A.M. Best Co. has downgraded the financial strength rating to B- (Fair) from B+ (Good) and issuer credit rating to “bb-” from “bbb-” of Northwest G.F. Mutual Insurance Co. based in Eureka, S.D. The outlook for both ratings is negative.
The rating downgrades for Northwest are due to its decline in overall risk-adjusted capitalization and its continued poor underwriting operating performance, according to A.M. Best.
In recent years, the company has been impacted by frequent and severe weather related events as well as the financial crisis in 2008. As a result, pre-tax operating losses and negative net income have been reported for three consecutive years with this trend continuing in 2011.
Significant surplus declines were reported in 2008, 2010 as well as through the third quarter of 2011, when the company’s surplus declined an additional 37.5 percent with the combined ratio escalating to 124.9 percent.
These results primarily are due to significant underwriting losses caused by frequent tornado/hail storms in Northwest’s core operating territories of the Dakotas.
In recent years, Northwest’s ongoing negative underwriting performance has mainly derived from frequent weather-related losses, which continue to hinder its capital position.
These losses combined with the company’s recent growth in premium writings have resulted in an erosion of its risk-adjusted capital position and an increase in its underwriting leverage ratios. Northwest has implemented several corrective actions to improve profitability, which include policy count reduction, curtailing of writing policies in more catastrophe prone areas, increase rates and tighten underwriting standards.
However, if Northwest’s negative trends in declining overall risk-adjusted capitalization and adverse operating performance continue it could result in further deterioration of the company’s ratings as reflected by the continuation of the negative outlook.
Conversely, there could be positive movement in the current ratings and/or outlook if there were a sustained turnaround in the currently poor underwriting and operating results, along with a sustained improvement in the company’s risk-adjusted capital position.
Source: A.M. Best
Topics Underwriting
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