By Chris Munro

April 16 - (The Insurer) - Stillwater Insurance Company has had its financial strength rating $(FSR)$ downgraded to B++ from A- by AM Best in response to what the agency said has been a “continued deterioration” in the carrier’s net underwriting results.

AM Best said the rating reflects the company’s “strong” balance sheet strength, its marginal operating performance, neutral business profile and appropriate enterprise risk management.

The agency has also dropped Stillwater’s long-term issuer credit rating $(ICR.AU)$ to bbb+ from a-, with its outlook standing at negative. It also downgraded the ICR to bb+ from bbb-­ of WT Holdings, the ultimate parent of Stillwater, with a negative outlook.

AM Best had first Stillwater’s ratings under review with negative implications in February 2023.

The agency said the FSR, the outlook on which has now been revised to stable from negative, and long-term ICR downgrades reflect the continued deterioration in Stillwater’s net underwriting results, a trend that began in 2022 and stemmed from multiple fire losses and weather-related events.

AM Best said the underwriting results were also impacted by “rapid and atypical increases” in inflation, along with supply chain disruptions.

Santa Barbara, California-based Stillwater’s homeowners business accounts for 71.5% of its premium volume, and AM Best said the division has been impacted by increasing costs of material and labor, as well as supply chain constraints.

The company’s auto line of business results has also been affected by higher prices for new and used vehicles, along with increased rental length periods and longer average repair times, again due to supply chain issues.

“As a result, loss ratios were higher, and the average severity of claim settlements increased during the year,” AM Best noted.

As per statutory data compiled by S&P Capital IQ, Stillwater reported a combined ratio of 101.1% for 2021, 123.9% in 2022, 129.8% for 2023 and 116.7% in 2024.

AM Best said Stillwater’s unfavorable net underwriting results continued in 2023, primarily due to losses from weather-related events, and to a smaller degree, inflationary pressures.

As the combined ratio shows, and as AM Best noted, Stillwater’s unfavorable underwriting results trend extended to 2024, largely because of weather-related losses.

“Stillwater’s operating performance results are more in line with other carriers that also have a marginal assessment level,” AM Best said.

“In response, management has implemented a series of initiatives, including several rate actions, increased deductibles as well as reducing the company’s geographic footprint in catastrophe prone areas in order to return to profitability,” the agency added.

Alongside downgrading Stillwater’s FSR to B++, AM Best has also reduced Jericho, New York-based subsidiary Stillwater Property and Casualty Insurance Company’s FSR to B++ from the previous A-.

The ratings agency said Stillwater’s negative long-term ICR outlook is based on the decline in the carrier’s overall risk-adjusted capitalization and its weakening balance sheet metrics which have been primarily driven by net underwriting losses in recent years resulting in a capital decline.

According to S&P Capital IQ, Stillwater’s capital and surplus totalled $280.7 million at 2021’s close, but that fell to $182.2 million at the end of 2022.

Come 2023’s close, Stillwater’s capital and surplus had increased to $220.7 million, but that reduced to $203.4 million at 2024’s.

“The expectation is for operating metrics to improve in the near term to alleviate further pressure on capitalization,” said AM Best.

“Further deterioration in overall risk-adjusted capitalization could potentially result in a downgrade in the balance sheet strength assessment,” the ratings agency added.