AM Best has downgraded the Financial Strength Rating (FSR) to B++ (Good) from A- (Excellent) and the Long-Term Issuer Credit Rating (Long-Term ICR) to “bbb+” (Good) from “a-” (Excellent) of Cities and Villages Mutual Insurance Company (Cities and Villages) (Wauwatosa, WI). The outlook of the FSR has been revised to stable from negative, while the outlook of the Long-Term ICR is negative.

The Credit Ratings (ratings) reflect Cities and Villages’ balance sheet strength, which AM Best assesses as very strong, as well as its marginal operating performance, limited business profile and appropriate enterprise risk management (ERM).

The Long-Term ICR downgrade reflects deterioration in Cities and Villages’ key operating return metrics, which has trended downward in recent years following continued volatility in underwriting and operating results primarily due to an increased number of large auto physical damage and auto liability losses. The company’s policyholders’ dividend payment structure constrains overall underwriting performance and negatively impacts pre-tax and total return on revenue and equity measures. As a result, the company’s five-year average operating return metrics have fallen materially compared with the workers’ compensation industry composite. Net underwriting losses have been reported in all recent five years, with the largest decline occurring in 2025.

The negative Long-Term ICR outlook reflects the continued pressure on Cities and Villages’ balance sheet strength in recent years due to policyholders’ surplus erosion from increased underwriting volatility and a corresponding decline in the company’s risk-adjusted capitalization. In addition, the company’s policyholder’s dividend structure has suppressed policyholders’ surplus growth over the long term. Management has addressed the adverse trends through ongoing strategic initiatives; however, it remains to be seen if these initiatives will be effective. If negative trends continue, this could result in further negative rating actions.

Cities and Villages’ limited business profile assessment is driven by the company’s geographic concentration as a single state writer in Wisconsin with product concentration. The company’s ERM remains appropriate and in line with its risk profile, with strategies focused on loss control practices and risk management services to Wisconsin municipalities.

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