OLDWICK, N.J.--()--A.M. Best Co. has revised the outlook to stable from positive and affirmed the financial strength rating (FSR) of A- (Excellent) and issuer credit ratings (ICR) of “a-” of Sequoia Insurance Company and its wholly owned subsidiary, Sequoia Indemnity Company, collectively referred to as Sequoia.
“Risk Management and the Rating Process for Insurance Companies”
A.M. Best also has affirmed the FSR of A- (Excellent) and ICR of “a-” of Personal Express Insurance Company (Personal Express), a subsidiary of Sequoia. The outlook for these ratings is stable. All companies are headquartered in Monterey, CA.
The affirmation of Sequoia’s ratings reflects its strong risk-adjusted capitalization and the benefits derived from its niche underwriting expertise in the small to medium-sized commercial marketplace. Furthermore, the ratings recognize the financial flexibility provided by Sequoia’s immediate parent, Strongwood Insurance Holdings Corporation (Strongwood), and Strongwood’s relationship with JPMorgan Chase & Co. These positive rating factors are somewhat offset by Sequoia’s high cost structure, the inherent risks associated with the organization’s concentration in California and the sizeable growth in workers’ compensation net written premiums with the introduction of its California workers’ compensation program in 2010.
Sequoia reported underwriting losses over the last two years due to an increase in loss severity, hail storm losses and increases in reserves to bring them in line with industry standards following the introduction of the California workers’ compensation product. Moreover, a higher-than-average expense structure continues to strain profitability. The revised outlook reflects A.M. Best’s prospective viewpoint that Sequoia’s pre-tax operating returns and underwriting results over the next several years may lag the industry, especially since Sequoia’s concentration of business leaves it susceptible to legislative, regulatory and economic changes. Although management has undertaken corrective actions to improve underwriting performance, the risks associated with a growing book of business may affect profitability over the near term.
A.M. Best believes Sequoia is adequately positioned at its current rating level. Negative rating actions may occur over the near to mid term if there is a continued decline in Sequoia’s underwriting profitability and/or deterioration in its risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio.
The ratings of Personal Express acknowledge its solid capitalization, generally profitable underwriting and operating performance and established market profile and infrastructure that have been sourced through Sequoia.
Partially offsetting these strengths are Personal Express’ limited geographic and product concentration, which exposes its operating results to legislative and regulatory changes as well as competitive market pressures and adverse development of loss reserves.
A.M. Best believes Personal Express is adequately positioned at its current rating level. Downward rating pressure could occur if Personal Express’ future underwriting and operating results are not in line with A.M. Best’s expectations or if there is a significant decline in its risk-adjusted capitalization. Downward rating pressure also could result from negative rating actions on Sequoia or if A.M. Best were to view Personal Express as having lesser strategic value to its parent.
The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Key criteria utilized include: “Risk Management and the Rating Process for Insurance Companies”; “Understanding BCAR for Property/Casualty Insurers”; “Rating Members of Insurance Groups”; “Insurance Holding Company and Debt Ratings”; “The Treatment of Terrorism Risk in the Rating Evaluation”; and “Catastrophe Analysis in A.M. Best Ratings.” Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
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