There's more to tracking your carriers'
financial health than watching the ratings
By Susan Hodges
A.M.Best, Standard & Poor's, and Moody's all issue company "Outlooks" that explain why they've given each company its current rating to the carrier in question.
Martha Goodall* couldn't put her finger on it, but she knew something was wrong. The year was mid-2000, and Frontier Insurance Company wasn't returning her calls. And when Goodall finally reached the folks she usually dealt with, they seemed distracted and distant.
* This agent's name has been changed to protect her privacy.
"I got this general feeling each time I called that their people were unhappy," says Goodall, vice president of a New York City-based independent agency that writes both property/casualty and life/health. The agency had done business with Frontier Insurance , a New York-based multiple-line carrier, for 10 years. So when the complexion of Frontier's interaction with the agency began to change, Goodall and her agency took quick action.
First, they scanned their list of carriers for those who also wrote malpractice insurance. They also signed contracts with additional carriers. Then they began placing all new malpractice business with these carriers. But Frontier moved even faster. "They pulled the rug out from under us," says Goodall. Before the agency could move its existing business from Frontier, Frontier sent a letter announcing that state regulators required that the company cease doing business.
"But we were lucky," says Goodall in hindsight. The agency's list of carriers included several which, combined, absorbed all of the agency's business still on the books at Frontier. Observes Goodall, "The lesson is never to put all your eggs in one basket."
Frontier Insurance entered voluntary rehabilitation in New York in August 2001.
Since January 2002, regulators have placed 12 companies into supervision, receivership or liquidation. In many cases, agents had to scramble to move business or to get paid for business they had already placed.
How to know when one of your carriers is in financial straits before a ratings agency--or a regulator--takes action? There can be early warning signs. Recognizing these signs can give you valuable time to contact your clients and move their coverage before news of a carrier's woes hit the press--and your pocket.
A.M. Best, Standard & Poor's, and Moody's all issue company "Outlooks" that explain why they've given each company its current rating to the carrier in question. In general, these outlooks also provide information on the company's expected direction over 12 to 24 months.
All three rating agencies also issue credit watches, or in Moody's case, rating reviews about 90 days before changing an insurer's rating. Even better, all three also offer a ratings-watch subscription service. As a subscriber, you receive an e-mail alert each time the agency takes any action on the carrier(s) you specify. Standard & Poor's e-mail alert service is free; A.M. Best and Moody's charge a fee. For comparison's sake, it's not a bad idea to subscribe to the ratings-watch services of all three agencies.
The ratings agencies will list various actions by companies that will serve as warnings. "The biggest thing for an agent to watch for is high growth in a carrier, particularly if that growth comes from new policies," suggests Matthew Mosher, group vice president of property/casualty ratings at A.M. Best. In today's market, Mosher expects carrier growth to stem from premium increases or mergers and acquisitions, but not from new business.
"Companies with rating issues now are usually dealing with capital shortfalls," Mosher explains. Acquiring significant amounts of new business could signal that the carrier has relaxed its underwriting standards in a dubious attempt to boost cash flow. Loosening underwriting standards during the current heavy-loss period, which gathered momentum after 9/11 and continues with a number of catastrophes since, would almost inevitably create more shortfall down the road.
"Any company that has a commentary (from A.M. Best) on concerns about capitalization, even poor earnings, is a warning sign," cautions Mosher. Agents should always check a company's ratings outlook, and the embedded rationale for the rating, whenever a ratings agency issues a commentary. "The outlook and rationale provide a lot of information about why our rating is what it is," says Mosher. Thus, the outlook and rationale can provide significant insight into a carrier's probable future.
Steve Dreyer, managing director, insurance ratings at Standard & Poor's, explains the criteria his company uses to issue a credit watch. "We only issue a credit watch to companies that experience a near-term or developing event," says Dreyer. A carrier's pending sale, change in underwriting habits or change in lines of business would constitute three such events. But there are many subtle indicators.
"Agents should ask the same questions we ask," Dreyer advises. Changes in management, for example, can be positive developments. But why might a CEO resign suddenly or take an early retirement? By the same token, why would a company revise its underwriting standards? Doing so could signal an intention to withdraw from a state or line of business.
Moody's Investor Service conducts a carrier rating review "when we've decided that there's a sign [of financial change]," notes Alan Murray, vice president and senior credit officer in Moody's Insurance Group. Such a review signals that Moody's could change a carrier's rating in the next three to six months. Rating reviews are not always posted before a rating is changed, however. If a carrier experiences a major change that warrants a sudden rating alteration, Moody's may change the rating without a rating review.
Typically, though, Moody's produces a company Outlook when its analysts see issues "that may not be yet be clear, but which have surfaced and we are monitoring," says Murray. Thus, an outlook from Moody's should serve as a leading indicator of concern.
Subscribing to rating-agency alert services makes good sense. So does keeping an ear to the ground. Martha Goodall's first hint of trouble at Frontier was deterioration in the carrier's service. Carol Hammes, a long-time industry observer, consultant to independent agents, and president of The Middleton Group of LaGrange, Illinois, includes deterioration of service on her list of 20 "red flags." (See box at left.)
"It's a delicate balance now for agents to figure out which companies to use," says Hammes. On one hand, rising premiums force agents to seek alternative markets with lower premiums. On the other hand, carriers that succumb to a desire for increased market share by writing business at rates that are too low for their loss experience will still feel the pain, albeit later rather than sooner.
Necessary for successful company monitoring, then, are two criteria: the discipline to track company actions continually, and the ability to interpret the information you obtain.
In addition to monitoring rating-agency information and red flags, you can go the National Association of Insurance Commissioners' (NAIC) Web site (www.naic.org) and click on Consumer Information Source (CIS). From there you can click on Company Information and type in the name of any company you want to investigate. Although the CIS is a work in progress, you can find information on many companies pertaining to finances, complaints filed, and regulator action.
"The idea is to have a rational view of a company from the get-go, and then move forward," concludes Murray. And moving forward is nearly always a good thing. Have you examined your egg baskets lately?
The author
Susan Hodges is a Maryland-based freelance writer and former contributor to Professional Agent magazine.
Carol Hammes, president of The Middleton Group, provides the following list of "red flags." When several of these conditions are present in a carrier, she says, they may signal acute distress.
* Negative cash flow
* Inadequate reserves or partial transfer of loss reserve portfolio
* Combined ratio higher than the industry average, and/or
increasing rapidly
* Any kind of state action taken against an insurer
* Finance companies refusing to finance the company's premiums
* Umbrella carriers refusing to accept underlying coverage
from the company
* Major executive-level management changes every 1-2 years
* Frequent changes in auditors
* Sale of some assets or lines of business
* Stock price declines
* Premium-to-surplus ratio over 2:1 and increasing
* Dramatic changes in written premiums from one year to the next
* Consistent under-reserving on claims and/or a slowdown in
claims payments
* Overall deterioration in service, especially when accompanied by a slowdown in processing return premium endorsements and audits
* Sudden increased attention to prompt collection of accounts current
* Frequent changes in reinsurance carriers
* Increase in accounting differences due to charges for policies
not yet issued
* Significant changes in agency force, either in appointments
or terminations
* Sudden entrance into or withdrawal from a territory or line of business, particularly a line or territory avoided by other carriers
* Issuance of a company letter denying "rumors" of the company's financial condition