AM Best revises ratings of Vermont Mutual to negative

AM Best has revised the outlooks to negative from stable and affirmed the financial strength rating of A+ and the long-term issuer credit ratings of “aa-” of Vermont Mutual Insurance Company and its fully reinsured subsidiary, Northern Security Insurance Company and its fully reinsured affiliate, Granite Security Insurance Company (formerly Granite Mutual Insurance Company). 

These companies are domiciled in Montpelier, VT and are members of Vermont Mutual Group (Vermont Mutual).

AM Best said that these ratings reflect Vermont Mutual’s balance sheet strength, which AM Best assesses as very strong, as well as its strong operating performance, favourable business profile and appropriate enterprise risk management.

The rating agency said that the negative outlooks are based on the declining trend in Vermont Mutual’s risk-adjusted capitalisation in recent years, which has placed pressure on its overall balance sheet assessment. This was partially driven by increased modelled losses from inflationary trends and management’s increased insurance-to-value efforts. Additionally, the organisation’s capital growth in recent years has been subdued by volatility in its operating performance, deviating from historically favourable results, influenced by material property exposure within the group’s footprint. However, near-term capital management plans are expected to materially improve the company’s capital position.

Vermont Mutual’s maintains a balance sheet strength that is assessed as very strong, said AM Best, supported by risk-adjusted capitalisation at the strong level, as measured by Best’s Capital Adequacy Ratio (BCAR). Balance sheet strength is further reinforced by strong liquidity, favourable loss reserve development in all calendar years (and nearly all accident years), as well as modest underwriting leverage. Furthermore, a comprehensive reinsurance program provides substantial protection from severe events without excessively increasing reinsurance dependence.

Vermont Mutual’s operating performance is assessed as strong, based on five- and 10-year operating performance metrics, which compare favourably to its industry composite average, according to the rating agency. Significantly better-than-average loss ratios reflect strict adherence to underwriting guidelines and price adequacy initiatives. This is partially offset by an elevated underwriting expense ratio, driven by higher commission costs typical of New England writers. Strong operating earnings have been driven by a steady stream of investment income and material underwriting earnings in most years. However, patterns have deviated in recent periods with underwriting earnings being challenged by weather-related losses and inflationary trends.

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