AM Best: Credit Ratings of Brotherhood Mutual Insurance Downgraded

January 17, 2019

AM Best has downgraded the Financial Strength Rating to A- (Excellent) from A (Excellent) and the Long-Term Issuer Credit Rating to “a-” from “a” of Brotherhood Mutual Insurance Co. (Brotherhood) in Fort Wayne, Indiana.

The outlook for the ratings is stable.

The ratings reflect Brotherhood’s balance sheet strength, which AM Best categorizes as strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management (ERM).

The rating actions reflect deterioration in Brotherhood’s overall balance sheet strength due to a decline in its risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), and the instability of its loss reserves following a significant increase in net carried reserves in third-quarter 2018.

Beginning in late 2017 and continuing in 2018, Brotherhood strengthened its reserve position across all core business lines following several consecutive years of adverse development reported on prior accident years. According to management, the underlying factors supporting this strengthening process were to develop a more conservative reserve position and to adopt industry best practices.

Overall, the company’s strong balance sheet is supported by a very strong level of risk-adjusted capitalization, high quality assets with adequate liquidity, partially offset by ongoing adverse reserve development that spiked in 2018, and above-average common stock leverage.

Operating performance has been adequate in most years, derived from generally profitable underwriting results despite volatility due to weather-related losses and continued adverse reserve development, and supported by a steady flow of net investment income.

In 2018, despite the negative impact from Hurricanes Florence and Michael, as well as the California Camp Fire, underwriting losses were driven primarily by the company’s reserve strengthening actions.

Brotherhood’s neutral business profile reflects its geographic diversification, as it operates in most states and serves a market niche providing coverages to churches and related ministry organizations. AM Best considers the ERM program to be appropriate for the company’s risk profile, with enhanced capabilities in assessing risk tolerance levels. Brotherhood’s catastrophe exposure is managed through a comprehensive reinsurance program to mitigate losses from severe weather-related events.

That stable outlooks are based on AM Best’s expectation of Brotherhood maintaining a strong balance sheet and operating performance returning to pre-2018 levels despite its ongoing exposure to weather-related events, with approximately 60 percent of loss exposures being property related.

The stable outlooks also are based on AM Best’s expectation of stabilization in loss reserve development following the significant strengthening that occurred in 2018.

Source: AM Best

Topics AM Best

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