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 Service American Indemnity Company, which operate under a pooling agreement. Both companies are headquartered in Austin, TX. 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, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management.

The negative outlooks reflect ongoing volatility 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, although positive total returns have been achieved due to favorable investment returns. The consistent adverse claims development can be attributed to a few different factors. First, the pandemic significantly disrupted normal claims processes, leading to delayed adjudication of many cases, and ultimately 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 substantial increase in delivery volumes driven by the rise of online shopping, which ultimately led 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 (TPA) 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.

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’ compensation, 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.

Negative rating actions could occur if underwriting and operating results weaken further relatively to similarly assessed peers. Also, negative rating actions could occur if there is a material decline in the group’s balance sheet metrics that weakened to a level that is no longer supportive of the very strong assessment. Positive rating action could occur if there is a sustainable improvement in underwriting and operating results, that also exhibits minimal volatility.

This press release relates to Credit Ratings that have been published on AM Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see AM Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Guide to Best's Credit Ratings. For information on the proper use of Best’s Credit Ratings, Best’s Performance Assessments, Best’s Preliminary Credit Assessments and AM Best press releases, please view Guide to Proper Use of Best’s Ratings & Assessments.

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