IPOs Highlight Strength of Non-Standard Auto Writers: A.M. Best

The flurry of initial public offering activity amongst non-standard auto insurance carriers shows just how far this sector has rebounded following disastrous results from 1999-2001, notes a new report by A.M. Best.

In a special “Then and Now” report on non-standard auto, the rating agency points to four successful IPOs by U.S. carriers – Infinity P&C, Direct General, Bristol West and Affirmative – which have garnered support on Wall Street. Prior to September 11, 2001, the non-standard market was coming off of several years of disastrous results. Rates were being slashed as carriers bent to competitive pressure at the same time severity was on a sharp rise. But most non-standard writers responded with rate reductions in late 2001, while those who found no competitive gain to be made in the sector decided to exit. This market withdrawal opened the door to new business for the remaining players, A.M. Best notes.

Unfortunately, many non-standard writers ran afoul of raters following 2001, when they turned to reinsurance to boost capacity and take advantage of stronger pricing. “… during a time when reinsurers disappeared as quickly as new ones were formed, companies faced not only tighter reinsurance contract terms, but also A.M. Best Co.’s negative view of excessive dependence on reinsurance. Collectively, these issues made extensive utilization of reinsurance a less attractive capital-management tool.”

With reinsurance capacity concerns and lack of investment returns hampering growth even as pricing strengthened, the rater notes many writers turned to surplus notes and trust-preferred securities, along with the aforementioned IPOs, to support growth. It remains to be seen how this sector will handle the inevitable downturn in pricing. “Should underwriting discipline decline markedly in the near term and the focus on market share re-emerge as a main industry theme, the strong results that the nonstandard auto sector currently is enjoying could give way to disappointing earnings, weakened balance sheets and ultimately lead to downward pressure on financial strength ratings,” A.M. Best notes. “Conversely, the companies that maintain strict underwriting discipline through the soft cycle will likely build on the favorable earnings trends established in 2003 and 2004, and further strengthen their financial position.”