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Nonstandard auto group seeks deal to 'significantly' boost sagging surplus

Third-quarter 2017 results served to heighten solvency concerns for one group of nonstandard auto insurers that had already submitted a corrective action plan to regulators.

Regulatory filings reveal that the group's, which conducts business under the Good2Go Auto Insurance name, was in pursuit of a transaction that would have the effect of "significantly" increasing policyholders' surplus for the individual members above the authorized control level. The companies as consolidated by S&P Global Market Intelligence collectively suffered a third-quarter net loss of $15.6 million, following a $40.4 million net loss in full year 2016.

Four of the seven-member intercompany pool led by American Independent Insurance Co. ended 2016 with total adjusted capital of below 200% of their authorized control level risk-based capital. Ratios of 200% or less of authorized control level risk-based capital may trigger varying degrees of regulatory action under National Association of Insurance Commissioners guidelines.

While total adjusted capital is only disclosed in annual statements, the group's surplus eroded significantly during the first nine months of 2017. It also dropped sharply at four of the seven entities on an individual basis, raising concerns about their prospective year-end 2017 risk-based capital ratios.

"The surplus of the Company, in the absence of a capital contribution, may fall below the authorized control level risk-based capital determined as of December 31, 2017," the Pennsylvania-domiciled American Independent warned in its Sept. 30, 2017, quarterly statement.

The group previously addressed solvency matters in the notes to its consolidated audited financial statement for 2016 where it confirmed that certain members "failed to maintain surplus in excess of prescribed minimum risk-based capital requirements." The filing further disclosed that the group submitted its initial corrective action plan in May 2017 in response to requests from certain state insurance regulators.

The authorized control level risk-based capital ratios of group members Omni Insurance Co. and Personal Service Insurance Co. were within the company action level range of between 150% and 200%. The ratios of Omni Indemnity Co. and Apollo Casualty Co. were within the more severe regulatory action level at 146.5% and 142.5%, respectively. American Independent's ratio totaled 210%.

"The group believes that ... it currently has sufficient cash and financing to meet its funding requirements over the next year," American Independent declared in the audited financial statement. "However, the Group has experienced and continues to experience negative operating margins and negative cash flows from operations."

At the group level, the surplus as of Sept. 30, 2017, had dwindled to $18.6 million from $36 million at year-end 2016, and $37.6 million as of June 30, 2017. Omni Insurance and Omni Indemnity suffered declines in their respective surpluses of greater than 50% during the first nine months of 2017; American Independent's surplus fell by 36.1%.

The group suffered a net underwriting loss of $36.8 million for the first nine months of 2017, of which $20.2 million pertained to the third quarter. Unfavorable development of loss and loss-adjustment-expense reserves for prior accident years totaled $13.6 million on a year-to-date basis and just over $12 million for the third quarter.

The results appeared to prompt the inclusion of the cautionary statement regarding American Independent's capitalization in its quarterly statement for the third quarter of 2017. The same section of the company's June 30, 2017, quarterly statement reported that management "has no substantial doubt about the Company's ability to continue as a going concern."

A spokesman for the Pennsylvania Insurance Department did not respond to a request for comment. Efforts to reach American Independent President and CEO Bruce Arneson were unsuccessful.

Additional disclosures in the third-quarter 2017 quarterly statement suggest that the denominator of the risk-based capital ratio formula might be lower at year-end. American Independent said, for example, that it had "taken significant actions, including reducing net premiums written, increasing rates and reducing other underwriting expenses, that are expected to significantly reduce the Company's authorized control level risk-based capital requirement."

Discussion of potential capital-raising efforts first surfaced in the 2016 audited financial statement when the group said it "expects to seek to obtain additional funding through private equity." American Independent cautioned in the third-quarter 2017 filing that there was no assurance that th ecapital-raising transaction being pursued would be consummated.

Independent Insurance Investments Inc., the holding company for the American Independent group, was 58.8% owned by Inverness Partners II LP as of Sept. 30, 2017. Other owners of the holding company's common stock included an entity described in regulatory filings as "Blackrock Funds," Executive Capital Partners II LP and Phoenix Life Insurance Co.

The group generated 56% of its $235.2 million of its 2016 private auto direct premiums written from Pennsylvania, New Jersey and Georgia.