A.M. Best Downgrades Ratings of Pennsylvania Lumbermens Mutual Insurance

A.M. Best Co. has downgraded the financial strength rating to A- (Excellent) from A (Excellent) and issuer credit rating to “a-” from “a” of Pennsylvania Lumbermens Mutual Insurance Company (PLM) (Philadelphia, PA). The outlook for both ratings has been revised to stable from negative.

The rating actions reflect PLM’s weakened operating performance in recent years and sizeable deterioration in underwriting results in both 2010 and 2011. Driving the unfavorable underwriting experience most recently have been an increase in catastrophe-related and large losses and a decline in premium volume related to challenging market conditions in PLM’s niche. The decline in premium volume has exacerbated the company’s typically above-average underwriting expense ratio.

A.M. Best notes that PLM has undertaken numerous corrective actions to improve underwriting profitability, including coastal wind and hail deductibles, increased rates, stricter underwriting guidelines as well as maintenance of an enhanced, comprehensive reinsurance program. Nonetheless, PLM may be somewhat challenged to return to its historical level of profitability due to ongoing competition in the commercial lines segment and weak macroeconomic conditions affecting its market niche.

Despite these concerns, the stable outlook reflects PLM’s strong capital position and established presence in its niche market of providing coverages to the lumber, woodworking and building materials industries. PLM’s specialty focus provides it with competitive advantages in terms of pricing, claims adjusting and loss control, which historically resulted in a much better-than-average level of loss and loss adjustment expenses.

The ratings further acknowledge the company’s experienced management team and disciplined operating philosophy.

A.M. Best believes PLM is well positioned at its current rating level; however, negative rating actions may occur if there is a significant decline in PLM’s operating results and/or considerable deterioration in its risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio.

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