AM Best Downgrades Credit Ratings of Frederick Mutual Insurance Company

AM Best has downgraded the Financial Strength Rating to B+ (Good) from B++ (Good) and the Long-Term Issuer Credit Rating to “bbb-” (Good) from “bbb+” (Good) of Frederick Mutual Insurance Company (FMIC) (Frederick, MD). The outlooks of these Credit Ratings (ratings) have been revised to negative from stable.

The ratings reflect FMIC’s balance sheet strength, which AM Best assesses as adequate, as well as its marginal operating performance, limited business profile and appropriate enterprise risk management (ERM).

The downgrades on the balance sheet strength and business profile assessments reflect the significant erosion in FMIC’s policyholder surplus, weakening balance sheet metrics and corresponding decline in the company’s risk-adjusted capitalization. The results were mainly due to sizable underwriting losses due to higher than normal catastrophe activity, inflation driven increases in loss costs, elevated expenses and stock market volatility. As a result, operating losses and the company’s combined ratio each reached a five-year high in 2022 and policyholder surplus declined by $6.7 million.

The downward revision in the business profile assessment to limited reflects the company’s demonstrated high level of volatility, driven by its exposure to weather-related events and elevated expense structure. The company’s expense ratio has risen as it has dedicated significant resources and undergone numerous initiatives to improve efficiencies, increase rate adequacy, improve pricing sophistication, streamline work processes and upgrade technology systems. However, these initiatives have not materialized as expected, which was reflected in its adverse results and declining risk-adjusted capitalization.

Currently, FMIC’s ERM assessment is appropriate. However, the negative outlook on the ratings reflects the uncertainty regarding the overall effectiveness of the company’s ERM program. Despite numerous initiatives and a developed ERM program, the company continues to report adverse operating results and weakening balance sheet metrics. If these trends continue in the near to intermediate term, this could result in a revision in the company’s ERM assessment from appropriate to marginal.

This press release relates to Credit Ratings that have been published on AM Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see AM Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Guide to Best's Credit Ratings. For information on the proper use of Best’s Credit Ratings, Best’s Performance Assessments, Best’s Preliminary Credit Assessments and AM Best press releases, please view Guide to Proper Use of Best’s Ratings & Assessments.

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