American Skyline Insurance Co., launched four years ago with exuberant backing from Baltimore leaders concerned that high auto insurance premiums were driving residents from the city, has been halted by state regulators from taking additional policies because of financial problems.
The order from the Maryland Insurance Administration forbids American Skyline from renewing current policies when they expire. It remains in effect until the company can prove it is financially solvent.
The state insurance commissioner said the company couldn't support its operating costs after losing $27 million in roughly three years and the loss of its lead investor. State regulators believe the company had ample customers to cover claims, although industry experts said Skyline's limited mission serving city residents made it harder to turn a profit.
From its inception, city leaders cheered the insurer for its promise to offer more affordable rates to Baltimoreans. Auto insurance rates have long been higher in the city than in the suburbs and rural areas - a deterrent to efforts to woo back residents or keep middle-class families from leaving for the counties.
Earnest Eugene Hines, a 25-year industry veteran, was recruited to run the company and the St. Paul Travelers Cos. Inc., one of the nation's largest insurers, made an initial investment of $10 million in the venture. As recently as last fall, the Greater Baltimore Committee, an influential business group, honored Skyline with an award for business achievement.
But the company had lost nearly $27 million since its launch in 2001. Skyline lost $4.9 million its first year, $8.4 million in 2002, $9 million in 2003 and $4.6 million for the first six months of 2004, according to state documents. It provides auto, small business, renters and homeowner insurance to residents in Baltimore and Washington.
The poor financial showing prompted St. Paul Travelers, which owns 85 percent of the company, to suspend further investment. Other initial investors include the Venture Fund, a private equity investment fund in Baltimore.
"We have incurred significant losses on substantially all of our investments and we have made a business decision not to invest further," said Marlene Ibsen, a spokesman for Minnesota-based St. Paul.
American Skyline's headquarters at Light and Redwood streets in downtown Baltimore remained open yesterday afternoon. Company officials said no one would be available for comment until next week.
Insurance Commissioner Alfred W. Redmer Jr. said that his agency's order against American Skyline doesn't force the insurer to go out of business. The commission will give it time to raise additional capital to meet state requirements for financial solvency, he said.
"Under Maryland law, there are financial solvency requirements that we have to examine," Redmer said. "If a carrier falls below financial breakpoints, we are required to take certain action. If a company's financial condition continues to deteriorate, then the actions that we take become more stringent.
"I can tell you that the management team is in active negotiations with potential investors," Redmer said of the company's attempts to find new capital. "If that occurs, they will be back to doing business as they were before."
Although American Skyline has yet to turn a profit, last year was the first time the company failed to meet state financial requirements. Redmer didn't say how long the company had to find more capital or what would happen if it didn't.
"I am hopeful they will become financially solvent," Redmer said. "We look at it on a daily basis. We look at it on a weekly basis. What I cannot tell you is when we would take more aggressive action. We don't have a firm deadline in place, but it needs to happen soon."
State and city officials remain supportive of the company, although industry professionals acknowledged the difficulty of its limited scope.
"American Skyline is an important business and employer in Baltimore City, and we are all doing what we can to preserve that business," Redmer said.
Mayor Martin O'Malley and M. J. "Jay" Brodie, president of the Baltimore Development Corp., have also sought to put American Skyline in touch with potential business partners.
"They are working to ensure American Skyline stays in business and also stays in business in Baltimore," said Raquel Guillory, a spokeswoman for O'Malley.
Baltimore Comptroller Joan M. Pratt, who praised American Skyline's creation four years ago, said the need for an affordable insurance option for city residents remains great.
"Hopefully they will look to some private equity funds or some venture capitalists to supply them with the equity ownership St. Paul provided, and allow Skyline to continue to be a growing concern," she said.
American Skyline gained some notoriety for innovation in serving an urban market. It employed Spanish-speaking salespeople and advertised in Spanish telephone directories to build business among Hispanic residents. It donated steering-wheel locking devices for the police to give away at neighborhood events to help deter auto thefts and it co-sponsored new vanity license plates to promote city living. Its employees used a fleet of specially designed PT Cruisers to pursue claims and inspections.
Legislative efforts to close the city-suburban insurance gap have had limited success. Redmer's predecessor, Steven B. Larsen, told state lawmakers before American Skyline was formed that residents of ZIP code 21208 in northwest Baltimore County paid an average premium of $1,000 to $1,050 a car, while residents in the neighboring ZIP code of 21215 in the city paid on average $1,200 a car.
Some advocates contend discrimination is at the root of the cost divide, but the insurance industry has consistently pointed to higher accident rates, greater thefts and higher payouts as the cause.
"There are simply more wrecks because there are simply more people," said Carolyn Gorman, vice president of the Insurance Information Institute in Washington, an industry trade group. "There are more opportunities to get into accidents so there are more claims. It makes it hard to offer lower insurance rates."
There are also more auto lawsuits in Baltimore, which can drive up costs, said Shelley Arnold, executive vice president of the Independent Insurance Agents of Maryland. Skyline needs other types of business to help offset the cost of providing insurance, industry representatives said.
"American Skyline came in and tried to write Baltimore rates at a better cost, but I'm not sure it's possible," Arnold said.
Redmer said American Skyline's problems worsened when St. Paul backed out. Skyline had enough business to cover the cost of claims, but not to cover operational costs, Redmer said.
"I don't think it's an inner-city issue," the commissioner said. "I think American Skyline built a very impressive business model. Our numbers indicate that the business they have is profitable. However, the problem with American Skyline is it is a new business. Its market share is relatively small. And it has not been able to develop a significant amount of business to offset the cost of the infrastructure that was necessary to build the business."
Nevertheless, industry experts said American Skyline's problem is rare. Only one other Maryland insurer has had such serious financial problems in the 18 months that Redmer has headed the commission. The commission took control of Carroll County Mutual last spring, he said.