KBRA Downgrades Ratings for WT Holdings, Inc., Stillwater Insurance Company and Stillwater Property & Casualty Company; Affirms Rating for Evergreen National Indemnity Company
21 Aug 2023 | New York
KBRA downgrades the issuer and debt ratings for WT Holdings, Inc. to BB+ from BBB- and the insurance financial strength ratings (IFSR) for Stillwater Insurance Company (SIC) and Stillwater Property & Casualty Company (SPAC) to BBB+ from A-. The ratings for SIC, WT Holdings, Inc. and its debt have been removed from Watch Downgrade. All ratings now have a Negative Outlook. KBRA also affirms the A- IFSR for Evergreen National Indemnity Company. The outlook is Stable.
The downgrades reflect the deterioration in SIC's capital position due to significant underwriting losses in 2022 and the first half of 2023. SIC reported $110 million in underwriting losses in 2022 and an additional $68.9 million in the first six months of 2023. Other contributing factors include increased financial leverage at the holding company which may reduce financial flexibility to support the company's current rate of growth and the potential need to source additional capital externally in order to maintain an appropriate risk-based capital level at SIC.
The Negative Outlook reflects KBRA’s expectation that Stillwater’s underwriting results will continue to be challenged, putting further strain on policyholder surplus which, without capital contributions, could deteriorate further. The outlook further reflect that holding company financial leverage metrics have also deteriorated 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 and solid operating results, and management will continue to be prudent with respect to overall capital management.
Key Credit Considerations
The ratings for SIC and SPAC reflect their broad and diversified distribution platform, historically sound underwriting leverage, and experienced management team. Stillwater has produced consistent investment income, resulting in net income in six out of the last eight years. Business is generated using a multiple distribution platform, including relationships with over 4,000 independent agencies and several national partners. Stillwater's underwriting and financial analytics use advanced technology for risk selection. Further, KBRA believes Stillwater has good catastrophe risk management with adequate catastrophe 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 2022 where it experienced significant catastrophe losses including its 2nd and 3rd largest wind/hail events in company history. In addition to severe weather catastrophe events, the company experienced an uptick in single family home fires. Auto results also worsened in 2022. Further, the investment portfolio is somewhat aggressive with a high proportion of equities and below investment grade bonds.
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 80%.
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. Lastly, despite consistent net income, surplus growth has been, and is expected to be, constrained by shareholder dividends.
Rating Sensitivities
For the Stillwater companies, improved operating profitability and organic surplus growth, improved underwriting leverage and reserve adequacy, and meaningful improvements in auto results 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, material investment losses, the loss of available and appropriate amount of reinsurance , or a material adverse change in reserves.
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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