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Regulator, commercial auto insurer have 'materially' different view of reserves

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Regulator, commercial auto insurer have 'materially' different view of reserves

The extent of the U.S. property and casualty industry's improvement in commercial auto liability results for the first half of the year may be somewhat overstated.

Statutory data collected and aggregated by S&P Global Market Intelligence as of Sept. 12, excluding entities classified as state funds and residual markets, show that the direct incurred loss ratio in the embattled business line improved by 302 basis points year over year to 67.3%. But the July initiation of rehabilitation proceedings for two Illinois-domiciled subsidiaries of Atlas Financial Holdings Inc. means that their data, which includes material unfavorable development of prior-year reserves, are not incorporated in the industry aggregate.

Documents posted by the Illinois Department of Insurance in connection with the rehabilitations of American Service Insurance Co. Inc. and American Country Insurance Co. reveal that the companies posted direct loss ratios of 163.6% and 243.8%, respectively, for the first half of 2019, including the impact of unfavorable development of $77 million and $46.2 million.

The filings indicate that the companies' reserve levels and loss ratios reflect actuarial work conducted on the regulator's behalf. When incorporating the companies' underlying direct losses and earned premiums into the S&P Global Market Intelligence aggregation, the industry's direct incurred loss ratio rises by 61 basis points to 67.9%.

First-quarter statutory statements for both companies are not available, so results cannot be broken down by quarter. The rest of the U.S. P&C industry had direct incurred loss ratios in the commercial auto liability line of 63.9% and 70.6% for the first and second quarters. The values in both cases represent improvements of at least 250 basis points from the respective year-earlier periods. The business line traditionally exhibits considerable seasonality such that loss ratios for first quarters tend to be significantly lower than those for the other three reporting periods.

Both insurers had combined ratios of 330.2% for the first half of 2019. Net losses of $86.4 million at American Service and $52.1 million at American Country led each entity to show policyholder deficits as of June 30.

That American Service and American Country increased their reserves does not come as an unexpected outcome of a scenario that has been unfolding over the past several months. In announcing its dismissal of RSM US LLC, Atlas Financial in April cautioned that the independent accounting firm concluded that reserves in certain of the company's subsidiaries were understated and, as such, amounted to a material misstatement of the overall corporation's financial condition as of year-end 2018. RSM based its findings in part on the work product of an actuary that it had retained.

For its part, Atlas Financial said it disagreed with RSM's conclusion. In addition, the management's discussion and analysis sections of the 2018 annual statements of American Service and American Country stated that the companies believed their reserves were adequate and within the range set by an external actuary. Both companies had posted unfavorable development of losses and defense and cost containment expense in their 2018 statutory results.

In the same announcement, Atlas Financial disclosed that it was in discussions with the Illinois regulator and its third-party actuaries regarding reserve levels. The company warned it could not guarantee that more "material reserve increases" would not be required by the regulator's review. It included similar language in several subsequent SEC filings, the most recent of which it submitted on Aug. 9.

The notes to the two June 30 quarterly statements indicate that the department's findings "differ materially" from those the companies relied upon in preparing their 2018 statutory filings. They further state that Atlas Financial engaged Deloitte Consulting LLP to conduct a separate reserve study; Atlas Financial's outside actuary for the 2018 fiscal year is also undertaking an interim reserve analysis. The American Service and American Country annual statements listed Paradigm Actuaries LLC as serving in that capacity.

The Illinois regulator said it plans for the two companies to resume their reporting of statutory financial statements in the third quarter.

According to Atlas Financial's most recent update, in late August, the company was still working with financial adviser Sandler O'Neill on a range of strategic alternatives. The company's insurance subsidiaries continue to write renewal business, but only Global Liberty Insurance Co. of New York still writes new business on a limited basis.

Atlas Financial and American Financial Group Inc. continue to move forward with a June agreement that positioned National Interstate Corp. as the exclusive underwriting partner for its $119 million paratransit book of business. The company is working toward similar arrangements regarding a possible transition of its $153 million non-paratransit business. American Financial expects its agreement to bring in an additional $20 million in gross premiums written in the second half of 2019.

The Illinois regulator reported that the two companies in rehabilitation continue to pay all policyholder claims.