A.M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength rating (FSR) of A- (Excellent) and issuer credit ratings (ICR) of “a-” of Columbia Mutual Insurance Co. (Columbia), Columbia, Mo., and its insurance subsidiaries.
The negative outlook is based on Columbia’s significant operating losses in recent years that led to a sizeable decline in its policyholders’ surplus, stemming from catastrophe weather related losses and competitive market pressures in its primary operating territory.
The affirmation of the ratings is based on Columbia’s solid risk-adjusted capitalization, conservative operating strategy and long-standing market presence.
Columbia’s solid risk-adjusted capitalization is derived from its moderate underwriting leverage and adequate balance sheet liquidity, which are partially offset by its moderately adverse loss reserve development in recent years and above-average common stock leverage.
Columbia reported significant underwriting losses over the previous five-year period, driven by widespread storm losses in the Midwest that were partially mitigated by solid, albeit gradually declining, net investment income.
While Columbia has expanded its marketing territory in recent years, management has undertaken numerous corrective initiatives to improve underwriting results.
Specific actions include numerous commercial and personal lines rate adjustments, increased use of loss control, more accurate insurance-to-value efforts and utilization of improved underwriting tools. Additional initiatives include the run-off of the homeowners’ and dwelling fire lines of business, the cancellation of underperforming agencies, property deductible increases and improved product and geographic diversification.
Columbia also has implemented an improved enterprise risk management framework, which places greater emphasis on its risk management culture, corporate governance structure and risk assessment programs.
Columbia’s business concentration in the Midwest exposes its earnings and surplus to catastrophe losses stemming from wind, hail and tornadoes, as well as the earthquakes on the New Madrid fault line. This was particularly evident in 2011 and 2012, when Columbia reported significant underwriting losses, driven by unprecedented wind, hail and tornado losses.
These underwriting losses resulted in large operating losses, which led to a $57.6 million or 27 percent decline in policyholders’ surplus over the two-year period.
However, management partially mitigates these exposures through quality reinsurance, prudent risk management strategies and geographic spread of risk. In addition, through a comprehensive reinsurance program and underwriting actions, the net probable maximum loss (PML) for a 100-year hurricane (Columbia’s largest exposure), as depicted in a PML analysis, has been reduced to a manageable level.
The FSR of A- (Excellent) and ICRs of “a-” have been affirmed for Columbia Mutual Insurance Co. and its following insurance subsidiaries:
- Columbia National Insurance Co.
- Association Casualty Insurance Co.
- Georgia Casualty & Surety Co.
- Citizens Mutual Insurance Co.
Source: A.M. Best
Topics Trends Profit Loss Underwriting AM Best
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