A.M. Best Co. has affirmed the financial strength rating of A (Excellent) and issuer credit rating of “a+” of California Insurance Company (San Francisco, CA), Continental Indemnity Company (Cedar Rapids, IA) and Laurier Indemnity Company (Cedar Rapids, IA), collectively referred to as North American Casualty Group (NAC). The outlook for all ratings is stable.
The ratings reflect NAC’s excellent risk-adjusted capitalization, favorable operating performance since its inception and experienced management team. The ratings also acknowledge management's prudent operating philosophy, adherence to adequate pricing and reserving discipline, and strategic business plans and projections that call for near-term earnings and capital accumulation. 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. A.M. Best anticipates that Applied will continue to support NAC, allowing the group to maintain a level of risk-adjusted capitalization that remains supportive of its ratings. Lastly, the ratings also recognize the additional financial flexibility and support provided by NAC’s publicly traded ultimate parent, Berkshire Hathaway Inc. [NYSE: BRK.A and BRK B].
The positive factors are somewhat offset by NAC's relatively limited operating experience and the group's significant business and geographic concentration risk operating predominately as a workers' compensation insurer with limited geographic spread. This concentration exposes operations to a higher level of potential regulatory, judicial, legislative and competitive risks than that of more diversified competitors. Additional offsetting factors include challenging market conditions in the workers' compensation line of business and legislative/regulatory uncertainty in the California workers' compensation marketplace. 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. Considering the inherent challenges of entering new markets during challenging market conditions, A.M. Best will continue to monitor the group'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. Despite these concerns, the outlook reflects the group's strong level of risk-adjusted capitalization, strong operating results since inception and management's ability to adapt quickly to new or changing conditions.
While the ratings for NAC are stable, future positive rating actions may result from the group's continued strong underwriting and operating performance. However, negative rating actions could result if operating performance falls markedly short of A.M. Best's expectations, if there is a considerable deterioration in risk-adjusted capitalization as measured by Best's Capital Adequacy Ratio, or if A.M. Best determines that the group's strategic importance to its parent no longer to warrants rating enhancement.
The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Key criteria utilized include: “Risk Management and the Rating Process for Insurance Companies”; “Catastrophe Analysis in A.M. Best’s Ratings”; “The Treatment of Terrorism Risk in the Rating Evaluation”; “Understanding BCAR for Property/Casualty Insurers”; and “Rating Members of Insurance Groups.” Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
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