Standard & Poor’s lowered its financial strength rating on PAULA Insurance Co. to triple-’Cpi’ from single-’Bpi’. The rating action reflects the company’s deteriorating surplus, unfavorable recent reserve development, sustained high leverage, and continued marginal operating performance.
Based in Pasadena, Calif., PAULA Insurance predominately writes workers’ compensation insurance for agribusiness located throughout the major growing areas of California, Arizona, Oregon, Alaska, Idaho, Texas, Florida, New Mexico, and Nevada, with more than 60 percent of its revenue stemming from California. Its products are distributed primarily through agencies.
The company, which began business in 1975, is a member of PAULA Insurance Group and is owned by PAULA Financial.
Major Rating Factors:
– At year-end 2000, surplus levels declined 48.7% from 1999, and 42.0% from 1998 to 1999. This two-year decline in surplus of $35.0 million from 1998 is due primarily to a substantial bolstering of loss reserves to cover losses in California on accident years 1998 and prior. The California workers’ compensation market has been extremely volatile in recent years and has generally led to poor pricing and above-average losses.
– The company’s reserve development ratio has been highly unfavorable in the last two years. The one-year loss development in 2000 was 73.2% of surplus, while the 1999 one-year development was 34.5% of surplus.
– The company was considered highly leveraged in 2000 with its net premiums written to surplus at 6.1 times. The company did, however, enter into two quota-share reinsurance agreements with Insurance Corp. of Hannover (single-’A’ financial strength rating) and Everest Reinsurance Co. (double-’A-’ financial strength rating), where it may cede up to 75% of policy-year 2001 earned premiums.
– Operating performance has been marginal, with net losses of $15.7 million, $19.5 million, and $7.2 million for 2000, 1999, and 1998, respectively.
Although the company is a member of PAULA Insurance Group, the rating does not include additional credit for implied group support. Ratings with a ‘pi’ subscript are insurer financial strength ratings based on an analysis of an insurer’s published financial information and additional information in the public domain. They do not reflect in-depth meetings with an insurer’s management and are therefore based on less comprehensive information than ratings without a ‘pi’ subscript.
Ratings with a ‘pi’ subscript are reviewed annually based on a new year’s financial statements, but may be reviewed on an interim basis if a major event that may affect the insurer’s financial security occurs. Ratings with a ‘pi’ subscript are not subject to potential CreditWatch listings. Ratings with a ‘pi’ subscript generally are not modified with “plus” or “minus” designations. However, such designations may be assigned when the insurer’s financial strength rating is constrained by sovereign risk or the credit quality of a parent company or affiliated group, Standard & Poor’s said.