The rating reflects NLC's marginal capitalization, elevated underwriting leverage and history of adverse loss reserve development. These negative rating factors are partially offset by NLC's niche market expertise, adequate liquidity and strong reinsurance program.
NLC is a non-profit captive mutual insurance company that provides property/casualty coverages to risk-sharing pools set up by state municipal leagues. Leverage has risen in recent operating years under increasing reserves, ceded recoverables and premium levels. Negative return measures in 2004 followed significant prior year reserve development that led to significant underwriting losses. Underwriting results deteriorated further in the third quarter of 2005 following the audit of its New York state workers' compensation program. Prior to 2003, NLC had a generally favorable pre-dividend combined ratio, which outperformed the professional reinsurance industry composite.
NLC's high ceded leverage is partially offset due to highly rated reinsurers participating on its excess programs. Following a decline in capital at year-end 2004, the company implemented a capital call provision wherein $9.5 million is to be paid by its members prior to year-end 2005. Subsequent to the third quarter of 2005, all of this assessment was collected.
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