A.M. Best Revises Outlook to Negative for Michigan Millers Mutual Insurance Company

A.M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength rating of B++ (Good) and issuer credit rating of “bbb” of Michigan Millers Mutual Insurance Company (Michigan Millers) (Lansing, MI).

The rating actions reflect the continuation of Michigan Millers’ poor underwriting and operating results in 2011, which led to policyholders’ surplus declining for the fifth consecutive year, and the execution risk associated with aggressive actions taken by the new management to restore profitability and generate sustainable earnings. While Michigan Millers’ calendar year underwriting results improved in 2011, its performance deteriorated sharply from 2007 through 2010 relative to historical results, driven primarily by challenging market conditions, rate inadequacy, large property losses, relatively high underwriting expenses, the weak macroeconomic environment and an overall increase in loss severity, primarily in the agricultural book. As a result, policyholders’ surplus declined nearly 50% from 2007 to year-end 2011; however, its risk-adjusted capitalization continues to be more than supportive of its current ratings as a result of lower premiums and reserves, primarily related to the reduction in the company’s agricultural book of business.

The ratings also recognize Michigan Millers’ strong capitalization and management’s concerted efforts to improve the company’s underwriting and operating results. A number of strategic initiatives intended to restore profitability and generate sustainable earnings in response to unfavorable underwriting results from 2007 through 2010 were implemented following the appointment of a new chief executive officer in 2010. The primary change was Michigan Millers exiting a significant portion of its agricultural-related business, which had been the cause of significant volatility in underwriting results over a number of years. In addition, the company has introduced multi-variate underwriting systems to improve rate adequacy and has been aggressively non-renewing unprofitable business. The company also has taken a number of actions to reduce its elevated expense ratio, including, but not limited to, the elimination of a number of fixed costs as well as a more efficient use of reinsurance.

While management has taken decisive steps to address the issues that caused the poor results in recent years, the effectiveness of these actions will have to be demonstrated over a period of several years. Although Michigan Millers’ underwriting and operating losses were reduced in 2011, accident year underwriting results remain elevated. Furthermore, market and macroeconomic conditions, while improving, will continue to challenge management’s efforts to restore the company to profitability.

Factors that could trigger negative rating actions include further deterioration in underwriting and operating results (especially if driven by significant adverse loss reserve development), a decline in risk-adjusted capitalization to a level that is below A.M. Best’s expectations and material deviation from Michigan Millers’ submitted financial projections.

Key rating triggers that could result in positive rating actions include a sustained improvement in the company’s underwriting and overall operating performance, which are consistently in line with higher rated peers, while maintaining a strong risk-adjusted capitalization.

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.