AM Best has revised its outlook from stable to negative for Service Insurance Group, which includes Service Lloyds Insurance Company and Service American Indemnity Company. Both companies, headquartered in Austin, Texas, operate under a pooling arrangement and maintain a Financial Strength Rating of A- (Excellent) and a Long-Term Issuer Credit Rating of “a-” (Excellent), which have been affirmed.
These credit ratings reflect the group’s very strong balance sheet, adequate operating performance, a limited business profile, and suitable enterprise risk management practices. However, the shift in outlook to negative stems from continued underwriting volatility experienced over the past five years, largely due to significant adverse reserve development during that time.
Despite achieving overall positive total returns supported by solid investment performance, the group’s underwriting results over the five-year period have been consistently unprofitable. The adverse claims development is the result of several contributing factors.
One of the primary challenges was the disruption caused by the COVID-19 pandemic, which delayed normal claims processing and led to a backlog and subsequent surge in claims once restrictions eased. Additionally, the group’s quick expansion into, and subsequent withdrawal from, the parcel delivery insurance segment also led to unexpected increases in claims frequency, as online shopping activity surged during the pandemic.
More recently, the group encountered difficulties stemming from a third-party administrator (TPA) in California that failed to meet the group’s claims handling and reserving standards. In response, the group ended its relationship with the TPA, according to AM Best.
Beyond the deterioration in loss experience, the company is also facing elevated underwriting expenses. While its expense ratio has seen some improvement, it still remains above the workers’ compensation industry benchmark. This has left the group with limited ability to absorb unexpected losses, particularly given the recent uptick in claims volatility.
AM Best noted that further negative rating actions could be taken if the group’s underwriting or operating results continue to lag behind comparable insurers, or if key balance sheet metrics deteriorate to a point that no longer supports a “very strong” assessment. Conversely, an upgrade in outlook could occur if the group demonstrates consistent, improved underwriting and operational performance with reduced volatility.