The ratings reflect the unfavorable arbitration ruling related to Trustmark's involvement in a troubled workers' compensation carve-out (WEB) agreement with another reinsurer. In addition, A.M. Best notes that there are numerous uncertainties regarding other WEB agreements that are outside of Trustmark's control, and A.M. Best has assumed the worst-case scenario in concluding this rating review.
The primary reinsurer under this contract initiated an arbitration proceeding to rescind the contract soon after the agreement was put into place in May 1998, alleging misrepresentation and nondisclosures with regard to the business covered. The arbitration panel recently ruled that the reinsurer is responsible for 90% of the corresponding losses, finding that the cedant should have acted in a more open and forthright manner. The final capital exposure to the reinsurer will not be known until an audit on claims is finalized in the spring.
In addition, the primary reinsurer on the agreement is currently in litigation with Trustmark regarding its portion of the ultimate reinsurance losses. Although the dispute is in litigation, a resolution is not anticipated until late 2005 or 2006. The ultimate amount of liability which Trustmark will be held accountable for continues to be subject to considerable uncertainty. Since management was confident of a favorable arbitration outcome, no reserves were established for this particular contract, and management is currently pursuing capital alternatives to lessen the effect to its risk-adjusted capital position; however, the impact of a worst-case scenario would likely significantly impact the level of capital and/or operations. A.M. Best will continue to evaluate the effect of the audit results and litigation on Trustmark's risk-based capital and strategic position, as it develops.
A.M. Best does acknowledge that both Trustmark Insurance and Trustmark Life's combined earnings have continued to improve in recent years, due to management's focus on their core businesses along with expense controls. However, Trustmark's long-term financial position is unclear pending the arbitration claims audit and the outcome of the litigation.
While A.M. Best is maintaining a negative outlook on the ratings due to the uncertainties regarding the final monetary outcome of the dispute, if a major positive development occurs regarding this situation, A.M. Best would reassess the ratings.