A.M. Best Revises Outlook of Midwest Family Mutual Insurance Company

A.M. Best Co. has revised the outlook to stable from positive and affirmed the financial strength rating of A- (Excellent) and issuer credit rating of “a-” of Midwest Family Mutual Insurance Company (MFM) (Minneapolis, MN).

These rating actions reflect MFM’s trend of declining operating results and weakened risk-adjusted capitalization over the recent five-year period. Nevertheless, the ratings for MFM reflect its adequate risk-adjusted capitalization, positive five-year operating results derived from geographic and product diversification and expense reduction initiatives. The company’s geographic diversification into contiguous states also has mitigated its potential for significant losses resulting from a single, localized weather-related event. However, increased per-risk and catastrophic retentions over this period moderated the benefit from geographic diversification.

These positive rating factors are partially offset by MFM’s reporting two consecutive years of underwriting losses that were caused by an accumulation of frequent and severe weather-related losses, increased retentions, a somewhat unresponsive reinsurance program and challenging macroeconomic conditions. Additionally, MFM’s elevated underwriting and net liability leverage ratios exceeded the commercial casualty composite averages and exposed the company policyholders’ surplus to potential pricing errors.

Factors that could result in future negative rating actions on MFM include deterioration in its operating performance and meaningful erosion of its risk-adjusted capitalization. However, the company has initiated rate increases in 2011 that will continue into 2012, which should have a positive influence on operating performance.

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: “Risk Management and the Rating Process for Insurance Companies”; “Understanding BCAR for Property/Casualty Insurers”; and “Catastrophe Analysis in A.M. Best’s Ratings can be found at http://www.ambest.com/ratings/methodology.