Texas’ Hochheim Mutual Insurers Removed From Credit Watch Negative

November 19, 2018

S&P Global Ratings has removed Texas-based Hochheim Prairie Farm Mutual Insurance Assn. (HPFMIA) and its subsidiary, Hochheim Prairie Casualty Insurance Co. (HPCIC, collectively Hochheim) from Credit Watch Negative, where the companies were initially placed on Nov. 28, 2017.

S&P Global Ratings also affirmed its ‘B+’ financial strength rating on Hochheim. The outlook is stable.

Given the favorable weather for Texas and strong underwriting profits for Hochheim in 2018 the ratings agency said it believes the credit profile has stabilized. As of September 2018, the company’s combined ratio was 83.2 percent compared to 121.4 percent for the same period in the previous year.

The favorable underwriting translated to a net profit of $18.1 million, which allowed the company to boost its capital and surplus levels to $69.8 million from $53.7 million as of year-end 2017. The strong results for the company are a combination of favorable weather limiting losses, and underwriting actions.

Those underwriting actions included rate increases for both the property and auto businesses, property deductible shift to renew all $500 deductibles to $1,000 deductibles, continued shift of policies to insured to value, adjustments to the reinsurance program, and shifting the book back to purely rural Texas-focused, eliminating some of the drift into the urban markets.

In addition to these changes, the company revised its 2018 reinsurance program to reduce the quota share, and sustained the previous year’s tail coverage for natural catastrophes, while purchasing an additional $5 million of catastrophe coverage due to favorable market conditions. Although the changes to the reinsurance program were done for economic reasons and expose the balance sheet to a little more risk, the strong underwriting performance for the year allowed Hochheim to enhance its earnings profile for the year.

Given the capital build-up from the strong performance, S&P expects the company to pursue greater growth in rural markets and further reduce its quota-share reinsurance while maintaining current coverage levels for property catastrophe exposure as we get closer to the Jan. 1, 2019, reinsurance renewals.

The stable outlook on Hochheim reflects the expectation over the next 12 months that it will maintain capital adequacy at the less-than-adequate level, sustain reinsurance at current levels, and will have stable underwriting profitability assuming a normalized level of weather related losses.

S&P said it may lower our ratings in the next 12 months if the company incurs substantial losses that would materially reduce capital levels, regulatory authorities initiate supervisory actions, or the company cannot purchase adequate reinsurance during the 2019 renewal cycle.

The ratings agency does not expect to raise its ratings in the next 12 months. Any upgrade thereafter would depend on the company’s ability to boost earnings and significantly grow its statutory surplus, leading to a sustained improvement in capital adequacy.

Source: S&P Global

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