Today's rating action reflects Fitch's views of growing competitive threats in the health insurance and managed care sector, and Fitch's views regarding Trustmark's ongoing ability to contend with these threats. Fitch notes that the health insurance sector, on which Trustmark has chosen to focus strategically, is one of increasing competition and significant volatility, and continues to face high levels of regulatory, legislative and litigation risk. The health sector, including the administrative-service-only (ASO) line of business in which Trustmark has grown considerably over the past five years, is facing increasing competition from large, well-funded, lower cost managed care companies that are increasingly interested in expanding their position in business lines where Trustmark has historically had a strong niche position.
Following an evaluation of the company's core competencies, Trustmark's management exited its individual life, health and annuity lines of business. Fitch takes a positive view of management's strategy to pare the business lines in which the company operates, as it has allowed the company to improve its financial performance in the businesses where it has chosen to remain. Fitch also takes a positive view of Trustmark's growing voluntary benefits line of business, which includes dental, universal life, disability income and critical illness plans. Fitch believes that this business represents an area in which the company can continue to compete effectively and grow at an attractive rate.
The Rating Watch Negative status of Trustmark's ratings took effect on Jan. 12, 2004, following an annual review meeting during which Fitch discussed with Trustmark's management, developments related to the company's involvement beginning in 1998 in a workers' compensation carve-out agreement with another reinsurer. The business covered by this reinsurance contract was written by subsidiaries of Superior National Insurance Group (Superior National) prior to its seizure by the California Department of Insurance in March 2000.
The primary reinsurer under this quota share reinsurance contract, which was effective in May 1998, initiated arbitration proceedings to rescind the contract in November 1999, alleging misrepresentations and nondisclosures by Superior National with regard to the business covered by the reinsurance agreement. Although the parties have completed arbitration proceedings, a decision from the arbitration panel has not yet been delivered. Because the ultimate outcome remains uncertain, the Rating Watch status will likely continue until a final decision is announced.
In September 2003, the California Department of Insurance demanded that a California Special Schedule P deposit that was made by the primary reinsurer in June 1999 be increased substantially. In October 2003, the primary reinsurer transferred certain assets into a special Schedule P trust in accordance with an agreement with the California Department of Insurance, which stipulates that the funds cannot be withdrawn by the department until a final decision has been reached in the arbitration proceedings, and only if the decision denies rescission. The primary reinsurer demanded late in 2003 that Trustmark contribute its share of the special deposit, and the parties continue in their attempts to resolve the dispute.
The Rating Watch Negative status of Trustmark's rating reflects the uncertainty surrounding the final outcome of the arbitration and Fitch's concerns regarding t