Pace of insurer insolvencies not yet cause for alarm

Options Toolbox

Related Companies Ambac Financial Group Inc. (ABK) American International Group (AIG) American Keystone Insurance Co American Network Insurance Co. CIFG Holding Ltd. FGIC Corporation Penn Treaty American Corp. Penn Treaty Network Am Ins Co. Professional Liab Ins Co of Am Southeastern U.S. Ins Inc. Syncora Holdings Ltd. (SYCRF)

Related Articles 11/16/2009 Data Dispatch: Failed banks: Class of 2009 10/30/2009 Underwriting losses, declining surplus preceded Southeastern's fall 10/23/2009 MarketWeek: PLICA goes plunk 10/13/2009 American Keystone's surplus, reinsurance woes drew regulators' gaze 10/2/2009 MarketWeek: Pennsylvania commissioner finds Penn Treaty hopelessly insolvent

Related Issues in Focus Receivership roundup Need insurance data, STAT!

Insurance company receiverships have not occurred with anything like the same quantity, regularity or predictability as bank failures, but a recent rash of headlines regarding new orders of rehabilitation and liquidation has thrust the topic to the top of one's mind.

Following a year in which policyholders' surplus for the U.S. life and P&C industries tumbled 6.2% and 13%, respectively, according to SNL's 2008 statutory data, a number of insurers have found themselves in financial peril as a result of issues, including investment losses, reinsurance-related difficulties, unfavorable reserve development, poor underwriting results and a combination thereof. Although the focus on financial strife has become more intense since 2008, when leading bond insurers and American International Group Inc. experienced periods of acute distress, not all the financial woes affecting these companies are recent developments.

An analysis of SNL's statutory insurance data and financial information available through the second quarter of 2009 found that 24 U.S. life and P&C insurers with capital and surplus of more than $1 million as of Dec. 31, 2007, out of a group of more than 1,300 companies, saw their surplus plunge more than 80% during the 18-month period ended June 30, including 10 that swung to a surplus deficit during that time. Bond insurers, including units of Syncora Holdings Ltd., CIFG Holding Ltd., FGIC Corp. and Ambac Financial Group Inc., were featured prominently among both groups.

At least seven of the 24 companies have been subject to orders of rehabilitation, liquidation and/or conservation, and numerous others have been operating under varying degrees of regulatory supervision. A company that fell just short of that 80% threshold, Southeastern U.S. Insurance Inc., is the latest to become subject to an order of liquidation. At its peak in 2005 and 2006, Georgia's eighth-largest writer of workers' compensation premiums, according to SNL's market share data adjusted for mergers announced and completed subsequent to those dates, Atlanta-based Southeastern U.S. was declared insolvent by an Oct. 27 order entered by Fulton County, Ga., Superior Court Judge Thomas Campbell Jr.

The company boasted of offering prices of between 5% and 20% below employers' best quotes from competitors 90% of the time, but it reported a sharp drop in gross and net written premiums between 2007 and 2008. That reflected what the company said in a regulatory filing was its continued focus on improving its book of business by focusing on risks that are easier to quantify and where safety is easier to manage as well as a soft insurance market.

When Southeastern U.S.'s year-end 2008 surplus fell below the mandatory control level of its risk-based capital requirement, the company began to explore a variety of options including a sale of the company. It was hardly the only similarly situated insurer to apparently strike out in its sale efforts.

Documents released by the Pennsylvania Department of Insurance in connection with its order of liquidation for Penn Treaty Network America Insurance Co. included information showing the extent to which investment banking firms FBR Capital Markets, as adviser to Penn Treaty American Corp. starting in 2007, and Signal Hill Capital Group LLC, which had been retained in early 2009 by the company's rehabilitator, went to examine strategic alternatives for the company and its American Network Insurance Co. affiliate.

During the fall of 2008, the documents report, FBR contacted more than 250 potential parties. Two dozen signed confidentiality agreements to review data, and five expressed interest in some form of transaction. One potential purchaser presented a letter of intent to the company in December 2008, weeks ahead of the companies voluntarily entering rehabilitation in early January. By Feb. 27, the Pennsylvania Insurance Department determined that a revised proposal submitted by the proposed purchaser was unacceptable. It later concluded that efforts to rehabilitate Penn Treaty were "futile," leading to an order of liquidation.

One company recently subject to an order of liquidation did not make the list of the industry's largest declines in surplus during the 18-month period ended June 30, but the applicable time frame is more likely the cause than any lack of financial difficulties. Ponte Vedra Beach, Fla.-based American Keystone Insurance Co.'s reported surplus declined 14.6% between Dec. 31, 2007, and June 30, 2009, slightly worse than the U.S. P&C industry as a whole. However, court documents indicate that the company's pro forma surplus as of Aug. 30, as adjusted to reflect future payments due reinsurers, would have been a deficit of approximately $12.3 million.

Similarly, the decline in the reported surplus of St. Louis-based medical malpractice insurer Professional Liability Insurance Co. of America may not have been sufficient to trigger alarm bells at a drop of 26.8% during the 18 months ended June 30. But the Illinois Department of Insurance recently acted to suspend the company's ability to write business in the state after it uncovered a variety of issues, many associated with reserving disclosures and practices that served to otherwise inflate the company's reported surplus as of year-end 2008.

Though not to minimize the seriousness of the financial predicament facing some insurers in the current environment, the number of insurance company rehabilitations and/or liquidations on a year-to-date basis almost certainly falls short of the number of bank and thrift failures that have occurred during the last three months, according to an SNL analysis. It's a phenomenon that Connecticut Insurance Commissioner Thomas Sullivan highlighted, while employing more than a touch of hyperbole, in Oct. 29 testimony on behalf of the NAIC before the House Financial Services Committee.

"I can count on one hand over the last three years [the number of] insurance affiliates that have failed during one of the most significant upheavals in the financial market," Sullivan said, "while we've seen hundreds of banks fail during the same time."