A.M. Best Affirms North American Casualty Group Companies’ Ratings

June 10, 2020

Ratings issuer A.M. Best said it has removed from under review with negative implications and affirmed the Financial Strength Rating of A (Excellent) and Long-Term Issuer Credit Ratings of “a” of five companies collectively referred to as North American Casualty Group (NAC).

The companies with the affirmed ratings are: California Insurance Co. (CIC) (Foster City, Calif.), Continental Indemnity Co., Illinois Insurance Co., Texas Insurance Co. (Dallas) and Pennsylvania Insurance Co. All companies are domiciled in Santa Fe, New Mexico.

A.M. Best assigned a negative outlook to the credit ratings.

The ratings reflect NAC’s balance sheet strength, which A.M. Best categorizes as very strong, as well as its “strong operating performance, limited business profile and appropriate enterprise risk management.”

Applied Underwriters Sold to Founder in $920M Deal

Applied Underwriters Inc. and its subsidiary North American Casualty Co. has been acquired by Applied Underwriters founder Steve Menzies.

California Balks at Applied Underwriters Sale, Questions Subsidiary’s Move to New Mexico

The California Department of Insurance has denied approval of the sale of California Insurance Co., a subsidiary of Applied Underwriters that has been under scrutiny over campaign contributions.

Applied Underwriters Responds to California Department of Insurance Effort to Halt Sale

Applied says that after six months it gave up waiting for California to act on its request for approval of its sale and instead took up another state, New Mexico, on its offer to expedite the transaction by moving its California subsidiary, California Insurance Co., to that state.

New Mexico Explains Role in Enabling Applied Underwriters Sale

New Mexico’s insurance regulator said it facilitated the sale of Applied Underwriters by approving the creation of a new insurer and a merger of it with an existing Applied Underwriter California subsidiary in order to save jobs and protect policyholders.

A California judge on Nov. 4, 2019, appointed the California Department of Insurance as conservator of CIC after the state regulator legally challenged the company’s merger and relocation to New Mexico. A.M. Best said it remains in “close dialogue with company management, as they work to resolve these outstanding regulatory issues.”

Currently, there is no clear date for a resolution of this matter; however, the company does continue to operate unencumbered by this action, according to A.M. Best.

A.M. Best said it will continue to monitor NAC’s rating fundamentals and the “potential impact stemming from the ongoing controversy” between the company and the California regulator.

There is a background to the controversy (see sidebar). California Insurance Co. was purchased in 2003 by Applied Underwriters with California’s approval. In 2006, Berkshire Hathaway bought an 81% interest in Applied, which was founded in California in 1994. Owner and founder Steven Menzies retained the other shares. Last year, Menzies and The Quasha Group agreed to buy Applied back from Berkshire Hathaway. California insurance regulators complained that the $920 million sale of Berkshire Hathaway’s Applied Underwriters workers’ compensation unit to Menzies was apparently closed without their approval.

However, Applied Underwriters said that it got tired of waiting for California’s approval and changed the domicile of the California Insurance Co. to New Mexico through a merger with a newly-created company there and New Mexico’s regulator signed off on the deal. California maintains the decision to merge the entity with a New Mexico-based entity also required department approval.

Rating Analysis

NAC’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), is assessed at the strongest level, and AM Best expects it to remain at a similar level in prospective years. Balance sheet strength also benefits from the company’s strong liquidity profile, conservative investment strategy, and disciplined reserving.

The ratings agency said NAC has a track record of “strong operating earnings, underpinned by its robust underwriting performance” and demonstrated by a five-year average return on equity ratio of 13.1% and a combined ratio averaging 75% (2015-2019).

However, NAC’s operating performance has deteriorated over the past couple of years as the workers’ compensation industry remains under pressure, and the company’s EquityComp product is now a smaller contributor to underwriting results.

A.M. Best said it expects the company to maintain returns at historical levels to warrant the strong assessment for operating performance.

NAC’s business profile remains concentrated in the workers’ compensation line of business, which accounted for 80.7% of NAC’s gross written premiums (GWP) in 2019. Although management has achieved measured growth in other states, California remains the company’s primary market (i.e., 37% of 2019 GWP).

A.M. Best said it views NAC’s risk management capabilities as aligned with its risk profile; however, it will continue to monitor the company’s capabilities in maintaining regulatory compliance. A.M. Best said NAC’s enterprise risk management assessment could be revised downward if current regulatory issues are not resolved with a favorable outcome.

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