Oldwick, NJ -(BusinessWire)- A.M. Best Co. has assigned a financial strength rating of A- (Excellent) and an issuer credit rating of “a-” to Chesapeake Employers’ Insurance Company (Chesapeake) (Towson, MD). The outlook assigned to both ratings is stable.
The ratings reflect Chesapeake’s solid risk-adjusted capitalization (despite significant payments to the state of Maryland related to its privatization initiatives) and consistently profitable operating performance, the outlook of which has recently improved. Additionally, Chesapeake holds a leading position in Maryland’s workers’ compensation market, with a 23% share based on net premiums written in 2012. The ratings also acknowledge the company’s disciplined underwriting, commitment to reserve adequacy, knowledge of its markets, effective claims and loss control management, prudent investments and experienced management team. Chesapeake also benefits from its ability to utilize tiered rating, scheduled rating, experience rating and discounting tools to price risks appropriately, and an exemption from federal taxes.
These positive rating factors are partially offset by the company’s above-average loss and loss adjustment expense reserve leverage, albeit having declined significantly since 2002; single-state and monoline geographic concentrations as Maryland’s workers’ compensation state fund, which exposes its operations to potential adverse regulatory, judicial and/or legislative events; and somewhat above-average investment in equities. In addition, the company’s operating performance could be pressured in the near term by continued competitive workers’ compensation market conditions, the potential for less favorable prior-year loss reserve development and a continued decline in net investment income due to the current low interest rate environment. Moreover, movements in Washington D.C. that are focused on tax-exempt organizations could potentially impact the federal tax-exempt status of certain state funds such as Chesapeake. Despite these concerns, the rating outlooks reflect Chesapeake’s significant operating and pricing flexibility, improved near-term operating trends and strong market position.
In April 2012, Maryland Senate Bill 745 was approved by state lawmakers. This bill restructured Injured Workers’ Insurance Fund (IWIF) into a new company, Chesapeake, effective October 1, 2013. The law transferred all IWIF insurance operations to Chesapeake, including all assets, liabilities, insurance policies, etc. Chesapeake is now operating as a non-profit, non-stock, private insurer. The Maryland governor will continue to appoint Chesapeake’s nine-member board. The legislation enacted included provisions for a one-time $50 million transfer of funds from Chesapeake to the state for net financial benefits received from the state since the company’s founding in 1914 (which was charged to Chesapeake’s surplus in December 2012) and other payments totaling an estimated $56 million to fully fund legacy pension and healthcare liabilities. Those payments have or will be charged to Chesapeake’s “other income/expense” ($21.3 million in December 2012; $15.0 million in December 2013; and an estimated $20 million in 2014, sometime after May).
While A.M. Best believes Chesapeake’s ratings and outlooks are well positioned at current levels, they could come under pressure should continued soft market conditions and a lack of underwriting discipline result in the company’s underwriting and overall profitability underperforming its peers; local legislative/regulatory or economic changes adversely affect the company’s operating fundamentals; the company lose its federal tax-exempt status; or its risk-adjusted capitalization fall markedly short of A.M. Best’s expectations.