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A.M. Best Downgrades Rating of California State Fund
OLDWICK, N.J. April 30 (BestWire) - A.M. Best Co. has downgraded the financial strength rating to B- (Fair) from B+ (Very Good) of State Compensation Insurance Fund of California, San Francisco.
The rating action reflects A.M. Best's concern with the Fund's substantial growth in the California workers' compensation market and the resulting impact on its overall financial strength.
Historically, the Fund held a more favorable underwriting leverage position and substantial equity in its loss reserves, which provided a greater margin for error in pricing and reserving. This margin was verified in past rating reviews, which stress tested capitalization against the possibility of sizable reserve deficiencies.
However, at the time of the last review, a negative outlook was assigned to the rating due to A.M. Best's concern over the potential for future premium growth and its effect on capitalization. With the substantial premium growth over the past year and the increased operating risks that accompany it, A.M. Best believes the margin for error no longer protects the Fund's balance sheet. After four straight years of operating losses and the recent high premium growth, underwriting leverage has weakened and no longer supports the Fund's risk based on Best's Capital Adequacy Ratio (BCAR).
The Fund's underwriting losses have increased each year since open rating began, and loss reserves for each accident year since 1995 have developed adversely through year-end 2001. Moreover, A.M. Best continues to have concerns over premium adequacy. Given the growth in business and the high loss-cost trends in California, there is also concern with the Fund's ability to properly service and account for all the new business, as well as accurately reserve for potential losses.
Additionally, the Fund's large market-share concentration increases
exposure to both man-made and natural catastrophe losses. Over the next
few years, A.M. Best believes adverse loss-reserve development on recent
accident years may continue to dampen the Fund's operating performance,
further weakening capitalization in the face of additional premium growth.
Accordingly, the rating outlook remains negative.
last updated: May 14, 2002
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