Frontier’s A.M. Best Ratings Take a Slide

In a rating action taken on April 21, A.M. Best Co. again downgraded the financial strength ratings of all Frontier Insurance Group Inc. (Frontier) insurance subsidiaries (Frontier Insurance Co., United Capitol Insurance Co., Frontier Pacific Insurance Co., Western Indemnity Insurance Co. and Regency Insurance Co.) from “B” (Fair) to “C++” (Marginal).

In a previous rating action taken on March 17, Best had downgraded and removed from under review the financial strength ratings on the same companies from “B++” (Very Good) to “B” (Fair).

According to Frontier, the company made its 1999 10-K filing with the Securities and Exchange Commission on April 14, 2000. In that filing, the company announced an audited net loss of $233.2 million for the year ended 1999. That total represented a $45.5-million increase from the previously reported unaudited net loss of $187.7 million for the year ended 1999, which Frontier had announced on Feb. 23, 2000.

According to an A.M. Best press release on April 21, 2000: “The downgrade reflects the group’s increased financial vulnerability stemming from additional losses incurred as the result of accounting changes arising from the year-end audit. Certain of these financial issues were not anticipated by Frontier Group’s management or A.M. Best in connection with the previous downgrade on March 17, 2000.”

Richard Seyffarth, executive vice president for Frontier, commented on those events, the first of which was the decision made by Frontier’s management to sell two subsidiaries, Western Indemnity Insurance Co. and Regency Insurance Company. “Both of these subsidiaries carried some goodwill,” he said. “Therefore, $15 million of the loss was a non-cash write-down of the assets.”

Point two was that Frontier’s management also decided not to consummate a proposed reinsurance transaction, that is, a loss portfolio transfer. “That combined with some other expenses that we took resulted in a $3.7-million charge,” Seyffarth said. “That was built into the original numbers released on Feb. 23, but since we didn’t do the transaction, we had to reverse those entries. The reversal of that reinsurance transaction was reflected in our statutory filing.

“Then there was a $10-million write-down of an expected recoverable related to litigation with the State of New York involving coverage for State University of New York (SUNY) physicians,” Seyffarth continued. “The last piece was the posting of $16.8 million of additional reserves related to gain contingency accounting treatment of certain surety obligations.”

Frontier announced that it would, in unison with its subsidiary Frontier Insurance Co., implement a corporate corrective action plan in response to the concerns raised by Ernst & Young with respect to the company’s 1999 consolidated financial statements. The plan outlines some of the actions Frontier is taking towards improving its financial position. These include asset sales, underwriting actions, closing of business operations and management of expenses.

“We’ve had and continue to have an arrangement with [Clarendon Insurance Group] to do cut-throughs and fronting,” Seyffarth said. “Our agents are clearly aware of our efforts to assist them.”

Six days later, Frontier revealed that a non-binding letter of agreement for the sale of Western Indemnity Insurance Co. had been executed with Banc of America Securities LLC acting as Frontier’s financial advisor. The buyer in the cash transaction was identified as Galtney Investment Inc of Houston. Best acknowledged that the intended sales of Western Indemnity Insurance Company and Regency Insurance Co. might contribute to a future stabilization of Frontier’s ratings. However, Best warned that “failure to execute these plans, or a continuation of unfavorable operating performance, may result in further downward ratings adjustments.”

Frontier President Mark H. Mishler was quoted as saying that the company disagreed with Best’s rating action and would continue in its efforts to execute corrective action measures and support its agents.

Topics AM Best