A.M. Best has downgraded the Long-Term Issuer Credit Rating (Long-Term ICR) to “bbb” from bbb+ and affirmed the Financial Strength Rating (FSR) of B++ (Good) of Community Insurance Corp. and Wisconsin County Mutual Insurance Corp., collectively referred to as the Wisconsin County Mutual Group (WCMG).
The outlook of the FSR has been revised to negative from stable while the outlook for the Long-Term ICR remains negative. Both companies are domiciled in Madison, Wisconsin.
The ratings reflect WCMG’s balance sheet strength, which A.M. Best categorizes as strong, as well as its marginal operating performance, limited business profile and appropriate enterprise risk management.
The rating actions and FSR outlook revision reflect WCMG’s volatility in underwriting performance and decline in policyholders’ surplus over the most-recent three-year period. Underwriting losses resulted from adverse loss and LAE reserve development from lawsuit verdicts on several prior-year other liability and workers’ compensation claims.
WCMG’s positive rating factors primarily are driven by its net investment income, which partially offset underwriting shortfalls during the recent period. Net investment income is derived from the group’s diversified investment portfolio, which has generated a steady stream of investment income and favorable realized and unrealized capital gains.
Although management adheres to strict loss control and risk management services that mitigate potential loss and benefits from Wisconsin’s tort laws that cap large settlements, the group remains susceptible to civil-rights cases that are litigated in federal courts where there are no limits on jury verdicts.
Partially offsetting these positive rating factors is the group’s volatile underwriting results and negative operating results that led to three consecutive years of declines in policyholders’ surplus.
As a result, the group’s five-year average pre-tax and total returns on revenue and equity are negative and compare unfavorably with the commercial casualty composite. In addition, operating earnings are dampened by dividend requirements that have averaged 7.2 points on the combined ratio over the last five years.
In addition, while policy limits and reinsurance limit general federal compensation for the group, significant legal defense spending on these cases has significantly increased the cost of compensation for damages in this period.
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