A.M. Best Co. has placed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Penna.-based First Sealord Surety, Inc. (FSSI) under review with negative implications.
The rating action reflects the “significant operating loss as of September 30, 2011, driven by reserve strengthening on prior accident years, which negatively impacted FSSI’s capitalization,” Best explained. “As a result, the company implemented a significant quota share reinsurance agreement with a third party to provide immediate capital relief.
“In addition, management is considering longer-term strategic alternatives to further strengthen the company’s balance sheet. Management’s decision to strengthen reserves followed an extensive review of all open claim files with adjustments made to reflect ongoing economic weakness in the construction trades, which impacted the company’s contractor base.”
Best also noted that, “along with the reserve increase, FSSI significantly raised its estimate for salvage and subrogation as a partial offset to the reserving action. To the extent management may be unable to realize (collect) on the salvage and subrogation, loss reserves could deteriorate further with a corresponding decline in surplus.”
However, Best also noted some positive offsetting factors, notably the 100 percent quota share reinsurance agreement put into place, “wherein all existing unearned premium reserves and all new and renewal business will be 100 percent reinsured with a third party reinsurer, effective November 28, 2011.”
Additional positive factors include “FSSI management’s experience in construction, underwriting and engineering, as well as its use of collateral in combination with both personal and corporate indemnification to mitigate potential losses. Furthermore, management’s past estimates of salvage and subrogation appear to have been reasonably accurate.”
Best said the ratings would remain under review pending its discussions with FSSI’s management regarding potential measures to strengthen the company’s financial condition.”
Best also explained that the negative implications reflect its “concerns regarding the potential deterioration in FSSI’s financial condition should management fail to execute on these measures. If the capital weakness exhibited in FSSI’s third quarter filings is not corrected in the near term, there would likely be significant and immediate downward pressure on its ratings.”
Source: A.M. Best
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