AM Best has revised the outlooks to negative from stable and affirmed
the Financial Strength Rating of A- (Excellent) and the Long-Term Issuer Credit Rating of “a-” (Excellent) of Service Lloyds Insurance Company, a Stock Company and S
service American Indemnity Company, which operates under a pooling a
greement. Both companies are headquartered in Austin, Texas and are collectively referred to as Service Insurance Group (the group).
The Credit Ratings (ratings) reflect the group’s balance sheet strength, which AM Best assesses as very strong, a
s well as its adequate operating performance, limited business profile and appropriate enterprise risk management.
AM Best said the negative outlooks reflect ongoing volatili
company in the group’s underwriting over the last five years, which has been driven by large amounts of adverse reserve development during this period.
In aggregate, the last five years of underwriting results have been unprofitable, AM Best said, although positive total returns have been achieved due to fav
orable investment returns. The consistent adverse effects claims development can be attributed to multiple factors.
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First, the pandemic significantly increases normal claims processes, leading to delayed adjudication of many cases, and u
ltimately to a backlog in claims and a surge in cases once restrictions were lifted. A second contributing factor was the group’s rapid entry and exit in a parcel delivery book of business.
During the pandemic, parcel services saw a significant increase in delivery volumes driven by the rise of online
shopping, which ultimately leads to an unanticipated rise
in claims frequency within this segment. Most recently, the company has faced challenges related to its relationship with a third-party administrator (T
PA) in California that did not meet the group’s standards in terms of claims handling or reserving practices.
As a corrective measure, the company has since terminated its relationship with the TPA, AM Best said.
In addition to the deterioration in loss results, the group is also contending with challenges related to underwriting expenses. While the group's expense ratio has been improving in recent years, it continues to exceed the industry benchmark for workers' com
pensation, resulting in reduced capacity to absorb fluctuations in losses. This limited operational flexibility has become increasingly problematic as loss volatility has grown more frequent in recent periods.