A.M. Best has revised the long-term issuer credit rating (long-term ICR) outlook to stable from positive and affirmed the financial strength rating (FSR) of B++ (Good) and the long-term ICR of “bbb” of MGA Insurance Company Inc. (MGA), based in Dallas.
The outlook of the FSR remains stable.
The revision of the long-term ICR outlook to stable reflects the decline in risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), at March 31, 2017, and projected to continue through year-end 2017.
Policyholders’ surplus declined 4.2 percent during the first three months of 2017, driven by a $7.7 million stockholder dividend payment, which more than offset positive operating income for the quarter. In addition, risk-adjusted capitalization also was impacted by net written premium growth of 18.8 percent for the first quarter.
The credit ratings reflect MGA’s supportive balance sheet strength and favorable operating performance in recent years. Management has implemented corrective actions aimed toward improving profitability through refocused underwriting initiatives in combination with continued rate-strengthening actions and enhancing internal systems to improve operating efficiencies and price-monitoring tools. As a result, underwriting results have improved, and overall operating performance has been favorable in recent years, with pre-tax and total returns on revenue and surplus outperforming the private passenger non-standard auto composite.
Partially offsetting these positive rating factors is the company’s concentration of underwriting risk in non-standard auto lines and historical adverse loss reserve development. In addition, risk-adjusted capitalization has declined in recent years as a result of dividend payments to MGA’s parent holding company offsetting earnings and holding down surplus growth while premium growth has been solid.
In addition, while MGA operates in a number of states, a majority of the business is conducted in Florida and Texas. This concentration risk continues to expose the company to regulatory, judicial and economic concerns. However, these concerns are mitigated partially by a strong management team with expertise in the non-standard auto arena, stable reserve development in recent years and significant rate increases in 2016 and 2017 to offset rising loss costs over the near term.
Positive rating action may result if MGA reports favorable operating performance and improving loss reserve development, spurring growth in surplus and risk-adjusted capitalization and moderate underwriting leverage.
Negative rating action may result if risk-adjusted capitalization were to fall below A.M. Best’s expectation for the current rating level either due to stockholder dividends, a reduction in profitability or the reemergence of adverse loss reserve development.
Source: A.M. Best
Topics Trends AM Best Insurance Wholesale
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