800 independent agencies and insures more than 300,000 policyholders. It offers personal and commercial insurance in Connecticut, Maine, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont.
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