A.M. Best Downgrades Realm National to C++ (Marginal)

A.M. Best announced that it has downgraded the financial strength rating to C++ (Marginal) from B+ (Very Good) of Realm National Insurance Company, New York, and has assigned it a negative outlook.

“The rating action reflects Realm’s exposure to a high level of reinsurance recoverables and additional deterioration in operating performance and capitalization through 2001,” said the announcement.”The significant reinsurance recoverables affect not only capitalization but also raise concerns about operating cash flow. Additionally, A.M. Best has concerns regarding tightened financial flexibility at Realm’s ultimate parent company, Stirling Cooke Brown Holdings, Ltd., Bermuda.”

Best’s analysis indicated its concerns over the changed business mix which began in 1996.”The rapid growth in program business has resulted in the adverse development of loss reserves, significant reinsurance recoverables and an increase in reinsurance disputes, which negatively affect cash flow,”

Realm’s parent, Sterling Cooke Brown, is involved in a number of legal disputes, notably with Odyssey Re over reinsurance agreements covering workers’ compensation, including the Unicover pool. Trial of those cases began last January in London, but no verdict is expected before June at the earliest.

Best indicated that, “Over the past two years, management has undertaken a number of actions to stabilize and strengthen the overall operations at Realm, which include setting loss reserves at higher levels, implementing stronger agency controls and making additions to the senior management team. Beginning in 2000 and through 2001, Realm made the transition from a program insurer to a direct writer, focusing prospective underwriting efforts on its core mono-line workers’ compensation, commercial property and general liability specialty risks.”

Best noted, however, that “Realm’s operating performance further deteriorated as legal expenses associated with its reinsurance disputes and larger than expected losses associated with a large program that is in run-off hindered improvement efforts.”

Best’s report concluded by expressing its “concerns regarding Realm’s cash flow, reinsurance recoverables that represents multiples of its statutory surplus and ongoing reserve adequacy.” It added that “Further, financial flexibility at Stirling Cooke is now somewhat constricted, which with operational issues and legal disputes, have increased uncertainty regarding its ability to support Realm.”

Topics Reinsurance AM Best