Ratings Roundup: Castle Key, Preferred Contractors

July 16, 2009

A.M. Best Co. has downgraded the financial strength rating (FSR) to ‘B-‘ (Fair) from ‘B+’ (Good) and issuer credit ratings (ICR) to “bb-” from “bbb-” of Castle Key Group and its members, formerly known as Allstate Floridian Insurance Group (headquartered in St. Petersburg, Fla.). The outlook for all ratings is negative. “The rating downgrades and negative outlook are based on Castle Key’s continued deterioration in risk-adjusted capitalization,” said Best, particularly as measured by the rating agency’s “catastrophe stress tested basis.” Best added that, as the group is the dedicated Florida property writer for its parent company, Allstate Insurance Company, “Castle Key continues to maintain significant exposure to hurricanes and is susceptible to market dislocations and regulatory changes. The ratings also reflect the group’s continued unprofitable operating performance. Although Castle Key is separately capitalized and is not reinsured by Allstate, the ratings recognize the historical financial and operational support provided by Allstate. Despite the recent re-branding from Allstate Floridian Insurance Group to Castle Key,” best said it expects that parental support regarding the claims paying ability of Castle Key commensurate with the revised ratings will be maintained in the event of frequent and/or severe hurricane activity.” However, Best warned that “to the extent such parental support is not provided, it would be necessary” to re-evaluate the ratings of Castle Key and potentially the current FSR of ‘A+’ (Superior) and ICRs of “aa-” of Allstate and all of the remaining Allstate Insurance Group member companies.”

A.M. Best Co. has assigned a financial strength rating of B+ (Good) and an issuer credit rating of “bbb-” to Montana-based Preferred Contractors Insurance Company Risk Retention Group, LLC (PCIC), both with stable outlooks. “These rating actions reflect PCIC’s adequate capitalization and its quality management team, which has substantial expertise in marketing the type of business PCIC writes,” said Best. “Also inuring to the ratings is incorporation of a favorable business plan, upon which the profitability and liquidity metrics of the ratings are based. Partially offsetting these positive rating factors are the company’s volatile operating results during the first three years of operation, high expense ratio and limited business profile. An additional offsetting factor is execution risk associated with the implementation of PCIC’s business plan. Further rating factors are the company’s fundamental business strategies, which include providing stable insurance coverage coupled with quality service for its members. Reflecting its limited business profile, PCIC as an insurer is exclusively oriented toward one class of insures, who act to concatenate the company’s spread of risk. PCIC maintains a conservative operating strategy by limiting participation in its insurance program to members. Its geographic diversification is adequate since PCIC is registered in 20 states and has registrations pending in other states. The company is writing a consistent book of business and is familiar with the accounts it writes. The insurance program provides general liability coverage to general contractors and subcontractors in the residential and commercial construction industry. The company has consistently posted negative underwriting profits in its three short years of operations. However, the ratings recognize PCIC’s financial projected operating results indicating favorable returns.” Best did say that it has “concerns with PCIC meeting the goals included in its business plan, with the existing competitive pressures as well as economic volatility,” and will “closely monitor the quarterly performance of PCIC, and any material negative deviation from its business plan in terms of management, earnings, capitalization or risk profile could result in negative rating pressure and a possibly downgrading of the ratings.”

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