By Michael Loney

Feb 5 - (The Insurer) - AM Best has revised the outlook for E&S carrier Prime Insurance Company’s A (Excellent) financial strength rating to stable from positive after “material” adverse loss development, a move that follows RLI taking a hit from its investment in the specialty insurer in Q4.

The outlook was also revised to stable for Prime Insurance Company’s “a” (Excellent) long-term issuer credit rating.

AM Best said that Prime’s balance sheet is indicative of its “very strong” risk-adjusted capitalisation, positive earnings contributing to surplus growth year over year and adequate liquidity supplemented by positive operating cash flows.

“The balance sheet strength was negatively impacted by material adverse loss development during the third quarter of 2024 and the group has projected an overall pre-tax operating loss for 2024,” it said.

AM Best expects Prime’s operating results and capital generation to revert to its historical level in 2025.

It noted that Prime’s balance sheet is supported further by a quota share arrangement led by strong reinsurance partners. This includes RLI Insurance Company, which not only acts as a reinsurer but as an equity partner-owner as well.

Prime’s largest line of business is commercial auto liability, which has been challenged in recent years by increased loss trends.

“As an excess and surplus writer, Prime has been successful in generating significant growth and profits from this dislocated market,” AM Best said. “Despite the adverse reserve development, the group’s operating performance remains favourable when compared with its peers.”

RLI's management revealed last month that its Q4 results included a loss from its stake in Rick Lindsey-led Prime Holdings Insurance Services.

In a 10-K for 2023, RLI had noted that at the end of 2023 it had a 23 percent interest in the equity and earnings of Prime Holdings Insurance Services.

The filing also noted RLI has a quota share reinsurance agreement with E&S carrier Prime Insurance Company and admitted carrier Prime Property and Casualty Insurance, the two insurance subsidiaries of Prime Holdings Insurance Services.

On an investor call on 23 January, RLI CFO Todd Bryant noted: “We recorded a loss of $12.5mn from our share of Prime's earnings as Prime strengthened reserves on a number of prior accident years.”

But he added: “While a notable impact to the quarter, our investment in Prime remains very positive on an inception-to-date basis.”

When asked by an analyst whether RLI would look to reduce its ownership, CEO Craig Kliethermes said: “It’s been a good investment to date. I think we received dividends in excess of what our original investment was. So we still view that as a very positive experience so far.”

Bryant added that the average annual returns from the investment have been in the 20-plus percent range, despite the “noise to the fourth quarter”.

Discussing a quota share treaty arrangement that RLI has with Prime Holdings Insurance Services, Kliethermes said: “We did reduce our participation from 2.5 I think to 1 on a go-forward basis as a result of the terms and conditions that were put forward.”

In a 10-Q filing for the third quarter of last year, RLI had said that as of 30 September 2024, its investment in Prime Holdings Insurance Services was $65mn.

The filing added that it received dividends of $3mn from Prime Holdings Insurance Services in 2024, while no dividends were received in 2023.

“We recognised $8mn of investee earnings from Prime in the first nine months of 2024 and $7mn in 2023,” it said.

According to SNL, Prime Insurance Company wrote $174.3mn in direct premiums in the first months of 2024, with a 112.6 percent combined ratio.

It wrote $185.6mn in direct premiums for the full year 2023, down from $227.8mn the year before, with a combined ratio of 79.7 percent, down from 92.0 percent in 2022.