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Dallas National challenges ratings downgrade

A.M. Best Co. recently downgraded the financial strength rating of Dallas National Insurance Company (DNIC), Dallas, Texas, and the insurer has challenged that move. DNIC President and Chief Executive Officer Chris Nehls took issue with Best’s decision to downgrade his company to “B++” (Good) from “A-” (Excellent) and made his views known in a statement released by DNIC.

Disagreeing with Best’s assessment that the company’s rapid growth in premium volume and associated liabilities significantly weakened its risk adjusted capital, DNIC countered with an appeal to Best to reverse the downgrade. That appeal was denied.

In its announcement, Best said DNIC’s premium growth outstripped Best’s expectations and caused “uncertainty” as to the company’s profitability.

However, DNIC’s Nehls said the company has “demonstrated our ability to grow our business profitably. Dallas National Insurance Company has outperformed the insurance industry in terms of profitability since the business was acquired in 2003.”

On the positive side, Best acknowledged DNIC’s historical profitability in its core general liability book of business, and recognized that it outperforms the industry. However, Best said it has “concerns” that aggressive growth during what it considers “softening market conditions” would adversely affect profitability. Best noted significant growth in 2006 of DNIC’s “core general liability and high deductible workers’ compensation books of business, in conjunction with growth in new lines of business and states,” which weakened DNIC’s risk-adjusted capitalization. Still, Best concluded that DNIC’s risk adjust capital continued to be “supportive of its ratings.”

Nehls countered Best’s soft market argument by noting that the company “has not reduced rates for our general liability product since 2003 — and the rate change in 2003 was an increase. The only reason we haven’t increased rates more is that regulators would be reluctant to approve a rate increase when our loss ratios have remained around 30 percent.”

Nehls said DNIC’s owner, Dave Wood, is committed to “maintaining the capital necessary to keep Dallas National Insurance Company strong.” He said the company’s policyholder surplus had been strengthened to more than $65 million and that the company anticipates capital and surplus will grow to more than $100 million by the end of the year.

DNIC maintains that since the company’s “capital adequacy ratio as measured by AM Best” exceeds 160, by “AM Best’s own published standards, this places our capital adequacy ratio in the ‘A’ category.

“We are forced to conclude that objectively we have maintained the financial numbers supportive of our ‘A-‘ or better rating,” he said.

“Defiantly, our management team will commit to the Board of Directors that we will continue to do what has made this company strong,” Nehls continued. “We will continue to improve underwriting and claims processes. We will continue to maintain strong regulatory compliance. We will continue to partner with reinsurers who are rated ‘A’ or better by A.M. Best. And we will continue to grow the company profitably.”