A.M. Best Downgrades Ratings of Nevada General Insurance Company

A.M. Best Co. has downgraded the financial strength rating to A- (Excellent) from A (Excellent) and the issuer credit rating to "a-" from "a" of Nevada General Insurance Company (NGIC) (Las Vegas, NV).

The outlook for both ratings has been revised to negative from stable. NGIC is a non-standard personal automobile writer in Nevada, New Mexico, California and Arizona and is a wholly-owned subsidiary of Mutual of Enumclaw Insurance Company (Enumclaw, WA).

The rating downgrades reflect NGIC's geographic concentration, limited product offering, elevated but improving expense ratio and recent operating setbacks in 2010 and 2011, and more pointedly in 2013, when the setbacks in NGIC's underwriting performance were caused by negative selection within its major market, the greater Las Vegas area. The delayed recovery in NGIC's results in response to this event uncovered a weakening in the company's market profile. NGIC's response began shortly after a period of surveillance, which had uncovered the trend towards negative selection. While swift, the efficacy of the response was blunted originally by the limited analytical capacity at NGIC, which impaired its ability to obtain complete market insight for the proper placement of its response. While NGIC's strong capitalization and historic track record in its chosen niche market go a long way to temper the adverse effects of this situation in the short term, the overall view of NGIC's market profile remains diminished.

The company's historical favorable operating performance was derived from consistently favorable underwriting results and steady investment income, which also depended on a premium stream 40 percent larger than it currently possesses. While 2012 underwriting results were profitable and represented a marked improvement over 2010 and 2011 results, they fell again in 2013 due to negative selection in their primary market. NGIC's somewhat delayed recovery of its results in response to the recent negative selection evidenced the aforementioned weakened market profile in its largest concentration. Management anticipates that its operating performance will improve prospectively, due to the recent corrective actions that management is taking, supported by sound operating strategies, extensive local market knowledge of the non-standard automobile market that still remains in place, and the recent improvements in systems and reporting structures. NGIC will be challenged to replace its premium base both profitably as well as with greater diversity, allowing for greater premium continuity and stability over the intermediate to long term.

As a non-standard automobile writer with the majority of its writings in Nevada, the company's overall performance is subject to the economic, competitive, regulatory and judicial environments of the Nevada marketplace. In an effort to diversify geographically, NGIC also distributes its non-standard automobile products in New Mexico, California and Arizona. The company's overall performance is impacted by its elevated underwriting expense ratio, driven by higher than average commission costs. The company's current efforts to diversify its distribution channels through independent agents (mostly in states other than Nevada), as well as through direct sales, both online and through call centers, have begun to broaden its demographic reach. In response, the product base (term, limit and payment flexibility) also has been widened to take greater advantage of recent opportunities.

A.M. Best does not expect to further downgrade the ratings of NGIC in the near to midterm. However, such actions would ensue if NGIC were to incur material losses in its capitalization; not have the underwriting stability to return to its core book of business in the near term; be unable to contain its underwriting growth within the budgeted levels of the current set of preventative measures that have been recently put in place; have its relationship to its parent change in a manner that affects the independent operations of the company; or have substantial adverse reserve development relative to its peers, as well as the industry's averages.

More information:

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