The downgrading of the ICRs is based on the deterioration in Grinnell’s underwriting results and operating earnings in recent years. The deterioration in underwriting results has been driven by unfavorable loss experience on Grinnell’s assumed property reinsurance line of business and an above average underwriting expense ratio.
Grinnell’s ratings reflect its strong risk-adjusted capitalization, modest five-year operating performance, focused operating strategy and well-established market position as a leading reinsurer of farm mutuals in the Midwestern United States. Grinnell provides reinsurance and direct coverages to regional farm mutual companies that are statutorily limited to writing property business only. The relationship with the farm mutuals creates a strategic advantage for Grinnell, allowing it to penetrate the small towns and rural areas of its operating territory. This is accomplished through the independent agencies, which farm mutual business Grinnell reinsures.
Grinnell’s management is focused on continuous improvement of underwriting results and operating efficiency. Recent initiatives include rate increases in virtually all lines of business, tightened underwriting controls and intensive training sessions aimed at improving underwriting and claim processes. For the assumed property reinsurance line of business, additional initiatives include surcharges based on claims experience and insurance-to-value, increasing the farm mutuals’ attachment point for sharing loss exposures and non-renewing farm mutual reinsurance contracts that have poor claims experience, coupled with unacceptable management practices. Grinnell has streamlined operations by reorganizing its previously regionalized structure to one that is more function oriented.
Partially offsetting these positive rating factors is Grinnell’s concentration of risk within the Midwest and the corresponding exposure to severe weather-related losses. Grinnell’s exposure to adverse weather patterns in the Midwest has been illustrated in recent years as it has experienced severe weather-related losses, primarily in its assumed property reinsurance business, which resulted in a combined ratio above breakeven. This deterioration in underwriting results has adversely impacted operating earnings and surplus growth in recent years. The unfavorable loss experience for the assumed property reinsurance business also was driven by inadequate rates. In addition, the volatility inherent in Grinnell’s book of business has led to a greater dependence upon reinsurance to mitigate its catastrophe exposure. Furthermore, Grinnell maintains an above average underwriting expense ratio, which is driven by an elevated commission expense due to its independent agency structure. Grinnell remains challenged to maintain its high operational standards, given the significant exposures inherent in writing weather-sensitive insurance products in the rural Midwest.
Negative rating actions could occur with a continuation of the unfavorable underwriting results, operating earnings and/or surplus deterioration that has occurred in recent years, which were driven by storm losses on Grinnell’s assumed property reinsurance line of business.