A.M. Best Co. has affirmed the financial strength rating of A- (Excellent) of Zenith National Insurance Group of Woodland Hills, Calif.
The financial strength rating applies to three intercompany pool members and is based on the consolidated operating performance and financial condition of the three insurers. Concurrently, a “bbb-” subordinated debt rating has been assigned to existing capital securities issued by Zenith National Insurance Trust I, a subsidiary of Zenith National Insurance Corp. The rating outlook for all assigned ratings is stable.
The ratings reflect Zenith’s disciplined approach to pricing and underwriting which has consistently produced an accident year loss ratio advantage for the group in its primary line, workers’ compensation. To management’s credit, the group significantly reduced premium after open rating began in California in January 1995, causing severe price competition in that state.
Rates in California, where the group writes over 50 percent of its business, started to improve in 2000, alleviating some of the underwriting pressure driven by double-digit claims cost inflation. Given Zenith’s conservative operating philosophy and solid market position, the group is better positioned than most other carriers to benefit from the improving conditions of the California workers’ compensation market.
Partially offsetting these positive rating factors is Zenith’s weakened capitalization, caused by poor operating results in its assumed reinsurance business for the last three years as well as lower-than-historical workers’ compensation earnings reflecting the adverse industry pricing environment.
Zenith’s operating loss in 2001 was largely the result of $38 million of net pre-tax losses incurred in its assumed reinsurance business attributable to the World Trade Center tragedy. This loss followed significant reinsurance losses from the December 1999 European windstorms reflected in 1999 and 2000 operating results.
While Zenith’s assumed reinsurance business has performed poorly in recent years, it has been a very profitable book over the long term. Also, prices and terms, including a terrorism exclusion on all reinsurance policies, have improved considerably over the last year. However, Zenith’s policyholder surplus declined as a result of these reinsurance losses while, at the same time, premium production grew significantly, weakening the group’s overall capitalization.
Zenith National contributed over $47 million to the insurance operations in Sept. 2002 to provide support for the increased premium volume in 2002, alleviating A.M. Best’s concerns regarding the group’s immediate capitalization needs. The rating affirmation with a stable outlook reflects management’s ongoing commitment to appropriately capitalize the insurance subsidiaries commensurate with its rating, as well as A.M. Best’s expectations of improved operating results going forward.
The following debt rating has been assigned to Zenith National Insurance Corporation’s existing debt:
Zenith National Insurance Capital Trust I—”bbb-” on the $65.7 million 8.55 percent Capital Securities, due 2028; The A- (Excellent) financial strength rating of the inter company pool members of Zenith National Insurance Group has been affirmed with a stable outlook: Zenith Insurance Company; Zenith Star Insurance Company; ZNAT Insurance Company.