A.M. Best Downgrades Ratings of Pacific Specialty Insurance Group in California

A.M. Best has downgraded the Financial Strength Ratings to A- (Excellent) from A (Excellent) and the Long-Term Issuer Credit Ratings to “a-” from “a” of Pacific Specialty Insurance Co. and Pacific Specialty Property and Casualty Co., collectively referred to as Pacific Specialty Insurance Group.

The outlooks for all Credit Ratings remain stable. Both companies are headquartered in Palo Alto, Calif.

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

“The rating actions reflect the significant decline in Pacific Specialty’s policyholders’ surplus over the past five years, which has led to above average net and gross underwriting leverage relative to industry norms,” A.M. Best stated. “The policyholders’ surplus decline in 2014 was driven by the buyout of one of its owner’s one-third ownership share by the remaining two owners. The surplus decline in 2017 was driven by California wildfire and winter storm losses, the payment of a note due to its holding company, charges associated with a new policy/claims administration system, changes in net deferred tax assets and stockholder dividend payments to its holding company.”

While Pacific Specialty’s five-year average underwriting results have been unfavorable, this is largely reflective of results in 2017 that were “heavily impacted by unprecedented California wildfire activity,” A.M. Best stated.

Pacific Specialty’s profile reflects its concentration in California, which exposes its earnings and surplus to volatility from regulatory and judicial changes, market dislocations and catastrophe events, according to A.M. Best.

As a predominantly California homeowners and stand-alone earthquake policy writer, this is demonstrated by a high gross probable maximum loss from a 1-in-250-year earthquake relative to surplus, but the net PML has been reduced to a moderate level through a comprehensive catastrophe reinsurance program.