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Quota-share brings 'The General' more fully into American Family's fold

The steady expansion of the group of nonstandard auto insurers arguably best known for a catchy jingle and cartoon mascot led American Family Mutual Insurance Co. S.I. to more closely integrate the business.

Some five years after American Family's predecessor company acquired the holding company of Permanent General Assurance Corp. and its affiliates, which operate as "The General," American Family entered a 100% quota-share agreement to reinsure the group's in-force, new and renewal direct and assumed business — a structure that removed certain constraints to continued premium growth.

"The decision to bring The General into the 100% quota-share arrangement in 2017 was driven mainly by [the] desire to not have to continue making capital contributions to the Permanent General companies that were becoming necessary due to The General's strong growth," American Family CFO Dan Kelly said in a statement.

The Permanent General companies together saw an 18.8% increase in direct premiums written in 2017, marking a fifth straight year of double-digit percentage growth, according to S&P Global Market Intelligence data. Prior to the effects of the quota-share arrangement, the group's rate of expansion in net premiums written had followed a similar trajectory, topping 26% in both 2015 and 2016.

"The General's strong premium growth was producing capacity ratios that were stretching the limits of its NAIC IRIS ratio, along with getting the attention of the rating agencies," Kelly said in reference to the National Association of Insurance Commissioners' Insurance Regulatory Information System ratios.

The ratios, which are intended to help state insurance regulators monitor insurer solvency, generally provide a range of "usual" values for 13 distinct measures such as rates of growth in policyholders' surplus, premium writings as a percentage of surplus and the relative amount of prior-year reserve development.

While the unusual values that the Permanent General companies produced in 2016 largely resulted from factors such as unfavorable private auto claims trends and the low-interest-rate environment, their ratio of net premiums written to surplus had been steadily rising as their business expanded. Their ratio of premiums to surplus climbed to 254.2% in 2016 from 234.7% in 2015; a ratio of 300% or more is considered unusual.

The American Family subsidiary that directly owns the Permanent General holding company contributed $30 million in 2015 and $60 million in 2016. The latter amount helped boost the group's surplus to $224.8 million as of Dec. 31, 2016.

"For a number of years, we made capital contributions to shore up those ratios given the continued growth we were expecting," Kelly said.

The quota-share agreement led the Permanent General companies to produce multiple unusual IRIS ratio values in 2017, they said in regulatory filings. For instance, their net premiums written of negative $935 million that year triggered an unusual IRIS ratio value relative to the year-over-year change in that value.

Permanent General's direct premium growth came from a combination of newer and mature markets in 2017. Georgia, which Permanent General put in the latter category, stood out in terms of both the dollar value and percentage rate of increase. Peach State business volume more than doubled year over year to $38.2 million among the group. But Permanent General, at the individual entity level, attributed its policies-in-force expansion of 5.2% to what it described in its annual statement as "greater market penetration in states where we have been writing less than five years."

As a result of the shift from a pooling arrangement among the Permanent General companies to the quota-share treaty, a number of income statement line items show apples-to-oranges comparisons for 2016 and 2017 for both them and American Family. The top-tier company's net premiums written, for instance, spiked to nearly $8.61 billion in 2017 from $7.29 billion a year earlier even as its direct premiums written declined.

The 18% growth rate was American Family's highest since 2014 when a similar quota share with the Homesite Group Inc. companies began. American Family bought Homesite at the end of 2013, then executed a loss portfolio transfer and 100% quota share.

An added benefit of the new structure is that the Permanent General companies now hold A financial strength ratings from A.M. Best, one notch higher than previously. A.M. Best affirmed those ratings March 22, though Kelly said that even the lower original mark was considered "more than needed in the nonstandard auto market."