Standard & Poor’s Ratings Services announced that it has lowered its counterparty credit and financial strength ratings on American Steamship Owners Mutual P&I Assn. Inc. (American Club) to “B+” from “BB+” and placed the ratings on CreditWatch with negative implications.
“The downgrade reflects the company’s significant deterioration in operating performance resulting in significant capital losses reported in 2005,” explained S&P credit analyst Kevin Maher. S&P noted: “An increase in losses incurred of $38.8 million (from prior policy years including normal incurred but not reported development) reported in 2005 resulted in a loss in policyholders’ surplus of $29.6 million.”
The rating agency also warned that “American Club’s total adjusted capital of $8.4 million is well below the authorized control level risk-based capital (RBC) of $27.9 million producing an NAIC RBC of 30 percent.” S&P did acknowledge that “American Club plans to make an unscheduled supplementary call to members later in 2006, which could ultimately improve the NAIC RBC ratio to more than 80 percent absent further additional loss development.”
The bulletin indicated, however, that “American Club has recently been over reliant on this mechanism and there could be strain from membership collection from members and timely payment as the company reviews its membership ranks expecting to eliminate high loss cost members.”
S&P said it “believes management has not taken appropriate measures in the marketplace in the past to ensure adequate pricing and reserving and loss mitigation at the time members renew. American Club plans to develop a capital building initiative and possibly strengthen reserves over the 2006 calendar year for prior accident years.”
Maher added that the “ratings on American Club were placed on CreditWatch negative due to the weak capital position, uncertainties of regulatory actions, and the uncertainties about timing and collectibility of the supplemental call from members.” S&P said the “CreditWatch will be resolved pending a meeting with management to discuss its capital improvement, membership review plans, and relationship with the other members of the International Group of Protection and Indemnity Clubs.
“The rating could be lowered due to lack of capital improvement to at least double surplus in dollar amount by June 2006, evidence of loss of membership, resistance by members to pay the supplemental call, or further loss development for the 2003 accident year.”
On the other hand S&P said it “could affirm the rating with a stable outlook upon reported improved capitalization,” but it “expects American Club to demonstrate a clear quick capital improvement plan and provide evidence that there is satisfaction by regulators with the plan. Although statutory financials show the Club’s risk-based capitalization to be significantly below authorized control levels, Standard & Poor’s believes year-end 2005 GAAP capitalization will be somewhat higher than statutory surplus because GAAP accounting allows the full amount of assessments to be booked in 2005–unlike statutory accounting.”
S&P concluded that the “Club is expected to substantially improve its statutory capitalization by mid-year 2006, as revenue from the supplemental call becomes recognized in statutory revenue and as improved operating performance from higher rates helps to build retained earnings.”
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