Credit rating agency KBRA has affirmed the insurance financial strength ratings (IFSRs) for two key operating subsidiaries of Heritage Insurance Holdings, Inc. (HIH).
KBRA maintained the BBB+ rating for Heritage Property & Casualty Insurance Company (HPCIC) and Zephyr Insurance Company, Inc. (ZIC).
However, the agency downgraded the IFSR for Narragansett Bay Insurance Company (NBIC) to BBB+ from A- and revised the outlook to Negative for ZIC, while downgrading the outlook for NBIC to Stable. The outlook for HIH remains Negative.
The downgrade for NBIC is primarily attributed to a surge in underwriting losses over the past three years, leading to a 35% decline in surplus since 2020.
The company’s risk-based capital has also witnessed a decline from the 380-420% range maintained over the last five years. Sustained drops in surplus, driven by unfavourable loss trends and elevated underwriting leverage, indicate a significant change in risk profile.
Heritage’s ratings reflect vertically integrated operations, adequate capitalisation, a conservative investment portfolio, and a seasoned management team.
Despite facing elevated operating losses due to natural catastrophes, the company’s controlled growth strategy aims to diversify exposures and mitigate concentration risk.
The revision in outlook for NBIC to Stable is based on KBRA’s expectation that the company will take action to restore profitability through rate increases and exposure management.
ZIC, on the other hand, witnessed a Negative Outlook revision due to significant operating losses and a deterioration in risk-adjusted capitalisation in 2023 resulting from catastrophe losses.
The Negative Outlook for HIH is attributed to the company’s elevated Debt-to-Capital ratio of 45.0% as of September 30, 2023, partially due to an accumulated other comprehensive loss (AOCL) of $49.7 million.
KBRA acknowledges Heritage’s sound reinsurance program, favourable distribution channels, and access to additional borrowing capability through the FHLB. The agency expects HPCIC to maintain stable risk-adjusted capitalisation, benefiting from diversification efforts within Florida.
