Following a downgrade of its financial strength ratings (FSR) to “B++” from “A-” by A.M. Best Co. on Friday, Meadowbrook Insurance Group announced that it will seek to make arrangements with an A-rated insurance company to issue some policies.

(Update: On Monday, Meadowbrook announced an arrangement with State National Insurance Company. See related article, Meadowbrook Announces Agreement With State National For ‘A’ Rated Paper.”)

In addition to seeking an arrangement relating to programs and lines of business for which a higher rating is required, Meadowbrook said its board of directors is undertaking a review of strategic alternatives and has engaged Willis Capital Markets & Advisory in connection with its evaluation.

In December last year, Meadowbrook announced that it entered into a quota-share reinsurance arrangement with Swiss Re, ceding roughly $200 million of premiums on selected business. Effective Dec. 31, Meadowbrook transferred 50 percent of its unearned premium on the selected business to Swiss Re, and it also started ceding 25 percent of direct written premium on the selected books on Jan. 1, 2013.

Best explained its downgrades of the FSR and of issuer credit ratings (to “bbb+” from “a-” for Meadowbrook’s subsidiaries and to “bb+” from “bbb-” for Meadowbrook Insurance Group, Inc.), saying they were prompted by weaker than expected second-quarter results.

Meadowbrook reported a net operating loss of $4.4 million for the quarter, attributable in part of $21.4 million of prior year adverse loss reserve development and $8.2 million of pre-tax losses (on prior years) the result of adverse reinsurance arbitration.

In a statement released on Friday, Robert S. Cubbin, Meadowbrook President and Chief Executive Officer, commented: “We were very disappointed by today’s decision by A.M. Best…We have been demonstrating progress towards our goal of a return to stable and profitable underwriting results. As we discussed in our recent earnings release and conference call, our prior year loss reserves on both continuing and discontinuing business on the majority of our reserve categories have remained fairly stable on a year-to-date basis, with one exception in a discontinued territory within the California workers’ compensation business. ”

Cubbin added that the group has been targeting—and achieving—overall rate increases that have been in excess of the loss ratio trends, which have improved its underwriting results for the most recent accident years.

In addition to the $19.8 million of prior-year California workers comp development from the discontinued territory and the unfavorable arbitration over ceded losses, Best highlighted above-average storm losses of $12.9 million in the quarter.

The rating actions follow the negative outlook that was assigned to the holding company and its subsidiaries at the time A.M. Best affirmed its ratings in April along with the likelihood of potential negative rating actions if further adverse reserve development occurred.

With Friday’s action, Best is revising the FSR outlook to stable from negative, while maintain a negative outlook on the ICRs.

Best said positive rating actions are unlikely in the near term. “Key factors that could result in further negative rating actions include additional material adverse development in its reserves, prolonged unprofitable underwriting and operating results, a significant or sustained decline in its risk-adjusted capitalization or deterioration in its financial strength,” Best added.

The FSR of B++ (Good) and the ICRs of “bbb+” are applicable to the following subsidiaries of Meadowbrook Insurance Group, Inc.:

• Star Insurance Company
• Century Surety Company
• Savers Property and Casualty Insurance Company
• ProCentury Insurance Company
• Williamsburg National Insurance Company
• Ameritrust Insurance Corporation

Sources: A.M. Best; Meadowbrook Insurance Group