Although A.M. Best has affirmed the “A-“International Fidelity Insurance’s “A-” financial strength rating, the rating agency said it has assigned a negative outlook to the ratings for IFIC and subsidiary, Allegheny Casualty Company late last week.
In May, A.M. Best put the ratings under review with negative implications, following IFIC’s announcement that it would refile its year-end 2013 statutory statement.
The refiling came after the surety company uncovered that its former chief financial officer misappropriated funds and entered into unauthorized investments.
In its rating announcement late last week, A.M. Best said the negative outlook applied to the ratings reflects the rating firm’s uncertainty in the ability of the group’s management to fully implement an updated enterprise risk management (ERM) program, adding that ERM practices were called into question following the discovery of the former CFO’s fraud.
Noting that the fraud led to the group’s refiling of its year-end 2013 financial statements, A.M. Best said the associated drop in reported surplus was 18 percent.
Best said its action to affirm the ratings last week reflects the group’s strong capitalization, solid underwriting results and expertise in its niche of contract and bail bond surety. IFIC’s and Allegheny’s underwriting expertise is demonstrated in their favorable loss and loss adjustment expense ratio. In turn, the group’s underwriting results have remained consistently profitable over a 10-year period, producing positive operating returns.
Still, in addition to the questions about ERM, Best has some concerns that IFIC’s return measures trail peer composite norms. The group will be challenged to improve returns given its heightened expense structure and historically low level of net investment earnings, Best said.
There is an ongoing effort to implement a series of changes to the group’s ERM structure and improve return measures. Updated practices include revised governance policies and efforts to improve investment yields. Given that the revision to the group’s ERM began in mid-2014, such efforts are in their initial stages and their overall effectiveness is uncertain at this time, Best said.
Negative rating pressure could occur if operating performance materially worsens or ERM practices prove ineffective.
Source: A.M. Best