AM Best has revised the outlooks to negative from stable and affirmed the Financial Strength Rating of A- (Excellent) and the Long-Term Issuer Credit Rating of “a-” (Excellent) of Loudoun Mutual Insurance Company (Loudoun) (Waterford, VA).

The Credit Ratings (ratings) reflect Loudoun’s balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management.

The revised outlooks to negative from stable are based on the deterioration in Loudoun’s underwriting and operating performance in recent years and corresponding decline in overall risk-adjusted capitalization. Adverse operating results are driven primarily by the homeowner and dwelling fire lines of business from rising loss costs due to inflationary trends. Additionally, the homeowners and commercial multi-peril lines of business were impacted by increased fire and weather-related losses, which were exacerbated by inflationary loss cost trends. Consequently, Loudoun’s five-year pre-tax operating results are negative.

Furthermore, Loudoun has reported underwriting and pre-tax operating losses in three of the past five years; however, net losses have only been reported in two of those years due to substantial realized gains on its equity portfolio over the period. Loudoun’s five-year average loss and loss adjustment expense ratio has compared favorably with its composite average, which has been more than offset by an elevated five-year average underwriting expense ratio, which is reflective of higher commission rates typical of Virginia personal property writers.

Loudoun has implemented significant rate increases for homeowners and all other property lines of business in recent years, with additional rate adjustments implemented in January 2025, in conjunction with underwriting, pricing and claims strategic initiatives to reduce exposures in concentrated locals. However, it is uncertain at this time if Loudoun will execute these plans successfully to return it to underwriting profitability over the near term.

Loudoun’s balance sheet strength assessment of very strong is driven by its strongest level, albeit declining, risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR). Overall risk-adjusted capitalization has been declining due to volatile operating results, increasing underwriting leverage, higher reinsurance costs and increased net catastrophe retentions.

While recent challenges are considered more of an operating performance issue at this time, continuation over the intermediate term could begin to challenge the balance sheet assessment.

AM Best will monitor Loudoun’s ability to execute its underwriting, pricing and weather mitigation strategies to return to sustained operating profitability prospectively. Furthermore, Loudoun will be expected to maintain its very strong overall balance sheet strength, as it navigates through its risk mitigation strategies as they pertain to catastrophe risk and the company’s relative concentrations.

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