Oldwick, NJ -(BusinessWire)- A.M. Best has assigned a financial strength rating of A- (Excellent) and an issuer credit rating of “a-” to Pinnacol Assurance (Pinnacol) (Denver, CO). The outlook assigned to both ratings is stable.
The ratings reflect Pinnacol’s excellent risk-adjusted capitalization, substantially improved underwriting and overall operating performance, and leading position in the Colorado workers’ compensation market, with a 60% share based on direct premiums written in 2014. The ratings also acknowledge the company’s more disciplined approach to underwriting; use of predictive analytics and traditional underwriting techniques, in combination with multi-tiered pricing, to more accurately price risks; commitment to reserve adequacy; effective claims management and loss control services; and knowledge of the Colorado workers’ compensation market. In addition, as a workers’ compensation state fund operating as a private, not-for-profit, mutual company and serving as the carrier of last resort in Colorado, Pinnacol is exempt from paying federal and state income taxes.
These positive rating factors are somewhat offset by Pinnacol’s above-average investment allocation to common stocks and non-investment grade bonds and that it operates as a single-state, monoline insurer with limited geographic spread, which exposes its financial results to local legislative, regulatory and economic changes. Moreover, in the near term, the company’s substantially improved operating performance appears likely to be pressured by increasing competitive conditions in the Colorado workers’ compensation markets and more modest improvement in net investment income as a result of the current low interest rate environment and expenses associated with a recently issued surplus note. In addition, 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 Pinnacol. Despite these concerns, the outlook reflects Pinnacol’s excellent risk-adjusted capitalization and commitment to maintain its capitalization level, along with significant operating improvement.
Over the past several years, Pinnacol’s management and board have initiated changes in operating philosophy that now include using dividends as a mechanism to return surplus to policyholders when excess surplus exists, rather than charging lower premium rates. In the past, rates and policyholder dividends were used to adjust surplus levels. Now, premium rates are set to achieve combined ratios in a targeted range while policyholder dividends are used to adjust surplus levels. Moreover, targeted surplus levels are being set to result in excellent levels of risk-adjusted capitalization throughout market cycles. While management acknowledges there may be years where the company ends up outside of its targeted ranges for underwriting profitability and surplus, they intend to make the corrections necessary to return within these targeted ranges as quickly as possible.
While A.M. Best believes the ratings and outlook for Pinnacol are appropriately positioned at current levels, negative rating actions could occur should 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 loses its federal tax-exempt status; or risk-adjusted capitalization fall markedly short of A.M. Best’s expectations.