The downgrade of the rating primarily reflects Mutual Protective's surplus deterioration reported in 2004, related to a significant reserve charge taken at year end, the resulting weak risk-adjusted capitalization and its temporary discontinuation of all new sales through both companies. After performing reserve adequacy testing on a block of the companies' long-term care policies--containing a return on premium rider (ROP)--management discovered a substantial deficiency. Mutual Protective recognized this reserve deficiency in its 2004 year-end financials, which had an impact on both earnings and surplus levels.
Mutual Protective has taken numerous corrective actions, including rate increase filings and an early benefit program aimed at the ROP rider. The early benefit program, which has been highly successful to date will, however, have an implementation period that could continue through the third quarter of 2005. A.M. Best also believes that it will take some time for these corrective actions to take effect and for surplus to recover to the level prior to the charge.
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