A.M. Best has downgraded the financial strength rating to B (Fair) from B+ (Good) and the issuer credit rating to "bb" from "bbb-" for Preferred Contractors Insurance Company Risk Retention Group (PCIC).
The outlook for both ratings has been revised to negative from stable.
The ratings reflects PCIC's deteriorating risk-adjusted capitalisation and uncertainty surrounding its volatile operating performance given the multiple and significant changes in reinsurance arrangements in recent years.
These concerns are amplified by the sizable adverse loss-reserve development recorded during 2013 on prior accident years, ample growth since 2011 and relatively weak management controls.
Partially offsetting these negative factors are PCIC's positive underwriting results recorded since 2011.
Furthermore, an adverse development cover was put into place with London market reinsurers on 31 December 2013, to protect against additional loss development.
A quota share reinsurance treaty, effective 1 January 2014, was also placed with London market reinsurers to reduce PCIC's net underwriting leverage.
A.M. Best has stated that it will closely monitor quarterly performance of PCIC.
Any material negative deviation from the business plan in terms of management, operating profitability and risk profile, or a decline in its risk-adjusted capitalisation could result in negative rating pressure.
Factors that could lead to positive rating movement are evidence of sustained favourable operating performance and credit metrics that improve risk-adjusted capitalisation over the long term.
