29 July 2014USA analysis

A.M. Best downgrades 'inadequate' PCIC

A.M. Best has downgraded the financial strength rating of Preferred Contractors Insurance Company Risk Retention Group (PCIC) from B+ (Good) to B (Fair) and the issuer credit rating from "bbb-" to "bb".

The outlook for both ratings has been revised to negative from stable.

A.M. Best says the ratings reflect PCIC's deteriorating risk-adjusted capitalization and uncertainty surrounding its volatile operating performance given the multiple and significant changes in its reinsurance arrangements in recent years. These concerns are amplified by the sizable adverse loss-reserve development recorded during 2013 on prior accident years, sizable growth since 2011, and relatively weak management controls.

The negative outlook on the ratings reflects A.M. Best's concerns regarding the adequacy of the company's loss reserves, relatively weak capitalization and uncertainty over future underwriting and operating results.

Partially offsetting these negative factors are PCIC's positive underwriting results recorded since 2011. Furthermore, an adverse development cover was put into place with London market reinsurers on Dec 31st, 2013, to protect against additional loss development.

A quota share reinsurance treaty, effective Jan 1st, 2014, was also placed with London market reinsurers to reduce PCIC's net underwriting leverage.

A.M. Best will closely monitor quarterly performance of PCIC. Any material negative deviation from the business plan in terms of management, operating profitability and risk profile, or a decline in its risk-adjusted capitalization could result in negative rating pressure.

Factors that could lead to positive rating movement are evidence of sustained favourable operating performance and credit metrics that improve risk-adjusted capitalization over the long term.