A.M. Best Downgrades Ratings of Community Mutual Insurance Company

A.M. Best Co. has downgraded the financial strength rating to C+ (Marginal) from B- (Fair) and the issuer credit rating (ICR) to “b-” from “bb-” of Community Mutual Insurance Company (Community Mutual) (Castleton, NY). The outlook for all ratings remains negative.

The rating actions follow Community Mutual’s continued unprofitable underwriting performance and diminished level of surplus, resulting in high underwriting leverage measures. In particular, through the first nine months of 2011, the company’s surplus decreased by 34%. Community Mutual has experienced significant losses attributable to weather-related events and major fire losses in recent years. The company’s unfavorable operating performance is evidenced by negative five-year average pre-tax returns on revenue and surplus. Although the company's pure loss ratio improved in recent years and compared favorably to the personal property composite average on a five-year average basis, elevated loss adjustment expenses and other underwriting expenses contributed to net underwriting losses in each of the past five years and again in 2011. Also, the company’s single-state concentration of risk exposes it to weather-related events as well as to market, regulatory and judicial issues.

Partially offsetting Community Mutual’s negative rating factors are its local market presence and long-standing agency relationships. Company initiatives to improve long-term operating performance have included re-underwriting and agency management initiatives. In addition to the non-renewal of a number of unacceptable risks, significant rate increases were taken in the core homeowners and commercial multi-peril lines of business.

Community Mutual will need to improve its surplus level and underwriting leverage measures as well as its operating performance before the negative outlook can be removed. There will be additional pressure on the ratings if the unfavorable results experienced in 2011 continue in 2012, resulting in a loss of surplus and a further deterioration of underwriting leverage measures.

The principal methodology used in determining these ratings is Best’s Credit Rating Methodology -- Global Life and Non-Life Insurance Edition, which provides a comprehensive explanation of A.M. Best’s rating process and highlights the different rating criteria employed. Additional key criteria utilized include: “Catastrophe Analysis in A.M. Best Ratings”; “Risk Management and the Rating Process for Insurance Companies”; and “Understanding BCAR for Property/Casualty Insurers.” Methodologies can be found at http://www.ambest.com/ratings/methodology.