50 Innovators of the Year 2021
Financial analysis is an integral part of the insurance business. It gives us an overview of the company’s performance and makes clear inferences regarding the changes that will deliver continuous success. Financial data from balance sheets, income statements, and other company-related sources are analyzed regularly to identify the financial position of a business. However, we must also know that these data are often not useful unless a specialized firm analyzes them. Making use of the services from a financial analysis firm is one of the most efficient ways to predict profit from your investment or fulfillment of the company’s promise to you. These firms provide you with the necessary market evaluation insights by deciphering external and internal information from a business organization.
Globally there are several firms specializing in financial analysis, however, Demotech, Inc. stands out from the rest. Established in 1985, Demotech, Inc. is a financial analysis firm located in Columbus, Ohio. Demotech has served the insurance industry by providing Financial Stability Ratings® (FSRs) for Property & Casualty insurance companies and Title underwriters. FSRs are a leading indicator of the financial stability of Property & Casualty insurers and Title underwriters. Demotech’s rating process provides an objective baseline for assessing solvency based upon changes in financial stability, as presented in an insurer’s balance sheet. FSRs are based upon a series of quantitative ratios and considerations that comprise Demotech’s Financial Stability Analysis Model. As an independent financial analysis firm, Demotech has a proven track record of predicting financial stability in the insurance industry. As the first company to have its rating process formally reviewed and accepted by Fannie Mae, Freddie Mac, and HUD, Demotech has been leveling the playing field by offering FSRs to insurers of all sizes. We interviewed Joseph Petrelli, President and Co-founder of Demotech, to know more about how the company maintains its position as a thought leader in the financial analysis segment. Here are the excerpts from the interview:
What is your corporate history?
Demotech, Inc. was incorporated in 1985 as a financial analysis company. More than thirty-five years ago, we based our name on the belief that “demography” and “technology” would be the driving forces behind most of the future advances and turning points in the insurance industry.
History, especially lately, has proven this to be correct. In 1989, Demotech became the first to review and rate independent, regional, and specialty insurers writing Property & Casualty (P&C) insurance. We were the first to have a rating process reviewed and accepted by Fannie Mae (1989), Freddie Mac (1990), and the U.S. Department of Housing and Urban Development (1994). We accomplished this despite the fact that the A. M. Best Company had advised representatives of both Fannie Mae and Freddie Mac that it was “impossible” to review and rate these fine, regional carriers. In 1993 and again in 2005, HUD designated FSRs of A or better as evidence that an insurer was deemed “responsible.” More recently, we have secured thousands of third-party acceptances in the public and private sectors.
In addition to being the first to rate independent, regional, and specialty P&C insurers, Demotech was the first to review and rate public entity liability insurance pools, health maintenance organizations, and title underwriters. Today, we review, rate, and follow more than four hundred carriers domiciled, licensed, and writing business in the U.S. and its territories. Our clientele includes hundreds of independent, regional, and specialty carriers as well as the affiliates of icons such as Allstate, First American Financial, and Fidelity National Financial. Our ability to identify financially stable insurers is long-standing and well documented. We have earned the trust of, and assisted, lenders, producers, and the reinsurance community by identifying financially stable insurers that would otherwise have been overlooked.
How are the analysts of Demotech unique?
Great question. Unlike A. M. Best, Standard & Poor’s, and Moody’s, which began their enterprises as publishing companies, Demotech has always been focused on insurer financial analysis by insurance specialists. Over time, the other firms morphed into rating agencies. I assume the transition required that they hire financial analysts rather than reporters, journalists, or media types.
In stark contrast to publishers, Demotech has had insurance analysts on staff from day one, credentialed insurance professionals. Our top six analysts have seventeen college degrees and professional designations to supplement more than 200 years of progressively responsible insurance experience.
Insurance company executives often advise us that the analyst turnover at other rating agencies is high. By the time an analyst knows the insurer, the insurer’s personnel, and its unique value proposition, the analysts leave the employ of the rating agency. This may have an adverse impact on the insurer’s rating as the newer analysts tend to have limited persuasive impact on the more senior analysts. Once again, Demotech’s situation is in direct contrast to the dilemma that some CEOs find at other rating agencies. I am an analyst as well as a founder. I have three actuarial designations, an MBA, and have been in the insurance industry since I attended and graduated from The College of Insurance. Sharon Romano Petrelli, CPCU, AIAF, CCP, ARC, is also a founder and an analyst. Barry J. Koestler II, CFA, our Chief Ratings Officer, has been with us for more than 25 years. Bob Warren, CPCU, CPA (Inactive), Paul Osborne, and Douglas Powell, MBA, have been with us more than fifteen years. Rachel Wilkins has been with us for more than ten years.
Why do self-insurers, captives, and risk retention groups rely on you?
Although a majority of the risk-bearing entities that we review and rate are smaller, we have several larger clients. Lemonade Insurance recently went public, LMND, and has in excess of $8 billion in market capitalization. We also review and rate Coefficient Insurance Company, owned by a subsidiary of Alphabet (Google). Several other of our clients are publicly traded. This said, self-insurers, captives, and risk retention groups gravitate to us because of our philosophy – we appreciate the unique business models of specialty carriers that focus on a particular line of insurance or a particular jurisdiction. We review an entity based on the execution of its business model, financial size is not a dominant criterion.
A bigger insurer is not always the better insurer. The respective state guaranty funds have paid out in excess of $60 billion of loss and loss adjustment expenses on behalf of failed insurers, with appreciably more in their pipelines. The overwhelming majority of these insolvent carriers were larger insurers. Although we did not rate these giants, our review process was constructed to identify challenges before the manifestation of the problems caused failure. Think of the insurance industry as you do wrestling or boxing. There are heavyweight, middleweight, lightweight, flyweight, etc. divisions. Each division has a champion. Similarly, independent, regional and specialty insurers have unique skills and strengths.
Source- Demotech Company Classification System (established 2007 – updated each year)