Markham General insolvency a case study in trying to grow too quickly: PACICC report

Absent realistic forecasting, a solid business plan and adequate pricing, trying to grow too quickly and aggressively can serve as ingredients in the recipe for disaster, noted a paper released by the Property and Casualty Insurance Compensation Corporation (PACICC) on Apr. 17.

This may be the biggest lesson learned from Markham General Insurance Company (MGIC), launched in the fall of 1999 and subject to an order to wind up just three years later.

PACICC issued a report on the rise and fall of MGIC, entitled Why insurers fail: Lessons learned from the failure of Markham General Insurance Company.” Presented by Jim Harries, PACICC’s vice-president of operations, the report is the sixth annual installment of the corporation’s Why Insurers Fail series.

Hopes were high for the start-up of MGIC. The company’s original objectives included:

• having insurance brokers become significant investors in the holding company;

• using computerized, Internet-based underwriting and business-processing tools to achieve one of the lowest expense ratios in the industry; and

• focusing on profit growth rather than volume growth.

As it turned out, at its October 2009 launch, brokers owned less than 3% of MGIC, and $20 million out of the $23.5 million required for the start-up came from Connecticut-based Dailey Capital Ltd.

The paper notes the majority shareholder was intent on leveraging the valuation arbitrage in the middle market for the benefit of investors. However, “it became apparent fairly quickly that the ‘valuation arbitrage’ opportunity perceived by Dailey was an illusion.”

Upon its launch, MGIC projected its expense ratio would drop from 46.3% to 26.4% by 2003. But by late 2001, the ratio was three times the industry average.

Further, MGIC’s 2001 business plan called for a loss ratio of 76%. Near the end of the year, however, the ratio was 87.2%, ballooning to 94% by year’s end.

“MGIC, in fact, grew its business (primarily in Ontario auto insurance) so rapidly that the company was unable to support or sustain it with adequate capital – or to ensure the quality of the new business it acquired,” the report states.

“The uniqueness of [MGIC’s] business plan and the leading-edge tools intended to support the plan ultimately proved to be undeveloped and not commercially viable to achieve success as a P&C insurer,” it adds.

Red flags abound from the MGIC experience, the PACICC report notes. Industry players would be well-advised to take note that:

• start-up insurance companies need supervisory attention;

• early loss data may be unreliable;

• lack of diversification concentrates risk; and

• new insurer pricing significantly below market should serve as a warning.

To be protective, it is critically important to have effective governance, acknowledgement that vested capital could reduce risk and a firm understanding that business planning is a necessary, but insufficient, condition for success, the report says.

The full series can be viewed at:

http://www.pacicc.com/english/sub_contents.htm.