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Surplus note issuance lifts capitalization at National General-managed exchange

One National General Holdings Corp. subsidiary has obtained a surplus note in a reciprocal exchange that another of its units manages following regulatory approval of a corrective action plan earlier in 2018.

Those developments, which New Jersey Skylands Insurance Association disclosed in its audited financial statement for 2017, followed a year in which the reciprocal exchange's total adjusted capital plunged to a little more than $8.1 million from nearly $14.7 million as of Dec. 31, 2016. The resulting authorized control level risk-based capital ratio of 116.2% marked a decline from 471.8% a year earlier, and it signified a regulatory action level event under New Jersey statute.

The New Jersey Department of Banking and Insurance accepted a corrective action plan that New Jersey Skylands submitted in March, the filing revealed. Those plans typically are confidential documents that contain details of corrective actions that insurers intend to employ as well as certain financial projections for their business, assuming the implementation of those actions.

New Jersey Skylands then issued a $12 million subordinated surplus note in April to Bermuda-based National General Re Ltd., or NG Re as it is referenced in the filing. While the reciprocal exchange did not disclose the impact of the surplus note's issuance on its capitalization and quarterly statements for certain New Jersey-domiciled entities are deemed confidential by statute, a $12 million boost to total adjusted capital would have lifted its authorized control level RBC ratio to 288% all else being equal, well in excess of the 200% company action level. New Jersey Skylands obtained regulatory approval to record the note in its March 31 financial statements.

NG Re previously acquired a New Jersey Skylands surplus note with principal amount of $31.3 million in 2016 from Integon National Insurance Co., a U.S.-domiciled subsidiary of National General. Surplus notes generally rank junior to policyholder claims and other obligations in the event of an insurance company insolvency.

National General acquired the management companies that serve as the attorneys-in-fact for New Jersey Skylands and Adirondack Insurance Exchange in September 2014 from Tower Group International Ltd. It records fee income from the management of their businesses, but it does not maintain any ownership in the exchanges themselves.

A company spokeswoman did not return a message seeking comment.

The original surplus note was provided in 2002 by Camden Fire Insurance Association, a then-unit of what would later become OneBeacon Insurance Group Ltd., to serve as New Jersey Skylands' initial capitalization. Tower Group obtained control of the New Jersey Skylands attorney-in-fact and the surplus note through its July 2010 acquisition of OneBeacon's personal lines division. National General bought the attorneys-in-fact as part of a series of transactions highlighted by its acquisition of renewal rights to the financial ailing Tower Group's personal lines business.

"The way these work, they're very similar to mutuals," National General Executive Vice President and CFO Michael Weiner said of the New Jersey Skylands and Adirondack reciprocal exchanges during a September 2015 investor day. "They have their own independent boards, their own independent capital, but we manage them on their behalf. ... It's a phenomenal vehicle for both the consumer and for the underwriting company."

While the Adirondack exchange recorded a slight year-over-year increase to its surplus in 2017, the combination of New Jersey Skylands and its stock subsidiary ended the year with $5.6 million in surplus, down from $11.4 million at the end of 2016. The decline resulted from a net loss of $3.6 million and what the filing showed as a $2.1 million prior-year adjustment to surplus.

New Jersey Skylands said that it changed its accounting for ceded commission income, which triggered a $1.3 million reduction in its surplus on a stand-alone basis. Its stock subsidiary recorded a negative adjustment of nearly $719,000 for the same purpose.

The entities, which focus on homeowners and personal auto insurance, last reported a full-year underwriting profit in 2007. Their combined ratio, as calculated by S&P Global Market Intelligence to present the expense ratio on the basis of net premiums written, has topped 120% in two of the past three years. The entities recorded growth in direct premiums written of 35.8% in 2017 in a development that New Jersey Skylands attributed in its annual statement to the addition of new producers.