KBRA Affirms Ratings for WT Holdings, Inc. and Insurance Subsidiaries

KBRA affirms the BBB+ insurance financial strength ratings (IFSRs) for Stillwater Insurance Company and Stillwater Property and Casualty Insurance Company. The issuer and debt ratings for WT Holdings, Inc. have also been affirmed at BB+. The Outlook for these ratings is Negative. KBRA also affirms the A- IFSR for Evergreen National Indemnity Company. The outlook is Stable.

The continuation of the Negative Outlook reflects the poor underwriting results reported for a second consecutive year in 2023 at Stillwater, driven by significant weather events and inflation. KBRA acknowledges the rate and non-rate underwriting actions implemented to improve underwriting results, but these actions need to translate into improved results in the next twelve months, otherwise downward rating actions are likely. The outlook further reflects the deterioration in holding company financial leverage metrics in 2023 which may reduce the company’s financial flexibility to support its current rate of growth.

The Stable Outlook for Evergreen reflects KBRA’s expectation that Evergreen will continue to maintain its very strong risk-adjusted capitalization, maintain solid operating results and management will continue to be prudent with respect to overall capital management.

The ratings for SIC and SPAC reflect their broad and diversified distribution platform, experienced management team and consistent investment income. Business is generated using a multiple distribution platform, including relationships with over 3,500 independent agencies and several national partners. Investment earnings have helped generate net income in four of the last five years. Stillwater's underwriting and financial analytics use advanced technology for risk selection. Further, KBRA believes Stillwater has good catastrophe risk management with adequate reinsurance coverage for all perils.

These positives are somewhat offset by the company’s exposure to natural catastrophes – both wind (hurricane, tornado, and hail) and earthquake. In addition, Stillwater has exposure to California brush and wildfires. This was evident in 2023 where the company experienced 72 individual catastrophe events, following an extremely active cat year in 2022. Auto results continued their unfavorable trend in 2023, causing the company to shut down new auto business production nationwide until profitability is restored. Further, Stillwater maintains a moderately elevated level of non-investment grade bonds and equity investments relative to industry averages, but KBRA acknowledges the significant derisking of the portfolio in 2023 to reduce these concentrations.

Evergreen’s rating reflects its low underwriting leverage, favorable long-term underwriting results and experienced management team in its niche surety business, which focuses on waste sector landfill closure and post-closure bonds. Through prudent underwriting and risk management, Evergreen’s underwriting performance is highlighted by low loss ratios, reporting a five-year average combined ratio of approximately 85%.

These positive rating factors are somewhat constrained by the company’s product concentration in the waste/landfill sector for surety, necessitating a strong reliance on reinsurance. However, this constraint is partially offset by the credit quality and length of relationships with its reinsurance partners, its broad geographic distribution and niche market expertise. Additionally, Evergreen’s investment portfolio is somewhat aggressive with a high proportion of equities and below investment grade bonds. Also, despite consistent net income, surplus growth has been, and is expected to be, constrained by shareholder dividends. Lastly, because of the highly specialized business, key person risk exists with its top executives.

For the Stillwater companies, improved operating profitability and organic surplus growth, meaningful improvements in auto results, or a favorable change in risk profile could result in a positive rating action. A negative rating action could occur from a failure to meet financial projections provided to KBRA, further deterioration in earnings, an unfavorable change in risk profile, sustained material adverse loss reserve development or the loss of available and appropriate amount of reinsurance.

For Evergreen, improved profitability and surplus growth and continuation of appropriate underwriting leverage could result in a positive rating action. A negative rating action could occur from significant earnings deterioration, an adverse change in risk profile, loss of key clients, or material investment losses.

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