NAICO Downgraded

A.M. Best Co. downgraded the financial strength rating to “B+” (very good) from “B++” (very good) of National American Insurance Co. of Chandler, Okla., and revised its outlook to negative from stable. Concurrently, Best assigned an issuer credit rating of “bb-” to NAICO’s parent, Chandler U.S.A. Inc., and a debt rating of “bb-” to Chandler’s 8.75 percent senior unsecured debentures due 2014. The ICR and senior debt ratings have been assigned a negative outlook.

These rating actions reflect the weakening in NAICO’s risk-adjusted capitalization due to a net loss and decline in surplus in 2004 driven by adverse loss reserve development on prior accident years. More specifically, the company reported approximately $25 million in prior accident year adverse reserve development in 2004. Most of this development stems from accident years 1997 through 2001, a period of growth and expansion into Texas. The aforementioned reserve development follows approximately $40 million in cumulative prior accident year adverse reserve development reported from 2000 through 2003.

Somewhat offsetting these negative factors are corrective actions in recent years, including significant rate increases, reducing exposures, improving risk selection and tightening policy terms and conditions. As a result of these actions, recent accident years appear to be developing more favorably. However, given the uncertainty surrounding the development of accident years 1997 through 2001, as well as the time it will take to determine the true profitability of more recent accident years, the negative outlook is appropriate. Although financial leverage of 39 percent at year-end 2004 at Chandler remains within Best’s expectations given its rating, its fixed coverage ratio has been volatile and falls below that expected for its rating.