Ratings Recap: American Community, Washington Fire, DHC Group

A.M. Best Co. has downgraded the financial strength rating to ‘D’ (Poor) from C+ (Marginal) and issuer credit rating to “c” from “b-” of Michigan-based American Community Mutual Insurance Company. The outlook for both ratings is negative. The downgrades reflect “American Community’s sizeable net operating loss and corresponding significant deterioration in surplus incurred in fourth quarter 2009 due primarily to unfavorable underwriting results, the write-off of non-admitted assets, establishment of a premium deficiency reserve and reserve strengthening,” Best explained. “At year-end 2009, the combined value of American Community’s two outstanding surplus notes exceeded total surplus, and its risk-adjusted surplus level was below company action level. Historically, American Community has focused on marketing major medical products to individuals and employer groups in a limited number of states. The company currently is rationalizing its business plan by eliminating unprofitable segments in certain states and reducing administrative expenses.” Best added that it “believes its future operating results will continue to be unprofitable for at least the near term.”

A.M. Best Co. has withdrawn the financial strength rating (FSR) of ‘B++’ (Good) and issuer credit rating (ICR) of “bbb” of Washington Fire & Storm Insurance Company and assigned an NR-5 (Not Formally Followed) to the FSR and an “nr” to the ICR. Effective January 1, 2010, Washington Fire was merged with and into its affiliate, Tuscarora Wayne Insurance Company (TWIC). TWIC’s FSR of ‘A+’ (Superior) and ICR of “aa-” are unchanged by this transaction. The outlook for both ratings is stable. Both companies are domiciled in Wyalusing, PA.

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘B-‘ (Fair) and issuer credit ratings (ICR) of “bb-” of DHC Group, which is based in Long Beach, Calif., and its members. The outlook for all of the ratings is stable. At the same time Best withdrew FSR of ‘B-‘ (Fair) and ICR of “bb-” of Danielson Insurance Company (DICO) and assigned an NR-5 (Not Formally Followed) to the FSR and an “nr” to the ICR. Effective March 5, 2010, DICO was merged with and into its parent, National American Insurance Company of California (NAICC). Best explained that the “ultimate financial control of DHC and its members rests with Covanta Holding Corporation (Covanta), a publicly held company that is primarily involved in the waste disposal and energy services industry. The ratings reflect DHC’s unfavorable operating performance and decline in policyholder surplus. Offsetting these rating factors are management’s initiatives to improve operating income through a focus on its surety and specialty automobile books of business.” Best also indicated that significant underwriting losses over several years “were the result of inadequate rates and significant adverse loss reserve development from its run-off lines of business, rising loss costs and an above average underwriting expense ratio. As a result of substantial operating losses, surplus has deteriorated significantly from historical levels. To address the group’s adverse loss reserve deficiencies and loss of capital, Covanta has contributed $7.0 million to DHC since 2008. This continued financial support is contemplated in DHC’s current ratings.” The rating agency added that as part of the strategies to reverse DHC’s negative trends, “management continues to de-emphasize its historically unprofitable lines of business. Additional efforts include further development of the group’s surety division, a new livery program and investments in technology. The FSR of ‘B-‘ (Fair) and ICRs of “bb-” have been affirmed for DHC Group and its following pooled members: National American Insurance Company of California; Danielson National Insurance Company.