Schools Out in Pennsylvania

A.M. Best has downgraded the financial strength rating to B+ from A- and issuer credit rating to “bbb-” from “a-” of School Boards Insurance Company of Pennsylvania. The outlook for both ratings has been revised to stable from negative.

The rating actions reflect several consecutive years of variability in SBIC’s underwriting performance, which has resulted in large net losses in recent years. The deterioration in the company’s underwriting results was primarily driven by losses in its workers’ compensation program, adverse reserve development occurring on earlier accident years, large property losses and its declining premium volume.

A.M. Best notes that SBIC has undertaken numerous strategic initiatives to improve underwriting profitability, including an innovative approach to determining adequate premium levels, implementing a new workers’ compensation injury management (claims) model and restructuring the company’s reinsurance program to minimize exposures. Nonetheless, SBIC may be somewhat challenged to achieve a similar level of profitability as it had in the past due to increasing competition that is driven by the soft market, increasing reinsurance costs, a strict regulatory environment, as well as a litigation environment that lends to uncertainty with regard to claim emergence.

Despite these concerns, the outlook reflects SBIC’s strong capital position, management’s local market knowledge and expectations of improvement in operating performance despite ongoing competitive market conditions. SBIC provides a broad range of property and liability coverages to public schools in Pennsylvania that are eligible members of the Pennsylvania School Boards Association.

While positive rating actions are unlikely for SBIC in the mid term, the potential for downward rating pressure over the near term includes ongoing weak operating earnings due to further deterioration in its underwriting performance, which weakens the company’s overall capitalization.

Conversely, factors that could result in upward rating actions include a significant improvement in SBIC’s operating earnings as well as the resulting return on revenue measures, which can be sustained over a period of time. Accordingly, this would improve the company’s ability to generate additional organic surplus growth while strengthening overall capitalization.