OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best has revised the outlooks to negative from stable and affirmed the Financial Strength Rating of A+ (Superior) and the Long-Term Issuer Credit Ratings of “aa-” of California Insurance Company (CIC) (Foster City, CA), Continental Indemnity Company (Cedar Rapids, IA), Illinois Insurance Company (Cedar Rapids, IA), Texas Insurance Company (TIC) (Dallas, TX) and Pennsylvania Insurance Company (Cedar Rapids, IA). All companies are collectively referred to as North American Casualty Group (NAC).
The Credit Ratings (ratings) reflect NAC’s excellent level of risk-adjusted capitalization, favorable operating performance since its inception and experienced management team. The ratings also acknowledge management’s prudent operating philosophy, adherence to adequate pricing and reserving discipline. The ratings also consider the historical performance of business produced by its parent company, Applied Underwriters, Inc. (AU), a leading provider of bundled workers’ compensation insurance and payroll processing services to small and medium-sized businesses. A.M. Best anticipates that AU will continue to support NAC, allowing the group to maintain a level of risk-adjusted capitalization that remains supportive of the ratings. The ratings also recognize the additional financial flexibility and support provided by its publicly traded ultimate parent, Berkshire Hathaway Inc. (NYSE: BRK.A and BRK.B).
The positive rating factors are somewhat offset by NAC’s relatively limited operating experience, and the group’s significant business and geographic concentration risk; operating predominately as a workers’ compensation insurer with limited geographic spread that exposes operations to regulatory, judicial, legislative and competitive risks. In January 2016, an administrative action was issued to the group by the California Department of Insurance (DOI) regarding its EquityComp product. The group has appealed the action of the California DOI in a peremptory writ of mandate now pending before the Los Angeles Superior Court. This action is indicative of the exposure that regulatory and product concentration risk represent to the enterprise. The long-term implications of this action are uncertain at this time; however, A. M. Best is concerned as to the potential negative implications the regulatory action may have on the group’s market profile and future operating performance.
Additional offsetting rating factors include challenging market conditions in the workers’ compensation line of business and legislative/regulatory uncertainty in California’s workers’ compensation marketplace. In an effort to limit its concentration risk in California, management has diversified the group’s revenue streams in recent years through a controlled expansion into other states, primarily New York, New Jersey and Illinois. Considering the inherent obstacles in entering new markets during challenging market conditions, A.M. Best will continue to monitor the group’s progress in achieving its business plan to ensure that premium growth and accumulation of loss reserves do not strain its level of risk-adjusted capitalization. Despite the group’s historically excellent operating performance, the negative outlooks reflect the uncertainty regarding the implications of the administrative action taken by the California DOI.
The members of NAC are well-positioned at the current rating level. However, negative rating actions could result if operating performance falls markedly short of A.M. Best’s expectations, if there is a considerable deterioration in the group’s risk-adjusted capitalization, the group’s business profile suffers as a result of reputation damage or if A.M. Best determines that the group’s strategic importance to its ultimate parent (Berkshire Hathaway Inc.) no longer warrants rating enhancement.
This press release relates to Credit Ratings that have been published on A.M. 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 A.M. Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Understanding Best’s Credit Ratings.
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