AM Best Downgrades Issuer Credit Ratings of Erie Insurance Group's Members; Affirms Credit Ratings of Erie Family Life Insurance Company
AM Best has downgraded the Long-Term Issuer Credit Rating (Long-Term ICR) to "aa-" (Superior) from "aa" (Superior) and affirmed the Financial Strength Rating (FSR) of A+ (Superior) of the property/casualty (P/C) members of Erie Insurance Group (Erie). The outlook of the Long-Term ICR has been revised to stable from negative while the outlook of the FSR is stable. Additionally, AM Best has affirmed the FSR of A (Excellent) and the Long-Term ICR of "a" (Excellent) of Erie Family Life Insurance Company (EFL). The outlook of these Credit Ratings (ratings) is stable. All companies are domiciled in Erie, PA, unless otherwise specified.
Erie Insurance Exchange is the lead company of Erie; the remainder of the P/C group is composed of inter-company pooling members, Erie Insurance Company and Erie Insurance Company of New York (Rochester, NY), and reinsured subsidiaries Erie Insurance Property & Casualty Company and Flagship City Insurance Company.
The ratings of Erie reflect its balance sheet strength, which AM Best assesses as strongest, as well as its adequate operating performance, favorable business profile and appropriate enterprise risk management (ERM).
The Long-Term ICR downgrade of Erie reflects a continued trend of volatility and deterioration in the group's underwriting performance, driven predominantly by weather-related losses. While the group's operating results improved in 2020, largely from a drop in auto claims frequency and a decrease in weather-related events, Erie's five- and 10-year operating results continue to lag similarly related peers. Additionally, the combined impact of elevated inflation and supply chain disruptions starting in 2021 and through 2022 has adversely impacted the group's auto book of business, leading to significant underwriting losses in 2021, which have continued through the first quarter of 2022. While investment performance has generally offset underwriting losses, AM Best has some concern that the company's investment performance will also be pressured in 2022, given the investment market volatility.
AM Best notes that Erie has implemented a detailed strategy to restore undrwriting profitability, which includes action items such as rate changes and enhanced pricing sophistication. With Erie offering 12-month policies for all lines of business, there is a timing lag to earn fully the rate changes that are being introduced. As a result, overall performance will take some time to realize the benefit of these actions.
The ratings of EFL reflect its balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, neutral business profile and appropriate ERM. These ratings also consider the lift from Erie, based on its strategic importance in supporting the overall strategy of EFL selling life and annuity products to the group's property/casualty client base.
EFL's rating affirmation reflects its strongest level of risk-adjusted capitalization, as measured by Best's Capital Adequacy Ratio (BCAR), as well as good quality of capital. The company's investment portfolio mainly consists of investment grade bonds, which are diversified across industries and sectors. EFL continues to execute on its strategy by marketing ordinary life insurance and individual annuity products for the parent company's P/C client base. However, AM Best notes that earnings have deteriorated in recent periods driven by statutory strain related to growing the book of business.
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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