Meadowbrook Insurance Group, based in Southfield, Mich., has struggled with many challenges during the past couple of years but the “strong remedial measures” implemented to correct unacceptable results are working, its chief executive said.
In a Feb. 19 conference call discussing the company’s year-end and fourth quarter 2013 results, Meadowbrook President and Chief Executive Officer Robert S. Cubbin, praised the response of the company’s employees to the challenges required to fortify Meadowbrook’s surplus and “terminate and run off under-performing areas of our business.”
Cubbin said that early in 2012 the company began evaluating its weaknesses after noting “changes in claims activity and other performance metrics of the business.” Notable, he said, “was the divergence of industry published loss cost data from our own loss trend.”
The company began raising rates and “exiting problem subclasses of business within our various underwriting units,” he said, but the changes apparently weren’t enough for ratings agency A.M. Best, which in October 2012 placed Meadowbrook’s ratings “under review with negative implications.”
A.M. Best downgraded the company’s financial strength rating (FSR) in August 2013 from “A-” to “B++” (good, with a stable outlook), and affirmed the “B++” rating on Feb. 21, 2014. At the same time, however, Best downgraded the company’s issuer credit rating (ICR) to “bbb” from “bbb+.” The outlook for the FSR has been revised to negative from stable, while the outlook for the ICRs remains negative.
Cubbin said the company accelerated its underwriting and pricing adjustments through 2012, achieving a 16 percent rate increase and further reducing exposure to under-performing segments.
So far in 2014, Cubbin said, the market is continuing accept the necessary changes the company is making to bring its excess and surplus “book performance and predictability in line with our expectations.”
Cubbin said Meadowbrook ended the year “with approximately $488 million of statutory surplus in our insurance company and reduced our net premium written by almost 14 percent in a concerted effort to eliminate the more volatile segments of business that had not performed up to our underwriting standards.” Statutory surplus at year-end 2012 was $426.3 million.
He said “commission fee income remains strong,” net investment income results were as expected, and that aside from a problem area in California, “loss reserves on workers’ compensation were stabilized in 2013.”
Cubbin said in 2010 and 2013 the company was able to achieve sizeable rate increases cumulatively in its workers’ comp business in California, and that it has shed much of the problematic workers’ comp business in that state.
The company in 2013 experienced negative developments in its auto liability line, mostly stemming from accident years 2011 and 2012, “about half of which was from the discontinued programs we exited in 2012,” he said.
In its liability line of business in the E&S division, Meadowbrook experienced “unfavorable development” in 2012 and 2013, primarily for accident years 2010, 2011 and 2012,” Cubbin said. “The older accident years in our excess and surplus lines business appear to be stable.”
He attributed the loss patterns identified in 2012 in part to soft market pricing and competition from admitted carriers in lines of business that traditionally were written on an E&S basis.
Product classes that caused the most problems were “habitational, and restaurant, bars and taverns,” Cubbin said, and many of the remedial actions the company has taken has been in those two areas.
“The liability lines in our traditional program business have not had the same adverse development and remain profitable,” he said.
A Policy Issuing Relationship
After its ratings were downgraded in August 2013, Meadowbrook entered into an agreement with State National Insurance Co. to provide “A” rated policies for a portion of its business.
State National Insurance is an affiliate of Texas-based State National Companies, which provides national access to property/casualty products, programs and markets by acting as a policy issuing carrier for program managers and insurers nationwide.
That policy issuing relationship “is working well in the areas of the business that are most rating-sensitive,” Cubbin said. “In a significant portion of our business, the rating is less critical and we have retained the vast majority of the business we were seeking to retain. We attribute the stabilization in our production sources to long standing relationships and the trust and commitment from our agents and brokers.”
In October 2013, Meadowbrook announced the termination of a quota-share reinsurance agreement with Swiss Re that was placed in late 2012.
Under the reinsurance agreement, Meadowbrook ceded about $200 million of premiums on selected business. Effective Dec. 31, 2012, Meadowbrook transferred 50 percent of its unearned premium on the selected business to Swiss Re, and it also started ceding 25 percent of direct written premium on the selected books on Jan. 1, 2013.
Meadowbrook said because of the company’s improved financial condition the reinsurance was no longer necessary. The decision to terminate agreement with Swiss Re was mutual.
Meadowbrook continues to partner with Swiss Re as the lead reinsurer on its core workers’ compensation excess-of-loss treaty, according to Meadowbrook’s October 2013 announcement.
A Better Year
“We are confident that 2014 will be a much better year than 2013,” Cubbin said in the Feb. 19 conference call. “For 2014 we expect gross written premium to be between $775 and $800 million. We expect the combined ratio to be between 99 and 100, with the expense ratio to increase approximately 2 percentage points, relating to the cost of the policy issuing carrier.”
The company also expects its expense ratio to “increase as a result of a higher level of fixed costs in relation to earned premium and slightly higher other underwriting expenses related to a shift in the mix of business.”
The increase, however, “will be partially offset by improvement in the loss ratio as we earn the rate increases achieve in 2013 and 2014,” Cubbin said.
More Work to Do
Meadowbrook still has a lot of work to do, Cubbins acknowledged in a Feb. 21, 2014, release announcing the company’s year-end and fourth quarter 2013 results.
For all of 2013, Meadowbrook reported a net loss of $112.3 million, or $2.25 per diluted share, compared to net income of $11.7 million, or $0.23 per diluted share, for the year ended Dec, 31, 2012.
The company said results for 2013 were impacted by an after-tax non-cash goodwill impairment charge of $101.6 million, or $2.04 per diluted share, that was recorded during the second quarter of 2013.
The GAAP combined ratio for 2013 was 111.0 percent compared to 111.4 percent in 2012. Excluding the impact of the quota share reinsurance treaty, the GAAP combined ratio was 107.9 percent for the year, the company reported.
The accident year combined ratio was 101.2 percent, compared to 101.4 in 2012. Excluding the impact of the quota share reinsurance treaty, the accident year combined ratio was 99.8 percent at year-end 2013.
The increase in net ultimate loss estimates for 2012 and prior accident years added 9.1 percentage points to the GAAP combined ratio for 2013, the company said.
Full-year 2013 results also reflect the addition of 3.1 percentage points to the combined ratio related to the impact from the quota share reinsurance treaty that was entered into during the fourth quarter of 2012, and by an adverse interim final award from a reinsurance arbitration, which added 1.2 percentage points to the GAAP combined ratio.
In the statement regarding the recent downgrade of Meadowbrook’s ICR, Best indicated that in the near to medium term positive rating actions for the group are unlikely.
“Key factors that could result in further negative rating actions include any additional adverse development in its reserves, prolonged unprofitable underwriting and operating results, a significant or sustained decline in its risk-adjusted capitalization and/or deterioration in its financial strength,” the ratings agency said.
“While we are disappointed in our absolute results, we saw improvement in our core underwriting profitability as well as strong net investment income and fee income,” Cubbin stated in the earnings release. “The combination of this performance, along with other surplus enhancements, enabled us to continue to fortify our capital position as reflected by a year to date $61.9 million increase in statutory surplus and the significant improvements in our gross and net written premium leverage ratios.”
Ultimately, Cubbin stated, the company believes “our proactive efforts to terminate unprofitable business beginning in 2012 should enable us to continue to reduce overall future volatility in reserves, most importantly in the workers’ compensation line of business. These actions, along with the rate increases we achieved and other underwriting actions we undertook, helped us to improve our overall risk profile.”