Best’s News & Research Service - August 07, 2015 03:02 PM (EDT)
A.M. Downgrades Ratings of Public Service Insurance Company and Its Pooling Affiliates
Oldwick //BestWire// - A.M. Best has downgraded the financial strength rating (FSR) to B (Fair) from B+ (Good) and the issuer credit rating (ICR) to "bb+" from "bbb-" of Public Service Insurance Company (Chicago, IL) and its affiliates, Paramount Insurance Company (New York, NY) and Western Select Insurance Company (Los Angeles, CA) (collectively referred to as Magna Carta Companies), which operate through an intercompany pooling reinsurance agreement. The outlook for the FSR has been revised to stable from negative, while the outlook for the ICR remains negative.
The rating actions reflect the poor operating performance throughout the recent five-year period as evidenced by pre-tax operating losses during the 2010-2014 period driven by significant levels of adverse loss reserve development on prior accident years, the impact of weather-related losses and the need for improved risk controls. Operating performance was negatively impacted during the fourth quarter in 2014 by $27.0 million in reserve strengthening actions that occurred primarily on the workers' compensation and commercial multi-peril lines of business to more accurately establish ultimate claim liabilities. These actions were in addition to the fourth quarter 2013 actions resulting from a $48.8 million charge to strengthen reserves, the majority of which related to the workers' compensation line.
Partially offsetting these negative factors are Magna Carta's adequate but declining risk-adjusted capitalization, strong commercial market knowledge and management's plan to non-renew higher loss ratio business while focusing on low hazard business. The group's reduced risk-adjusted capitalization reflects its declining surplus and increased loss reserves and underwriting leverage, partially offset by the effects of an adverse development cover implemented during 2014. While risk-adjusted capitalization was supportive of the group's liabilities at year-end 2014 and is expected to remain so over the near-term, continuing operating losses may drive further deterioration in this metric.
The outlooks reflect A.M. Best's concerns with the sustained underwriting losses reported throughout the five-year period and the magnitude of actions required in recent years to strengthen loss reserves, as well as the lack of clarity regarding the Magna Carta Companies' risk appetite and business strategy, which has contributed to the poor underwriting and operating results. It is expected that management will focus on these critical issues in an effort to improve operating performance over the near term.
Negative rating actions could occur if the group's underwriting and operating performance are not in line with A.M. Best's expectations or if there is further significant deterioration in the group's risk-adjusted capital position. Positive rating actions are not expected in the near term.
This press release relates to rating(s) 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 visit A.M. Best's Ratings & Criteria Center.
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