20 July 2022Medical

Fitch affirms ratings of The Doctors Company

Fitch Ratings has affirmed the 'A' (Strong) insurer financial strength ratings on The Doctors Company (TDC), a California-based inter-insurance exchange, and its wholly owned insurance subsidiaries, collectively referred to as The Doctors Company Group (TDC).

The rating outlook for all ratings is Stable.

TDC's ratings are based on its very strong statutory capital position and sufficient loss reserve levels. Partially offsetting these positives is the company's business profile, with premiums concentrated in medical professional liability insurance (MPLI), which Fitch views as a volatile line of business with historically strong but recently declining profitability and underwriting performance.

According to Fitch health care providers are moving from independent and smaller group practices toward employment with hospitals and large medical groups that are more likely to self-insure and use captive or alternative risk programs, reducing demand for primary MPLI coverage.

The rating agency said that TDC is one of the few primary MPLI companies positioned to offer products and capabilities to accommodate this trend.

TDC's YE 2021 capital position was very strong, with policyholder surplus of $2.5bn, an operating leverage of 0.4x and risk-based capital of 337% of the company action level. TDC's profitability has improved with recent rate increases and reported a 101% combined ratio as of year-end 2021.

MPLI liabilities are longer in duration than the average p/c product segment, exposing the company to escalating loss costs tied to inflation of ultimate settlement costs from initial estimates in a period of higher inflation and rising litigation costs. This risk is actively monitored by the company when setting reserves and claims trends are monitored frequently to account for potential inflation. The majority of assets backing the reserves are high quality fixed income bonds that are close in duration to the liabilities.

Fitch views TDC's loss reserve position as a positive factor to the rating. The company has a history of favourable prior accident year reserve development, but favourable reserves are declining. Loss reserves are critically important for MPLI writers given the long duration of liabilities and the influence of severity, inflation and the litigation environment.