OLDWICK, N.J.--(BUSINESS WIRE)-- A.M. Best Co. has affirmed the financial strength rating (FSR) of B (Fair) and downgraded the issuer credit rating (ICR) to “bb” from “bb+” of Ullico Casualty Company (Ullico Casualty). Both ratings have been removed from under review with negative implications and assigned a negative outlook.

Concurrently, A.M. Best has affirmed the FSR of B++ (Good) and the ICR of “bbb” of The Union Labor Life Insurance Company (Union Labor Life). The outlook for these ratings is stable. Both companies are headquartered in the District of Columbia, and are owned by Ullico, Inc.

The ratings of Ullico Casualty take into consideration the subsequent discussions A.M. Best has had with management and the new information shared since its ratings were placed under review in February of 2012. While the ratings of Ullico Casualty continue to reflect the historical and future profits to be garnered from its core fiduciary and union liability business, these ratings also take into consideration the actions taken by management, the potential for further remedial actions and the time it will take for these actions to be accretive to earnings and capital formation.

On February 7, 2012, the ratings of Ullico Casualty were downgraded and placed under review due to the sizable net underwriting loss to be reported in 2011, the challenges facing the company including the departure of several of its key executives, the potential loss of its fronting partner, worst than expected loss experience of its non-core program business and substantial adverse reserve development stemming from some of its program partners, as well as the discontinued surety business. Since then, Ullico Inc.’s management has been proactive in installing new leadership, discontinuing its poorly performing programs while taking on further reserve strengthening in the fourth quarter of 2011. During this critical period, management also was successful in re-establishing a relationship with its former fronting partner, State National Insurance Company, Inc. (Fort Worth, TX) and maintaining Ullico Casualty’s excellent retention ratios on its core fiduciary and union liability business.

While management expects these actions will yield positive results, the negative rating outlook primarily reflects the continued uncertainty and near-term volatility around these discontinued programs, the potential for further loss reserve development and the time it will take to determine whether or not actions taken by management prove to be sufficient. Equally important is Ullico Casualty’s weakened capital position since its substantial net operating loss reported in 2011.

Downward rating pressure is likely to result from additional adverse loss reserve development and further weakening in Ullico Casualty’s capital position.

The ratings of Union Labor Life acknowledge its adequate risk-adjusted capitalization despite a declining trend in its absolute capital and surplus in recent years. This decline is primarily due to stockholder dividends, a significant legal settlement in 2007 and, more recently, to an investment impairment of one of its separate account funds. However, the company’s capital and surplus has increased organically in the early part of 2012. In addition, operating results remained positive in 2011 despite declining fee income from its separate account businesses and an increase in claims in its medical stop-loss insurance business. A.M. Best notes that Union Labor Life’s medical stop-loss insurance premiums have been the primary driver of its new insurance premiums in recent periods. While Union Labor Life has generally experienced favorable loss ratios and good persistency, A.M. Best notes that medical stop-loss has historically been cyclical in nature and remains susceptible to changes in government regulation.

Potential factors that may result in negative rating actions include a material decline in Union Labor Life’s risk-adjusted capital and/or a material deterioration in claims experience within the stop-loss line of business resulting in net operating losses. In addition, a downgrading of the ratings of Ullico Casualty may put negative rating pressure on the ratings of Union Labor Life.

The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

Founded in 1899, A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2012 by A.M. Best Company, Inc.ALL RIGHTS RESERVED.

A.M. Best Company, Inc.
Richelle Bryan—P/C
Financial Analyst
(908) 439-2200, ext. 5344
richelle.bryan@ambest.com
or
Michael Adams—L/H
Senior Financial Analyst
(908) 439-2200, ext. 5133
michael.adams@ambest.com
or
Rachelle Morrow
Senior Manager, Public Relations
(908) 439-2200, ext. 5378
rachelle.morrow@ambest.com
or
Jim Peavy
Assistant Vice President, Public Relations
(908) 439-2200, ext. 5644
james.peavy@ambest.com

Source: A.M. Best Company, Inc.