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Deal signals 3rd phase for ABA's community bank insurance program

American Financial Group Inc.'s agreement to acquire ABA Insurance Services Inc. brings a community bank-focused professional liability program under the ownership of a publicly traded insurer for the second time in its three-decades-plus existence.

ABA Insurance Services, a managing general agency, was established in connection with the financial crisis-era sale of Progressive Corp.'s former professional liability group to American Bankers Professional & Fidelity Insurance Co. Ltd. The bank-owned captive reinsurer selected Everest Re Group Ltd.'s Everest National Insurance Co. as the new carrier for the American Bankers Association-sponsored insurance program, in a relationship to which the insurer attributed aggregate direct premiums written of $382.2 million during an eight-year stretch from 2010 through 2017.

Although Everest Re CFO Craig Howie declined to comment on any specific relationships, he said the ABA business represents only a small part of the company's professional lines insurance operations. Everest National reported in its 2017 annual statutory statement that ABA Insurance Services generated direct premiums written on its behalf of more than $56 million for that year, representing 5.1% of its overall direct business volume.

American Financial said the $28 million acquisition would expand the range of specialty casualty insurance products offered through Great American Insurance Co. ABA Insurance Services, which American Financial described as having a long history of underwriting profitability, will continue to be endorsed by the American Bankers Association and 31 state bankers associations.

In 2009, Progressive's then-president and CEO, Glenn Renwick, wrote in his annual letter to shareholders that the auto insurer's professional liability group had a "highly consistent track record of performance." But the business was "a relatively minor premium contributor," Renwick added in explaining the decision to sell, and "we increasingly saw a mismatch with our long-term strategic interests."

The board of the American Bankers Association approved the formation of American Bankers Professional and Fidelity Insurance in 1986 to help provide a consistent market for blanket bond and directors' and officers' liability coverage for community banks. The association partnered with Progressive as the primary carrier for the program, and the insurer was responsible for underwriting and claims-handling functions.

At the time of the sale and the launch of the MGA, the association cautioned that the transition would be complicated and take place over a period of time. Everest Re initially began participating in August 2009, but the full amount of the associated business did not appear on Everest National's books for at least two years.

The transaction occurred at a particularly challenging time for community bank professional liability insurers, amid numerous small-bank failures and civil actions pursued by regulators, investors and others against financial institution directors and officers. The former BancInsure Inc., a longtime competitor of the ABA-sponsored program, was placed into liquidation in 2014.

Should the ABA Insurance Services relationship end, it would not mark the first time that Everest National has experienced the loss of a program that was a significant contributor to its overall premium volume.

The insurer at one point wrote business on behalf of New York-based Brownstone Agency Inc., a relationship that at times accounted for more than 10% of its total direct premiums written. The agency offers package policies for various types of residence in New York and select other major U.S. cities, and the program has since been underwritten by subsidiaries of Aspen Insurance Holdings Ltd. and, more recently, Swiss Re AG, James River Group Holdings Ltd., and Argo Group International Holdings Ltd., according to a review of company product filings.

Even as the loss of the Brownstone business reduced Everest National's MGA-produced direct premiums written to $52 million in 2012 from $111.8 million in 2011, its total direct business volume increased to $759.9 million from $558 million as the company significantly boosted its multiperil crop insurance writings.

Everest National reported at year-end 2017 that it had 16 active programs and 19 underwriting segments in place, offering general liability, professional liability, workers' compensation, medical malpractice, commercial property, multiperil crop, motor vehicle and nonstandard auto insurance coverage. Its direct premiums written across lines increased to $632.6 million in the first half of 2018 from $523.3 million in the year-earlier period, an increase of 20.9%.

Were the estimated amount of ABA Insurance Services-produced business removed from the total for the first half of 2018 based on a run-rate of its full-year 2017 business volume, Everest National's direct premiums written would still be up 15.5% year over year.