Ratings Roundup: Cooperative Mutual, Great Northwest

December 29, 2008

A.M. Best Co. has downgraded the financial strength rating (FSR) to ‘B+’ (Good) from ‘B++’ (Good) and issuer credit rating (ICR) to “bbb-” from “bbb” for Omaha-based Cooperative Mutual Insurance Company, and has revised its outlook on both ratings to negative from stable. “These rating actions reflect the significant deterioration in risk-adjusted capitalization during 2008, which were generated from both operating and equity investment losses associated with the current economic downturn and volatility in equity markets,” Best explained. “Furthermore, and despite the lower level of common stockholdings, investment leverage remains high as does underwriting leverage by virtue of the lower level of surplus. As a result, Cooperative Mutual maintains a much reduced level of capital to support its inherently volatile underwriting operations as well as the ongoing fluctuations in the equity markets.” Best also indicated that the rating outlook reflects its view that the “company will be challenged to restore capitalization to levels more supportive of the current rating, given its exposure to both underwriting and equity market losses. Cooperative Mutual specializes in writing property/casualty coverage for farmer-owned agricultural cooperatives with approximately 70 percent of direct written premiums produced in Nebraska and Iowa. The company is a dominant writer of farmer-owned agricultural cooperatives in Nebraska and is licensed in 23 states.”

Standard & Poor’s Ratings Services has lowered its counterparty credit and financial strength ratings on Great Northwest Insurance Co. (GNIC) to ‘B+’ from ‘BB-‘. S&P has also removed the ratings from CreditWatch with negative implications and assigned a negative outlook.” In addition, S&P said it has withdrawn the ratings at management’s request. “We lowered the ratings because of our concerns about the viability of GNIC’s long-term capital management plans and management’s higher risk appetite,” noted credit analyst Tracy Dolin. “In addition, GNIC has had an irregular and high expense structure and weak earnings power.” S&P also indicated “GNIC is a small company, so despite close to flat premium growth, unusual expenses significantly affect its expense ratio. In October and November, GNIC’s underwriting performance improved, though it remained unfavorable, with a combined ratio of more than 100 percent. GNIC’s limited subsidiary, Hawaiian Insurance Guaranty (HIG), benefited from a better catastrophe year, producing a 93 percent combined ratio for the same period. We view HIG as strategically important to GNIC.” S&P said it “expects that GNIC’s net premium growth will be in the low single digits in 2008, driven primarily by recent rate increase actions and western expansion efforts. We also expect that the combined ratio will be very high for 2008 and remain unsatisfactory in 2009 because of the company’s high expense structure, susceptibility to large shock losses, and competitive pricing actions. GNIC’s susceptibility to large losses–in conjunction with its small capital and premium base–also increases the firm’s insolvency risk. Although GNIC will be receiving capital infusions from its parent in 2009, we believe that its capital position will remain lower than historical levels. Over the longer term, we believe GNIC’s business strategy has above-average operating risk.”

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