Best Affirms No. Am. Casualty Financial Ratings; Upgrades Debt

May 10, 2011

A.M. Best Co. has upgraded the issuer credit ratings (ICR) to “a+” from “a” of North American Casualty Group (NAC) and its members, California Insurance Company, and Continental Indemnity Company, which operate under a pooling arrangement. Best also affirmed NAC’s financial strength rating of ‘A’ (Excellent).

The outlook for all of the ratings is stable.

The ratings reflect NAC’s “strong capitalization, generally favorable operating performance since its inception and experienced management team,” said Best. The ratings also acknowledge “management’s prudent operating philosophy, adherence to adequate pricing and reserving discipline as well as its strategic business plans and projections that call for near-term earnings and capital accumulation.”

Best indicated that the ratings also consider the “historical performance of business produced by its parent company, Applied Underwriters, Inc. (Applied), a leading provider of bundled workers’ compensation insurance and payroll processing services to small and medium-sized businesses.”

Best said it anticipates that Applied “will continue to support NAC with additional capital contributions as necessary, allowing the group to maintain a level of risk-adjusted capitalization that remains supportive of its ratings.”

The ratings also recognize the additional financial flexibility and support provided by NAC’s publicly traded ultimate parent, Berkshire Hathaway Inc.

As partial offsetting factors Best cited “NAC’s relatively limited operating experience and the group’s significant business concentration risk; operating predominately as a workers’ compensation insurer with limited geographic spread, which exposes its operations to potential regulatory, judicial, legislative and competitive risks.

“Additional offsetting factors include challenging market conditions in the workers’ compensation line of business, legislative/regulatory uncertainty in the California workers’ compensation marketplace and the significant deterioration in the group’s underwriting results in 2009, driven primarily by a number of large losses outside of California.”

Best observed that in an “effort to limit its concentration risk in California, management began diversifying the group’s revenue streams in recent years through a controlled expansion into other states, primarily New Jersey, New York, Illinois and Texas.”

However, Best also noted the “inherent challenges of entering new markets during challenging market conditions,” and said that it would “continue to monitor NAC’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.”

Source: A.M. Best

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