A.M. Best Co. has upgraded the financial strength rating to A- (Excellent) from B++ (Good) and the issuer credit rating to “a-” from “bbb+” of Pacific Compensation Insurance Company (Pacific Comp) (headquartered in Agoura Hills, CA). The outlook has been revised to stable from positive.
The rating actions reflect the additional explicit support provided to Pacific Comp by its affiliate captive reinsurer, AIHL Re, LLC (AIHL Re), and more importantly, the additional financial support provided by its parent, Alleghany Corporation (Alleghany) [NYSE: Y]. Through intercompany reinsurance agreements effective January 1, 2013, AIHL Re provides Pacific Comp with a multi-year adverse development cover (ADC) and aggregate stop loss (ASL). Alleghany stands behind these covers via a $100 million Keep Well Agreement to AIHL Re, which guarantees the recoverable balances owed to Pacific Comp from AIHL Re up to $100 million. These funds also are intended to cover the statutory collateral requirements at Pacific Comp, if and when necessary.
A.M. Best also recognizes the explicit support provided to Pacific Comp by Alleghany via $105 million in capital contributions since 2007 and the allocation of resources and corporate governance.
Offsetting rating factors include Pacific Comp’s poor historical underwriting performance, narrow product focus and geographic concentration as it plans to organically grow in a competitive California workers’ compensation market. Despite these inherent challenges, the outlook takes into consideration changes in Pacific Comp’s leadership, management’s business plans, Alleghany’s profit tolerances, as well as the strict governance and explicit financial support provided by Alleghany.Potential upward rating movement is unlikely in the near term as Pacific Comp continues to write new business as market conditions improve. Downward rating movement could result from a decline in Pacific Comp’s risk-adjusted capitalization to levels not supportive of its ratings, continued poor underwriting results and any material changes in the support provided by AIHL Re and/or Alleghany.