February 26, 2020 by matray

AM Best has downgraded the Financial Strength Rating (FSR) to A- (Excellent) from A (Excellent) and the Long-Term Issuer Credit Ratings (Long-Term ICR) to “a-” from “a” for the members of NORCAL Group (NORCAL). Concurrently, AM Best has maintained the under review status on these Credit Ratings (ratings) and revised the implications to developing from negative. (See below for a detailed listing of the companies.)

The ratings reflect NORCAL’s balance sheet strength, which AM Best categorizes as very strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management.

These rating actions are a follow up to ones taken on Dec. 10, 2019, when the group was placed under review with negative implications after significant reserve strengthening was reported in third-quarter 2019, resulting in deterioration of capitalization and profitability. The rating downgrades reflect the adverse reserve development reported in fourth quarter, the additional net reserve leverage taken on by this charge and the potential for further adverse loss reserve development, which is considered in AM Best’s view of risk-adjusted capitalization. The size and breadth of the charge also raises questions as to risk awareness and the appropriateness of the group’s reserving and claims management practices, as well as loss-cost assumptions when setting pricing.  

The under review status takes into consideration the potential for additional reserve charges as well as the recently announced acquisition of the group by ProAssurance Corporation, one of the leading medical professional liability insurers in the United States. The value of the transaction involves a base consideration to policyholders of $450 million with a $150 million three-year earn-out on prior year reserves, following the demutualization of NORCAL. The transaction is expected to close in late fourth-quarter 2020 or in first-quarter 2021, pending demutualization and regulatory approval.  

The developing implications reflect the potential for NORCAL’s ratings to be lowered in the event the transaction does not close and/or further reserve development is reported. There is also the potential for NORCAL’s ratings to be stabilized or enhanced if the ProAssurance transaction is consummated. However, concerns regarding rising loss costs (i.e., severity) in the medical professional liability segment and its impact on profitability remain.

The FSR was downgraded to A- (Excellent) from A (Excellent) and the Long-Term ICRs downgraded to “a-” from “a”, with the implications of the under review status revised to developing from negative for the following members of NORCAL Group:

· NORCAL Mutual Insurance Company

· NORCAL Specialty Insurance Company

· Medicus Insurance Company

· FD Insurance Company

· Preferred Physicians Medical Risk Retention Group, a Mutual Insurance Company