[June 13, 2014]

A.M. Best Removes Ratings of Public Service Insurance Company and Its Pooling Affiliates From Under Review

A.M. Best has removed from under review with negative implications and affirmed the financial strength rating of B+ (Good) and the issuer credit ratings of "bbb-" of Public Service Insurance Company (Chicago, IL) and its affiliates, Paramount Insurance Company (New York, NY) and Western Select Insurance Company (Los Angeles, CA (News - Alert)) (collectively referred to as Magna Carta Companies), which operate through an intercompany pooling reinsurance agreement. The outlook assigned to the ratings is negative.

Following receipt of an executed adverse development cover (ADC (News - Alert)) reinsurance contract, which substantially improved Magna Carta Companies' risk-adjusted capital level, the ratings were removed from under review. The negative outlook is based on A.M. Best's concerns with the lack of clarity regarding the Magna Carta Companies' risk appetite and business strategy, which has contributed to its 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.

The rating affirmations reflect the organization's supportive risk-adjusted capitalization, commercial market knowledge and focus on low hazard business. These positie rating factors are largely offset by Magna Carta Companies' weak operating performance throughout the recent five-year period, including its pre-tax operating losses for 2009 and 2013, which were driven by adverse loss reserve development on prior accident years, the impact of weather-related losses and the need for improved risk controls.

Magna Carta Companies' operating performance deteriorated significantly during the fourth quarter of 2013, due to a $57 million charge to strengthen reserves, requiring implementation of the ADC, which covers 100% of net losses within the ADC coverage limit. Approximately $31.9 million of the group's reserve strengthening actions were related to its workers' compensation line of business. Inclusive of the benefit of the additional reinsurance protection, Magna Carta Companies' overall risk-adjusted capitalization adequately supports its current obligations and those anticipated by its near-term business plans.

Negative rating actions could occur if there is further significant deterioration in Magna Carta Companies' risk-adjusted capital position. Positive rating actions are not expected in the near term, although stabilization of the organization's underwriting and operating performance measures, as well as the implementation of improved risk controls, would be necessary prior to any positive rating actions.

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.

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

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