KBRA Downgrades Ratings for Oregon Mutual Insurance Company and Maintains Negative Outlook

KBRA downgrades the insurance financial strength ratings (IFSR) of Oregon Mutual Insurance Company (OM), and its wholly-owned subsidiary, Western Protectors Insurance Company (WesPro) to BBB+ from A-. The Outlooks for both ratings remain Negative. The downgrades reflect the continued deterioration in OM’s underwriting results, which have negatively impacted profitability ratios, policyholder surplus levels, underwriting leverage metrics, and liquidity measures. The Negative Outlook reflects KBRA's concerns about reserve adequacy and the potential for future deterioration in profitability and capital levels. The potential benefits and expected improvement in operating performance from the decision to exit personal lines has not translated to improved financial metrics as expected in management projections provided to KBRA.

The ratings for OM and WesPro, reflect a strong reinsurance program, conservative investment portfolio, and strong local market knowledge with many longstanding agency relationships. In addition, OM has adequate but deteriorating risk-adjusted capitalization. The company has a strong reinsurance program that provides catastrophe coverage between 1-in-250 and 1-in-500 year return periods. Further, OM has modest earthquake risk as the company reinsures 100% of its shake damage exposure. Oregon Mutual’s investment policy is conservative and supports the company’s objectives of capital preservation. The investment portfolio as of September 30, 2024 consists primarily of investment grade fixed income securities and cash and cash equivalents. Although the RBC ratio improved to 461% in 2023 from 369% the prior year, these levels are below the historical range of 500% - 600% maintained by OM in the years prior to 2022.

Offsetting these strengths are persistent and increasing underwriting losses reported in the last five years, reinsurance dependence and exposure to event risk, and geographic concentration. Underwriting results have been negatively impacted by poor personal lines results and an elevated expense structure. Losses experienced in the last few years have had a significant negative impact on Oregon Mutual’s capitalization. Ongoing legacy system conversion issues have elevated the company’s expense ratio and resulted in cost overruns. However, KBRA notes that OM continues to make progress on its new policy administration system which, once completed, is expected to realize material cost savings. OM’s exposures are concentrated in the Pacific Northwest and California, and the concentration of premiums written in California has doubled in the last four years. The contribution of premiums from California has increased in recent years due to the exit of personal lines which was predominantly in the Pacific Northwest as well as the higher rate levels in California compared to Oregon Mutual’s other states. KBRA notes that the increased concentration is somewhat offset by the vast and diverse geography of the region. OM utilizes reinsurance to mitigate earthquake losses, winter freezes and wildfires. The availability and affordability of reinsurance could have a material impact on results.

Factors that could positively impact the rating include favorable capital trends over an extended period, driven by internal capital generation, sustained growth in earnings, including underwriting and expense improvements, and favorable change in risk profile.

Factors that could negatively impact the rating include significant further decline in capitalization, failure to achieve financial projections provided to KBRA, material catastrophe losses, departure of key members of the management team, failure to maintain an effective reinsurance program, and unfavorable change in risk profile.

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