A.M. Best Downgrades Ratings of FHM Insurance Company

OLDWICK, N.J. --(Business Wire)--

A.M. Best Co. has downgraded the financial strength rating (FSR) to B++ (Good) from A- (Excellent) and issuer credit rating (ICR) to "bbb+" from "a-" of FHM Insurance Company (FHM) (Jacksonville, FL). The outlook for the FSR is stable, while the outlook for the ICR is negative.

The rating actions reflect FHM's substantial underwriting losses in 2011 and only partial recovery in the first nine months of 2012, which resulted in combined and operating ratios that compare very unfavorably with recent results for the workers' compensation composite. The significant decline in FHM's underwriting results was largely attributable to competitive market conditions, inadequate premium rates, increased claims severity, the weakened economy, as well as significant adverse prior year loss reserve development in 2011, primarily relating to accident years 2009 and 2010. FHM's substantial underwriting losses resulted in a net loss of $6.7 million and a 9.4% reduction in policyholders' surplus in 2011, and a further net loss of $5.5 million and an 8.5% decline in surplus in the first nine months of 2012.

In an effort to geographically diversify its workers' compensation operations outside of Florida, FHM began writing business in Georgia on a limited basis during 2007 and has increased its expansion in contiguous southeastern states in more recent years. Nevertheless, underwriting losses have been elevated for FHM's Florida and non-Florida wrtings over the past two years. Management is implementing substantive re-underwriting and claims management initiatives to improve profitability that include raising premium rates, non-renewing unprofitable business, reducing credits, raising loss cost multipliers and hiring new underwriting representatives and loss control consultants in several expansion states.

However, necessary adjustments to achieve acceptable profitability will likely take time in a highly regulated environment, and FHM's continued expansion in southeastern states in competitive markets poses additional operating risks. A.M. Best will continue to monitor the performance of the company's expansion to ensure that underwriting losses do not increase further and that premium growth and the accumulation of loss reserves do not strain FHM's risk-adjusted capitalization.

While corrective actions have been taken, FHM's ratings could be negatively impacted should soft market conditions, a lack of underwriting discipline or further adverse loss reserve development result in underwriting and overall profitability measures continuing to underperform its peers, or should there be a material decline in the company's risk-adjusted capitalization. Key rating factors that could result in positive rating actions include a sustained improvement in the company's underwriting and overall operating performance that compare favorably with its peers while exhibiting stabilization in loss reserves and maintaining excellent 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"; "Equity Credit for Hybrid Securities"; "The Treatment of Terrorism Risk in the Rating Evaluation"; and "Understanding BCAR for Property/Casualty Insurers." Best's Credit Methodology can be found at www.ambest.com/ratings/methodology.

Founded in 1899, A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.