Flash Report: A M Best Says Outlook Negative For Applied Underwriters

By: Brad Cain

Analysts at the A.M. Best rating agency issued a negative outlook warning for California Insurance Company, Continental Indemnity and the other companies in Applied Underwriters’ North American Casualty Group. The analysts are concerned by the group’s ongoing battles with state regulators and other factors.

Noting the California Department of Insurance’s action invalidating Applied Underwriters’ EquityComp program and the continuing ensuing legal battle, A.M. Best says it is “concerned as to the potential negative implications the regulatory action may have on the group’s market profile and future operating performance.” Best warns that reputational damage could ultimately impact the group’s business profile and its rating. Negative rating actions could also result “if operating performance falls markedly short of expectations,” it says, “or if there is a considerable deterioration in the group’s risk-adjusted capitalization.”

A.M. Best issued the negative outlook but retained the group’s A+ rating in large part because of its linkage to the Berkshire Hathaway (NYSE: BRK.A) empire. It says the rating could suffer, however, if the group loses its “strategic importance” to the parent company or it stumbles in the marketplace.

The rating agency is also concerned about Applied Underwriters’ concentration in the workers’ comp market and in the California workers’ comp market in particular. It notes that Applied Underwriters’ is working to diversify its exposure to other states including New York, New Jersey, and Illinois, but says the results are still uncertain. “Considering the inherent obstacles in 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,” the agency wrote.

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