Standard & Poor’s has affirmed its ‘BBB’ counterparty credit and financial strength ratings on Michigan-based Professionals Direct Insurance Co. (PDIC) and removed them from CreditWatch. The outlook is negative.
The ratings had been placed on CreditWatch on Jan. 22, 2004, because of Standard & Poor’s concerns about the rapid geographic expansion PDIC had experienced over the prior 18 months and the uncertainty regarding the level of losses that could be experienced with the newer business. After further discussions with management, Standard & Poor’s believes a negative outlook appropriately addresses the company’s potentially heightened risk profile.
If PDIC’s geographic expansion does lead to a significantly higher level of losses, the ratings will likely be lowered.
Major rating factors
— PDIC’s gross written premiums grew 134 percent to $24.3 million in 2003, with most of the growth coming from outside its historical market of Michigan. Whereas Michigan accounted for 77 percent of gross written premiums in 2002, it accounted for 38 percent in 2003, with Florida and Arizona each accounting for 12 percent. PDIC continues to only write lawyers professional liability coverage to relatively small firms (an average of two lawyers per policy) in Tier 2 cities and rural areas. However, Standard & Poor’s is concerned that such significant growth outside of the company’s traditional geographic marketplace could lead to an increase in loss frequency that is sufficient to negatively affect the company’s capital position.
— After experiencing a loss ratio of 77 percent in 2002, primarily because of an increase in claims frequency in the fourth quarter of 2002 from its Michigan business, PDIC’s loss ratio was 49 percent for 2003 and is estimated to be 43 percent for the first quarter of 2004. Although the 2003 figure is abnormally depressed because of the surge in that year’s premium volume, a normalized loss ratio is expected to be 60 percent-65 percent in 2004. Products are priced for an 89 percent combined ratio in 2004.
— PDIC’s capital adequacy ratio, as measured by Standard & Poor’s capital model, decreased to a projected 264 percent at year-end 2003 from 309 percent at year-end 2002. However, the change reflects the significant growth the company experienced during the year, and the capital ratio is expected to remain at least at the current level, as growth is expected to be at a much more moderate pace.
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