KBRA Affirms Ratings for Brotherhood Mutual and Changes Outlook to Negative
1 Aug 2024 | New York
KBRA affirms the A- insurance financial strength rating (IFSR) for Brotherhood Mutual Insurance Company (BMIC) and the BBB long term credit rating (LTCR) for the Surplus Notes. The outlook for all ratings has been changed to Negative from Stable.
The change in outlook to Negative from Stable for BMIC reflects declines in risk adjusted capitalization, deterioration in underwriting leverage measures, and adverse operating results. Although KBRA recognizes the potential for improvement in operating performance from the company’s more granular risk management practices, the benefits of these actions need to materialize in improved financial metrics in the near term to avoid further negative rating action.
The rating reflects BMIC’s focused market strategy, geographic diversification with limited exposure concentrations, high customer retention rates, and improved reserving practices. While the company has a track record of consistent growth in surplus over the long-term, there were declines in 2022 and 2023, followed by an increase in 1Q2024. Brotherhood Mutual’s management team is highly experienced. KBRA believes BMIC has fundamentally sound underwriting and financial analytics with advanced technology for risk selection that it continues to evolve.
Balancing these strengths is Brotherhood Mutual’s above average investment risk, as characterized by a high level of equities to surplus, although the company is in the process of reducing its equity exposure and the ratio has improved. In recent years, the company has seen its underwriting leverage and reserve leverage deteriorate, and its risk-adjusted capitalization has steadily declined over the past six years, somewhat offset by its surplus note issuance in March 2022. Surplus notes accounted for approximately 31% of YE2023 surplus. Pressure on underwriting leverage is somewhat offset by premium increases related to rising TIV and rate increases, while policy count remains flat. In addition, increased frequency from losses due to weather events and fire in recent years have negatively impacted net earnings and reversed the historical trend of favorable combined ratios. KBRA views negatively the company’s increased retention in its property catastrophe reinsurance cover. KBRA notes that while BMIC no longer purchases an aggregate catastrophe treaty, management believes that its concentration management and new quota share reinsurance helps mitigate its exposure to multiple catastrophes. However, KBRA also recognizes BMIC’s continued enhanced reserving practices by which it books reserves closer to the high end of the actuary’s range.
Factors that could positively impact the rating include sustained growth in earnings, favorable risk adjusted capital and balance sheet leverage trends, reserve adequacy over an extended period, and improved financial flexibility and liquidity. Factors that could negatively impact the rating include further reduction in risk adjusted capitalization and material deterioration in balance sheet leverage unrelated to rate increases, continued sustained unfavorable earnings trends, inability to obtain sufficiently robust reinsurance protection on an economic basis, additional material adverse reserve development, and loss of key members of the management team.
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