A.M. Best Downgrades Credit Ratings of Members of Pacific Specialty Insurance Group

A.M. Best has downgraded the Financial Strength Ratings to A-
(Excellent) from A (Excellent) and the Long-Term Issuer Credit Ratings
to “a-” from “a” of Pacific Specialty Insurance Company and Pacific
Specialty Property and Casualty Company, collectively referred to as Pacific
Specialty Insurance Group (Pacific Specialty). The outlooks for all
Credit Ratings (ratings) remain stable. Both companies are headquartered
in Palo Alto, CA.

The ratings reflect Pacific Specialty’s balance sheet strength
assessment, which A.M. Best categorizes as very strong, as well as its
adequate operating performance, limited business profile and appropriate
enterprise risk management.

The rating actions reflect the significant decline in Pacific
Specialty’s policyholders’ surplus over the past five years, which has
led to above average net and gross underwriting leverage relative to
industry norms. The policyholders’ surplus decline in 2014 was driven by
the buyout of one of its owner’s one-third ownership share by the
remaining two owners. The surplus decline in 2017 was driven by
California wildfire and winter storm losses, the payment of a note due
to its holding company, charges associated with a new policy/claims
administration system, changes in net deferred tax assets and
stockholder dividend payments to its holding company.

While Pacific Specialty’s five-year average underwriting results have
been unfavorable, this is largely reflective of results in 2017, which
were heavily impacted by unprecedented California wildfire activity. In
most years, Pacific Specialty has produced favorable pre-tax operating
income as reflected by its operating performance assessment of adequate.
Pacific Specialty’s profile reflects its business concentration in
California, which exposes its earnings and surplus to volatility from
regulatory and judicial changes, market dislocations and catastrophe
events. As a predominantly California homeowners and stand-alone
earthquake policy writer, this is demonstrated by a high gross probable
maximum loss (PML) from a 1-in-250-year earthquake relative to surplus.
However, the net PML has been reduced to a moderate level through a
comprehensive catastrophe reinsurance program.

This press release relates to Credit Ratings that have been published
on A.M. Best’s website. For all rating information relating to the
release and pertinent disclosures, including details of the office
responsible for issuing each of the individual ratings referenced in
this release, please see A.M. Best’s Recent
Rating Activity web page. For additional information
regarding the use and limitations of Credit

Rating opinions, please view Understanding
Best’s Credit Ratings. For information on the proper media
use of Best’s Credit Ratings and A.M. Best press releases, please view Guide
for Media – Proper Use of Best’s Credit Ratings and A.M. Best Rating
Action Press Releases.

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

Copyright © 2018 by A.M. Best Rating Services, Inc. and/or its
affiliates. ALL RIGHTS RESERVED.

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