Downgrade of Calif. Auto Company Results from Reinsurance Broker Error

Effective immediately, AM Best has downgraded Workmen’s Auto Insurance Company from a B++ to a B(u), citing the company’s drop in surplus as the main reason for the downgrade.

The company has filed a lawsuit against Guy Carpenter alleging failure to exercise reasonable care in performance of its duties; failure to effect appropriate documentation; breach of fiduciary duty; and failure to exercise professional reasonable care. The lawsuit seeks $25 million in general and specific damages and an undisclosed amount for punitive damages.

Workmen’s Auto Insurance Company (“Workmen’s” or the “Company”) is a non-standard private passenger automobile specialty insurer domiciled in California with headquarters in Los Angeles. The company is ultimately owned by the Shammas family, long-standing members of the Los Angeles community. Workmen’s is licensed in 23 states with operations in 17 states. The company utilizes 1900 independent agents and in California, contracted brokers. The domiciliary state of California has been the core state since operations began in 1949, accounting for 35% of total production in 2004.

In June and July of 2004 the Workmen’s Board of Directors hired a new Senior Management team. One of the first items reviewed by this team was the significant reinsurance contracts in place. As a result of this review the company was forced to take a significant charge of $13.2 million related to disputed reinsurance recoverables during the 3rd quarter of 2004. A large percentage of the surplus was restored by the Shammas family in the 4th quarter with capital contributions of $7.9 million bringing the total paid in capital to $17.9 million. The Shammas Group of businesses includes a number of new car dealerships and extensive real estate holdings in the Los Angeles area, in addition to the Workmen’s Insurance Group.

The company believes the causes of the dispute result from negligence in the handling of reinsurance placements by the company’s reinsurance broker, Guy Carpenter & Company Inc., a member of the Marsh & McLennan Companies. The company has filed suit against Guy Carpenter and believes this litigation will ultimately be resolved in its favor resulting in a significant recovery.

Per AM Best’s their ratings are their independent opinion and do not provide a warranty of the company’s financial strength or ability to meet our financial obligations. AM Best reviews a company’s business profile, operations, investment strategy, growth, loss development, and capital and then compares it to industry averages.

Overall the review from AM Best was quite positive; however, they did show concern over the adequacy and liquidity of the company’s capital. Workmen’s is financially secure, and the owners are committed to the business plan, the product offerings and the Senior Management team. The company reported both a pre-tax and after-tax profit for 2004.

“Despite the events of 2004, my family is confident that Workmen’s AM Best rating will be elevated to the appropriate ‘secure’ status,” said Carole Shammas, co-chairperson of the Board.