Standard & Poor’s Ratings Services placed its ‘BBB’ counterparty credit and financial strength ratings on Professionals Direct Insurance Co. (PDIC) on CreditWatch with negative implications.
The ratings were placed on CreditWatch because of Standard & Poor’s concerns about the rapid geographic expansion PDIC has experienced in the past 18 months and the uncertainty regarding the level of losses that will be experienced with the newer business.
Standard & Poor’s will be meeting with PDIC management to discuss further the risks accompanying the recent geographic expansion as well as future projected growth. If Standard & Poor’s decides to lower the ratings, they are expected to remain at the investment-grade level (at least ‘BBB-‘).
Major rating factors
— PDIC’s gross written premium grew 172 percent to $20.6 million through Sept. 30, 2003, compared with the same period in the prior year, with 90 percent of the growth coming from outside its historical market of Michigan. Whereas Michigan accounted for 77 percent of gross written premium in 2002, it accounted for 37 percent through the third quarter of 2003, with Florida accounting for 13 percent and Arizona accounting for 12 percent. PDIC continues to write only 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 sufficient to negatively affect the company’s capital position.
— An increase in claims frequency in the fourth quarter of 2002 led to a loss ratio of 77 percent for 2002. The loss ratio fell to 54 percent through the third quarter of 2003, which is more in line with historical performance. Similarly, the expense ratio of 29.5 percent through Sept. 30, 2003, is back to a more historical level after being 37 percent in 2002, which incorporated the expenses associated with a new computer system installed that year and the expenses of acquiring state licenses. Products are priced for an 89 percent combined ratio for 2003 and 2004.
— Although PDIC’s capital adequacy ratio, based on Standard & Poor’s capital model, decreased to a projected 264 percent at year-end 2003 from 309 percent at year-end 2002, the change reflects the significant growth the company experienced during the year. The capital adequacy 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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