Standard & Poor’s has downgraded Attorneys Liability Protection Society’s rating a notch in response to the company’s recent shoring up of reserves to support a higher-than-expected claims experience in some states, but not Virginia.
In addition to taking money from surplus to bolster reserves, the company has sustained an underwriting loss in 2001 and 2002. Those factors, along with corresponding shifts in key ratios watched by the insurance industry for signs of financial health, contributed to the downgrade.
The insurance rater has taken ALPS off its “CreditWatch” list, where it flags companies that are facing a possible further downgrade. S&P has, however, rated ALPS with a “negative outlook,” meaning that it expects ALPS’s vital signs to slip more before corrective actions by the company take effect.
ALPS — the Virginia State Bar’s endorsed insurance carrier — was demoted from an A-minus rating to a BBB rating on April 10. The downgrade was not unexpected.
The rating is the lowest in S&P’s “secure range,” and indicates that a company “has GOOD financial security characteristics, but it is more likely to be affected by adverse business conditions than are higher rated insurers,” according to S&P’s definitions.
ALPS’s A.M. Best rating remains unchanged, at A.
The S&P downgrade followed ALPS’s own internal evaluation of its finances, during which the company determined that money it had set aside for unsettled claims in the years 1998-2001 was inadequate.
Since then, according to S&P’s press release, ALPS has taken several steps to improve its financial picture. The company has:
* Raised premiums, sometimes by double digits, in states where premiums were not keeping up with claims.
According to Robert Reis, president and chief operating of ALPS Risk Retention Group — the insurance arm of the company — ALPS keeps each state’s book of business separate, so lawyers from states where claims experience is good, such as Virginia, are not subsidizing those with poor experience.
ALPS has taken a hit in some western states, including Nevada, Reis said.
* Toughened its underwriting standards, to avoid higher-risk policyholders.
* Adopted what S&P describes as a “best practice” measure of setting up reserve funds for individual cases earlier than the company had previously.
* Reorganized. The company, which has several business ventures in addition to insurance, used to operate as a single entity. Expenses and losses in other sectors were attributed to the insurance operation, under the old structure.
On July 1, 2002, ALPS Corp. was set up as a holding company with 100 percent ownership of ALPS RRG and the other entities, which include a brokerage that obtains errors and omissions, premises liability and other coverage for law firms; an investment firm that helps law firms as well as ALPS itself with investment decisions; a program that sets up profit-sharing plans for law firms; and several other ventures.
ALPS Corp. also includes ALPS Reinsurance, which initially was set up to accommodate the VSB’s request that Virginia’s book of business be segregated and tracked closely. As ALPS improved its statistical tracking of all of its states, there was no need for the separate company, so ALPS Re currently has no function, although the company is keeping it as a potential vehicle for other programs, Reis said.
The reorganization was costly to the insurance arm, because it resulted in a drop of about $4 million in policyholder surplus from 2001 to 2002. But the new structure keeps ALPS RRG from being penalized by the financial experiences of the ancillary companies.
According to S&P, “As of year-end 2002, $1.4 million of expenses that previously would have been allocated to ALPS were reallocated to its non-insurance sister service companies. This resulted in an approximate 7 percent decrease in ALPS’s expense ratio to 24.5 percent.”
S&P had several good things to say about ALPS in its press release, which is based on the report issued with the downgrade.
“Historically, ALPS’s superior customer service — as demonstrated by retention ratios of about 97 percent — produced measurably better loss ratios than its peers,” S&P reported. “Though historically lower loss ratios were partially offset by higher expense ratios relative to their peers, ALPS produced an underwriting profit year after year.” The company suffered its first underwriting loss in 2001.
ALPS’s lack of product diversity — what S&P calls a “virtual monoline insurer of attorneys’ liability coverage” — was troubling to the insurance evaluator. However, the threats implicit in that are “partially offset by a relatively good and improving geographic spread of risk,” S&P reported.
The company has a strong capital position, S&P reported.
“The negative outlook reflects [S&P's] belief that the company faces challenges as it will need a period of sustained rate increases and effective underwriting controls, in addition to renewed reserves and claims discipline to return ALPS to an underwriting profit,” the press release states.
S&P “will continue to monitor the company’s comprehensive strategic plan and will review the outlook following full-year 2003 statutory results.”
Reis stressed that the challenges facing ALPS are very different from the financial stresses that brought down American National Lawyers Insurance Reciprocal, which was put into receivership in January and left 5,000 Virginia lawyers with no coverage.
ANLIR was part of the Reciprocal of America network of companies, and shared board members with numerous companies in the network. Those companies had potentially competing interests. ANLIR also was 100 percent reinsured by ROA.
ALPS, on the other hand, purchases its reinsurance from several companies with whom it shares no corporate relationship, Reis said. Those companies include PMA Re, New Jersey Re, Odyssey Re, Munich American Re and Converium Re — all of which can be monitored on S&P’s A.M. Best’s websites, he said. All have a Best rating of A-minus or better, he said.
“We are not owned by any reinsurer,” Reis said.
ALPS’s insurance product is only for lawyers. It has no corporate ties with insurers of doctors or other high-risk groups whose interests could conflict with those of the lawyers, he said.
There is little overlap on the boards of ALPS and its ancillary companies, Reis said. ALPS President and Chief Executive Officer Robert W. Minto Jr., the company’s chief financial officer and a couple of other ALPS RRG directors serve on the board of the holding company; only Minto and the CFO serve on the boards of the ancillary companies, he said.
The intensive S&P evaluation that ALPS underwent is voluntary, and paid for by the company that requests it. ALPS considered it valuable because “it gives us some very good objective information from people who look at insurance companies for a living,” Reis said.
With the events of Sept. 11, 2001, and the downturn in the economy, downgrades in the insurance industry have been widespread.
Reis recently looked up the ratings of all the carriers in ALPS’s niche. “Since 2001, every single one of those, except one, have been downgraded,” he said. The exception, he said, is Prolegia, which has not sought an S&P analysis.
“Downgrading this year is very, very common,” Reis said.