The Providence Mutual Fire Insurance Company has been dealt a financial strength rating downgrade from A.M. Best.

A.M. Best said its decision to downgrade the insurer’s financial strength rating to “B++” (Good) from “A-” (Excellent) comes even as the insurer has a “very strong balance sheet.”

Factors that shaped the decision include: Providence Mutual’s “marginal operating performance, limited business profile and appropriate risk management.”

According to A.M. Best, the downgrades (including similar action with its long-term issuer credit rating) involve a business profile “that has consistently challenged operating performance and restricted surplus growth.”

The ratings agency noted that Providence Mutual in previous years had a book of business that included a large amount of coastal exposure susceptible to weather events, which produced “material losses.” The insurer correctly responded by lowering those risks and diversifying its book of business to include more customers in the business owner and personal auto lines segments. But as A.M. Best noted, “the personal auto line has proven difficult due to onboarding undesirable risks and insufficient pricing.”

As a result, those risks have hurt Providence Mutual’s performance, though the insurer has tried to correct this with actions such as rate increases, targeted nonrenewals and stricter underwriting guidelines.

Problems remain, however, according to A.M. Best.

“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,” A.M. Best explained.

On the positive side, A.M. Best noted that Providence Mutual’s balance sheet remains strong due to “the strongest level of risk-adjusted capitalization,” as well as “consistently favorable loss reserve development,” though that’s partially offset by “elevated common stock leverage.”

While the insurer’s operating performance over time has had “a number of years with materially depressed results,” A.M. Best said that the insurer’s performance has seen some marginal stabilization, thanks to ongoing corrective actions.

In addition to the financial strength rating downgrade, A.M. Best also downgraded Providence Mutual’s long-term issuer credit rating to “bbb+” from “a-“.

Outlooks in both areas have been adjusted, however, to stable from negative.

Source: A.M. Best