Best’s News & Research Service - October 03, 2017 02:33 PM (EDT)
A.M. Best Revises Outlooks to Negative for Mennonite Aid Plan of the Pacific Coast
- October 03, 2017 02:33 PM (EDT)
Oldwick //BestWire// - A.M. 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-” of Mennonite Aid Plan of the Pacific Coast (Mennonite) (Reedley, CA).
The negative outlooks reflect the company’s operating losses in each of the past five years and generally unfavorable underwriting and operating cash flows. The rating affirmations reflect Mennonite’s excellent risk-adjusted capitalization, strong liquidity position and historically positive annual growth in policyholders’ surplus, partially offset by high common stock leverage.
Mennonite’s operating losses over the past five years have been driven primarily by an elevated underwriting expense ratio that is higher than the personal property industry composite average. This is due generally to an economy of scale issue, as reasonable overhead expenses in nominal dollars weigh against a modest written premium base. The company’s investment portfolio carries high common stock leverage, which exposes its policyholders’ surplus to volatility in the equities markets. Operating cash flows historically have been unfavorable due to solidly positive cash flows from investments that on balance have not been able to sufficiently offset the negative underwriting cash flows from unfavorable underwriting performance.
Mennonite maintains an excellent level of risk-adjusted capitalization, largely due to its low underwriting and loss reserve leverage, combined with extensive reinsurance coverage that significantly limits individual risk exposures. Annual growth in policyholders’ surplus is driven primarily by solid realized capital gains, and to a lesser extent, by unrealized capital gains and net investment income. Additionally, Mennonite’s liquidity position is strong, as indicated by its quick, current and overall liquidity ratios, which significantly exceed the personal property industry composite average.
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