Can Pawtucket Mutual Be Saved?
Pawtucket Mutual Insurance Company is in the intensive care ward, and there are many determined people working extremely hard to keep it out of the morgue.
According to Marilyn Shannon McConaghy, the rehabilitator appointed by a state superior court judge, the Pawtucket, R.I.-based homeowners and auto insurer was placed into rehabilitation on May 1. The company was the victim (or perpetrator, some might say) of inadequate rates, poor investments and systems breakdowns.
Ms. McConaghy is the director of the Rhode Island Department of Business Regulation, which regulates insurance companies and other financial institutions operating in the state. Making broad use of her skills set, Ms. McConaghy also serves as Rhode Islands boxing commissioner.
"It was a perfect storm situation," Ms. McConaghy said when asked about the source of Pawtucket Mutuals troubles. "Their investment portfolio took a hit, their rates were too low, and their computer conversion went way over budget," she explained. "Then there were some storms in early 2003 that produced a lot of losses," she added.
When asked why the department would approve rates for use in Rhode Island that were "too low," Ms. McConaghy replied that the rates were adequate when originally filed, but had become inadequate over time due to adverse loss experience. "We kept telling them [Pawtucket Mutual management] that they needed to change the rate structure."
Statutory surplus of the company fell precipitously to $8.5 million in 2003, from $34.8 million at the end of 2000, according to court papers filed in support of the rehabilitation order. The order also applies to the companys wholly-owned stock subsidiary, Narragansett Bay Insurance Company.
Ms. McConaghy noted that Pawtucket Mutual has stopped writing new business, and is nonrenewing policies in the dozen or so New England and Northeastern states in which it operated, with the exception of Rhode Island and New York.
"Policyholder claims continue to be processed in the normal course of business," she stressed. The company had about 120,000 policies in force as of the end of 2002, according to a department statement.
"There is a court-ordered stay of all litigation against the company," Ms. McConaghy noted. "All states where the company did business have complied with the stay," she added. Among the stayed litigation is a $10 million mold-related homeowners claim filed in Vermont.
Pawtucket Mutual has a prospective buyer, which is currently performing due-diligence research, Ms. McConaghy revealed. She also noted that she has received court permission to convert the insurer into a stock company if such a conversion would make it more appealing to a buyer.
John Laubach, a senior financial analyst for Oldwick, N.J.-based A.M. Best Company, attributes Pawtucket Mutuals near-failure to "pricing issues and loss ratios higher than what they should have been." Mr. Laubach noted that Pawtucket Mutual is currently assigned a Best rating of "E," signifying that the insurer is under regulatory supervision.
The "E," for some, stands for the employment they have lost as a result of Pawtucket Mutuals woes. Ms. McConaghy was forced to lay off 67 of the insurers 172 employees in June, and there was another, smaller staff reduction in late November. Also, the company president retired shortly after the rehabilitation was announced.
"The company had to be contracted to bring expenses in line with the reduced premium income," Ms. McConaghy explained.
"Historically, Pawtucket Mutual has been a very significant employer and corporate citizen in this area since the 1850s," Ms. McConaghy said. "The employees are wonderful people and it has been a roller coaster ride for them."
She added that the company is located "in a beautiful building that stands like a patriarch on the main street of Pawtucket."
But even patriarchs sometimes have to be sacrificed in the name of survival, and developers have made inquiries about the availability of the building. In addition, Pawtucket Mutual has downsized the space it leases in a second building housing company operations.
The companys fate is also of great concern to its 350 independent agents. "Pawtucket Mutuals agency base is extremely loyal," Ms. McConaghy said. "We have scheduled meetings and conference calls with the agents to provide them with informationand hope."
That "hope" depends on, according to Ms. McConaghy, approval of 2004 rate increase requests filed by the company, eliminating reinsurance layers deemed unnecessary given the reduced policy count, the effectiveness of the implemented expense reductions, and whether sale of the company can be consummated.
Regarding the rate increase requests, Ms. McConaghy pointed out that approval was up to an independent actuary and that she personally did not grant or deny such requests.
"The insurer can be demutualized with a pen-stroke, which should help a sale," said Bests Mr. Laubach. "It is possible for them to successfully come out of rehabilitation if they take actions to reduce the amount of unfavorable business they wrote."
Mr. Laubach added that Pawtucket Mutual "would appear to have sufficient reserves going forward" and "should be able to cover claims that need to be paid."
"There is political pressure to save the company, but the political is with a small p," Ms. McConaghy stated, indicating that it is not a partisan matter. "The mayor of Pawtucket has been working with us to save the company."
(Editors Note: National Underwriter will continue to report on the progress of Pawtucket Mutuals rehabilitation.)
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, December 12, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
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