Best’s News & Research Service - April 30, 2019 01:38 PM (EDT)
AM Best Revises Outlooks to Negative for Members of Andover Companies Pool
- April 30, 2019 01:38 PM (EDT)
Oldwick //BestWire// - AM Best has revised the outlooks to negative from stable and affirmed the Financial Strength Rating of A+ (Superior) and the Long-Term Issuer Credit Ratings of “aa-” of the members of Andover Companies Pool (Andover), which consists of Merrimack Mutual Fire Insurance Company and its majority-owned subsidiary, Bay State Insurance Company, and its affiliate, Cambridge Mutual Fire Insurance Company. All companies are domiciled in Andover, MA.
The ratings reflect Andover’s balance sheet strength, which AM Best categorizes as very strong, as well as its strong operating performance, favorable business profile and appropriate enterprise risk management (ERM).
The negative outlooks reflect deviation from the historically strong operating performance, as well as fluctuations in risk-adjusted capitalization, which collectively have been impacted by unfavorable assumed loss and equity activity in recent periods. Andover has recorded multiple years of depressed operating performance that have not materially outperformed the composite as in years past. The more modest results have been impacted by severe weather-related events from direct and assumed risk exposures. Andover has participated strategically in assumed catastrophe property treaties for many years, several of which have improved overall performance. However, the past few years have deteriorated due to an increase in assumed losses specifically driven by a greater frequency of events including hurricanes hitting the southeast coast, wildfires in California and foreign typhoons. Furthermore, more severe winter weather on the pool’s direct book has elevated losses in a few years. Throughout the past five-year period, material net investment income derived from the pool’s considerable equity portfolio has helped partially offset underwriting volatility. While the dividend income from equities has assisted operating performance, it exposes the pool’s capital to shifts in the market as evidenced by the fourth quarter of 2018, which recorded sizable unrealized capital losses. Although the equity position rebounded in 2019, the magnitude of the volatility places pressure on overall balance sheet strength.
The balance sheet strength reflects Andover’s very strong risk-adjusted capitalization, low underwriting leverage and consistently favorable loss reserve development. Historically, operating performance has outperformed the composite more consistently. Business profile considers the pool’s market position, historically beneficial geographic diversification from the assumed book, and continued efforts to develop a high-quality book of business through automated and analytical enhancements. ERM is considered appropriate for the pool’s risk profile.
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