A.M. Best has downgraded the financial strength rating of Public Service Insurance Co. and its affiliates, Paramount Insurance Co. and Western Select Insurance Co., to “B+” (Good) from “B++” (Good) and the issuer credit ratings to “bbb-” from “bbb.”

The three companies, collectively referred to as Magna Carta Cos., operate through an intercompany pooling reinsurance agreement.

The ratings have been placed under review with negative implications pending receipt of an executed adverse development cover (ADC) reinsurance contract, which will substantially improve the group’s risk-adjusted capital level.

The rating downgrades reflect the significant deterioration in Magna Carta Cos.’ operating performance during the fourth quarter of 2013 due to a $57 million charge to strengthen reserves. Approximately $31.9 million of the group’s reserve strengthening actions were related to its workers compensation business.

To provide protection against further unexpected adverse reserve development, management plans to implement an ADC, which will cover 100 percent of net losses within the ADC coverage limit.

Inclusive of the benefit of the additional reinsurance protection, Magna Carta Cos.’ overall risk-adjusted capitalization adequately supports its current obligations and those anticipated by its near-term business plans.

But A.M. Best is concerned about the lack of clarity regarding Magna Carta Cos.’ risk appetite and business strategy, which has contributed to below-average underwriting and operating results in recent years. A.M. Best expects management will focus on these critical issues to return the group to profitability in the near term.

In the event that the ADC is completed as expected, the outlook on the ratings will likely remain negative until the group’s underwriting and operating performance stabilizes and there is demonstrated improvement in risk controls.

Source: A.M. Best