Best’s News & Research Service - April 25, 2014 03:25 PM (EDT)
A.M. Best Revises Outlook to Negative for Tower Bonding and Surety Company
Oldwick //BestWire// - A.M. Best has revised the outlook to negative from stable and affirmed the financial strength rating of B (Fair) and the issuer credit rating of "bb" of Tower Bonding and Surety Company (Tower Bonding) (San Juan, PR).
The negative outlook reflects Tower Bonding's weakened operating performance in 2013 as a reduction in earned premium combined with an increase in incurred losses resulted in an underwriting loss. As the loss was only partially offset by investment income, Tower Bonding reported its first pre-tax operating loss of the recent five-year period in 2013, which further weakened long-term return measures.
The ratings of Tower Bonding reflect its ongoing weak operating performance as evidenced by a pre-tax operating return on revenue measures that trail the fidelity and surety composite by a wide margin. The weak results reflect declining premium volume combined with a high underwriting expense structure and lack of premium scale to support fixed costs. The ratings also reflect the company's geographic concentration within Puerto Rico, which exposes it to judicial, regulatory and economic concerns occurring within that market as all business is produced locally.
Somewhat offsetting these negative rating factors are Tower Bonding's low loss and loss adjustment expense measures relative to the fidelity and surety composite over the long term, historically profitable underwriting results and sound investment income, which has driven earnings during the previous five-year period. The company's surety book of business has performed well, reflective of a low occurrence of losses and favorable reserve development on both an accident and calendar year basis over the long term.
Factors that could result in upward rating movement for Tower Bonding are a significant improvement and stabilization in operating earnings and a return on revenue measures that can be sustained over an extended period. Accordingly, this would enhance the company's ability to generate surplus growth, which has been constrained by weakened return measures in recent years.
A weakening in the company's overall capitalization driven by strong premium growth and/or a weakened operating performance will likely result in negative ratings pressure.
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. Best's Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
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