OLDWICK, N.J.– AM Best has downgraded the Financial Strength Rating to B++ (Good) from A- (Excellent) and the Long-Term Issuer Credit Rating to “bbb+” from “a-” for The Providence Mutual Fire Insurance Company (Providence Mutual) (Warwick, RI). The outlooks of these Credit Ratings (ratings) have been revised to stable from negative.
These ratings reflect Providence Mutual’s balance sheet strength, which AM Best categorizes as very strong, as well as its marginal operating performance, limited business profile and appropriate enterprise risk management (ERM).
The downgrades reflect a business profile that has consistently challenged operating performance and restricted surplus growth. In prior years, the geographic makeup included a significant amount of coastal exposure that proved susceptible to weather events, generating material losses. Providence Mutual responded by substantially lowering the coastal composition to mitigate risk. Concurrently, the company expanded its portfolio to include greater diversification by increasing involvement in the business owner and personal auto lines segments. However, the personal auto line has proven difficult due to onboarding undesirable risks and insufficient pricing. Results have negatively impacted company performance in recent years. Providence has responded by initiating several corrective actions such as rate increases, targeted non-renewals, and stricter underwriting guidelines. Overall, the portfolio composition has consistently created a dynamic in which pretax operating losses need to be offset by capital gains in order to generate surplus growth, developing a greater reliance on market activity and limiting organic potential.
Balance sheet strength continues to be supported by the strongest level of risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), and consistently favorable loss reserve development, partially offset by elevated common stock leverage. While operating performance over the long term has reported a number of years with materially depressed results, performance has stabilized at marginal levels due to corrective actions already in place and taking hold. The company’s ERM practices are considered appropriate for its risk profile, with initiatives led by a risk committee and guided by formal risk tolerance statements.
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