A.M. Best has revised the ratings outlook to negative from stable and affirmed the financial strength rating of B+ (Good) and the issuer credit rating (ICR) of "bbb-" of Physicians Insurance Programs Exchange (PIPE) (Upper Gwynedd, PA).
The ratings reflect the company's adequate capitalization, historical profitability and its specialty niche orientation and expertise in the medical professional liability insurance segment. These positive rating aspects are offset by the material adverse reserve development reported by PIPE and the corresponding net operating losses incurred during the first half of 2014, culminating in a contraction in policyholders' surplus for the period. This, in part, stems from higher than expected claim settlements combined with the company's limited reinsurance program, which requires PIPE to absorb a portion of indemnity losses above its loss retention of $100,000.
Also considered in the ratings are PIPE's elevated expense ratio, limited financial flexibility and the company's narrow business concentration both geographic and product. Management's planned geographic expansion into South Carolina may magnify the impact of these factors. Given the relatively brief history of PIPE, A.M. Best remains concerned with the execution of this expansion given the operational and judicial/regulatory risks. In addition, operating cash flows have been negative since 2011, investment earnings continue to dwindle and the company's reinsurance program, which has been costly, has provided little benefit.
PIPE specializes in writing medical professional liability coverage for physicians, primarily in non-urban areas. Revenue has been shrinking due primarily to lower investment income as a result of depressed interest rates and from changing market dynamics in that more and more physicians are leaving private practice for larger physician groups and hospital employment. Competition is also a key challenge.
The company is taking action to diversify its book of business by expanding into South Carolina. In addition, management is reviewing various options in its reinsurance program to improve its net position. However, the outlook on the ratings is negative due to the material setbacks reported in 2014, concerns around future adverse reserve development, and its potential impact on prospective profitability and capitalization.
The methodology used in determining these ratings is Best's Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best's rating process and contains the different rating criteria employed in the rating process. Best's Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
Key insurance criteria reports utilized:
Risk Management and the Rating Process for Insurance Companies
Understanding BCAR for Property/Casualty Insurers
A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.
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Contacts:
A.M. Best
Charles M. Huber, 908-439-2200, ext. 5122
Managing Senior Financial Analyst
charles.huber@ambest.com
or
Christopher Sharkey, 908-439-2200, ext. 5159
Manager, Public Relations
christopher.sharkey@ambest.com
or
Daniel J. Ryan, 908-439-2200, ext. 5325
Vice President
daniel.ryan@ambest.com
or
Jim Peavy, (908) 439-2200, ext. 5644
Assistant Vice President, Public Relations
james.peavy@ambest.com
