A.M. Best Co. has downgraded the financial strength rating (FSR) to A (Excellent) from A+ (Superior) and the issuer credit rating (ICR) to “a+” from “aa-” of Kentucky Farm Bureau Mutual Insurance Company (KFBM)(Louisville, KY). The outlook for the FSR has been revised to stable from negative, while the outlook for the ICR is negative.
The rating actions are a result of KFBM’s unfavorable operating performance, particularly in recent years and in 2011, which produced a declining trend in its risk-adjusted capitalization and below average profitability ratios. KFBM’s operating performance has primarily been adversely impacted by an increase in the frequency of severe weather-related events in Kentucky, which has produced significant underwriting losses over the last four years and contributed to negative returns on revenue and equity. Although surplus loss has not been material over the last five years, risk-adjusted capitalization has been falling due to increasing levels of loss reserves and modest premium risk growth.
Partially offsetting these negative rating factors is KFBM’s maintenance of a strong, liquid balance sheet and an excellent business profile in Kentucky. In addition, the ratings benefit from KFBM’s association with the Kentucky Farm Bureau Federation, along with the use of an enterprise risk management program to supplement traditional risk management practices. Furthermore, management continues to take aggressive action to reduce underwriting volatility and reverse the current negative earnings trend.
However; KFBM’s ICR may be further downgraded and pressure could be put on its FSR if capitalization declines and/or operating performance does not improve. The outlook on the ICR may improve with a more favorable profitability trend that leads to capital appreciation.
The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Key criteria utilized include: “Catastrophe Analysis in A.M. Best Ratings”; Risk Management and the Rating Process for Insurance Companies”; “Understanding BCAR for Property/Casualty Insurers”; and “Rating Members of Insurance Groups.” Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
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