Companies that buy monoline excess workers compensation policies are considering alternatives, after one of the few national underwriters of the coverage was dealt a recent financial warning.

Purchasers of Meadowbrook Insurance Group Inc.'s excess workers compensation policies and their brokers are evaluating whether to obtain coverage arrangements elsewhere, after the insurer's recent loss of its A- financial strength rating from A.M. Best Co. Inc., several sources said.

Whether policyholders move, however, will depend on Southfield, Mich.-based Meadowbrook's efforts to shore up its financials and whether the limited number of competing underwriters now offering stand-alone excess workers comp insurance provide acceptable coverage terms and prices.

Only six underwriters nationwide, including Meadowbrook, provide excess workers comp coverage on a stand-alone basis because of the line's significant long-tail challenges, said Duke Niedringhaus, an excess workers comp specialist and vice president at broker J.W. Terrill Inc. in Chesterfield, Mo.

Employers' purchasing options for stand-alone excess workers comp insurance are further narrowed because the underwriters that provide it have differing appetites for the business classes they accept, sources said.

Additional insurers provide excess workers comp coverage, but typically only for national customers buying their other products.

Mr. Niedringhaus, who tracks excess work comp insurer premium volume, estimates that Meadowbrook writes about 10% of the stand-alone coverage purchased by most self-insured employers. That amount totaled about $68 million in 2011 premiums.

A.M. Best's financial strength downgrade of Meadowbrook this month from A- (excellent) to B++ (stable) has caused Torrance, Calif.-based broker Keenan & Associates to closely monitor Meadowbrook's excess workers comp underwriter, Star Insurance Co., while simultaneously presenting alternative insurer quotes to clients now insured by Star, said Bill Poland, director of marketing for Keenan's property and casualty practice.

“Anytime a carrier that is on our risks drops below an A rating, ... we immediately react on behalf of the customer, take a deep breath and then figure out a strategic plan of how to work with the situation,” Mr. Poland said.

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Because self-insured employers typically purchase excess coverage with $500,000 or $1 million attachment points, the urgency to move will not be as great as if the coverage were first-dollar, he said.

Meadowbrook, meanwhile, hopes established relations with its distributors and policyholders, along with a new arrangement allowing it to use A-rated policies provided by a fronting insurer, will limit any loss of business, said Robert S. Cubbin, Meadowbrook's CEO.

“We like the excess comp business and we intend to stay in it,” Mr. Cubbin said.

Stand-alone excess workers comp is among several insurance lines Meadowbrook business units provide. Its six insurer units also underwrite program business and specialty excess and surplus lines coverage.

Other excess workers comp underwriters say a few brokers have asked whether they might provide acceptable terms for certain Meadowbrook customers.

Charles Caldwell, CEO of Midlands Management Corp., an Oklahoma City-based managing general agent that underwrites excess workers comp coverage, said he expects more inquiries and market movement when current policies expire.

“I am not sure anyone is going to want to move midterm,” Mr. Caldwell said. But “at renewal, there will be significant movement.”

Safety National Casualty Corp., a Meadowbrook excess workers comp competitor, also has heard from a few brokers inquiring whether it will “accept submissions on certain classes of business and how close we can get to certain terms,” said Steve Luebbert, executive vice president for the St. Louis-based underwriter.

Meadowbrook's Mr. Cubbin said he, too, expects to see some of his competitors' business at renewal time.

After the A.M. Best downgrade, Meadowbrook reached an agreement with Bedford, Texas-based State National Insurance Co., allowing Meadowbrook to write policies using State National's A (excellent) financial strength rating.

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Meadowbrook will reinsure those policies so that State National will not assume any of the risk, Mr. Cubbin said. That will provide A-rated paper for certain clients, such as those working under government contracts requiring it.

State National specializes in providing collateral protection insurance, a form of coverage that typically protects property, such as cars, held as collateral by financial institutions. Providing fronting arrangements also is a part of its business, Mr. Cubbin said.

A.M. Best's Meadowbrook downgrade came after the company's second-quarter earnings report was released July 30.

The insurer said it was hurt by a recent, unexpected adverse arbitration outcome concerning ceded losses, storm losses and some Southern California workers comp claims now in runoff after Meadowbrook discontinued writing that block of business in mid-2012.

“In hindsight, we needed to increase prices more than we did in 2009, "10 and "11 in order to achieve an underwriting profit,” Mr. Cubbin told securities analysts during a July 31 earnings call.

Meadowbrook began obtaining rate increases in 2010, and 2013 rate increases are averaging 11% across all lines, Mr. Cubbin said in an interview.

“Our core, ongoing business is performing pretty well in a rising premium rate environment,” Mr. Cubbin said. Meadowbrook also terminated about $180 million in various lines of underperforming business during 2012.

“So we have been able to get out of the businesses that were hurting us,” Mr. Cubbin said.

“On a go-forward basis, we are showing evidence of a return to profitability. It's just a question of a few more quarters to prove that out.”