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3/11/2024 By Jonathan Terrell

In November 2023, I wrote the blog post “What is the Deal with SPARTA Insurance?” advising policyholders of American Employers Insurance Company (AEIC) to enter into buyout settlement discussions if approached by SPARTA. That advice was based on September 30, 2023, financials. and now this update is based upon the full-year 2023 statutory Annual Statement.

AEIC policyholders are victims of that disaster of insurance company regulation: the OneBeacon Insurance Group’s reorganization. Ultimate responsibility for these policyholders rests with the now-insolvent Bedivere Insurance Company.

Through a convoluted series of transactions, primary responsibility for AEIC now rests with SPARTA — though neither SPARTA nor its previous owner, Pennsylvania Insurance Company (PIC), bargained for any liability. They contracted for it to remain with the mighty OneBeacon Insurance Group.

A review of developments in the fourth quarter and the full-year financials reveals both good and bad news for policyholders to take into account during their risk assessments:

The Good News

  • SPARTA is a subsidiary of a run-off specialist, Catalina Holdings — itself owned by the financially strong Apollo Global Management. Catalina contributed capital to SPARTA in the form of surplus notes of $8.5 million in July 2023, $5 million in October 2023, and an additional $40 million during the fourth quarter. This represents a significant level of commitment from the parent, without which SPARTA would be insolvent.
  • Management has no “substantial doubt” that SPARTA can continue as a “going concern,” according to their disclosures.

The Neither Good nor Bad News

  • SPARTA has continued to front payments to AEIC policyholders, a total of $26.4 million in 2023 ($8.6 million in the fourth quarter), and a total of $41.7 million since PIC stopped its fronting of the payments in May 2021.
  • SPARTA, with the sign-off of the Connecticut Insurance Department, accounts for these payments “below the line” — that is, outside from the normal accounting for loss payments in its Statement of Income, as an adjustment to surplus. Specifically, it includes the payments as “other-than-invested assets,” which then are deducted from surplus. Notwithstanding the parental capital infusion, surplus declined from $23.7 million to $13.8 million during 2023.

The Bad News

  • SPARTA incurred significant loss development (unrelated to AEIC), increasing its reserves for claim liabilities and expenses by $32.3 million during the year. The largest component of this increase was commercial auto liability.
  • Other disclosures indicate that a significant portion of this adverse development was related to the settlement of a bad faith action brought by its insured, Copper Solution, for which a $32 million judgement was entered by the New Mexico court.
  • In October 2021, SPARTA filed a declaratory judgement action against a subsidiary of PIC seeking to have it honor its obligations to AEIC policyholders, but reports no developments in the case.

Overall, in the short run, SPARTA is entirely dependent upon parental support to stay in business and would be insolvent without it. Unlike parent companies of actively underwriting insurance companies, Catalina and Apollo are not subject to big reputational risks by cutting ties and allowing SPARTA to descend into insolvency. In these circumstances, seeking buyout settlements at prudent discounts appears to be the best course of action for many policyholders.

Jonathan Terrell

About Jonathan Terrell

Jonathan Terrell is the Founder and President of KCIC. He has more than 30 years of international financial services experience with a multi-disciplinary background in accounting, finance and insurance. Prior to founding KCIC in 2002, he worked at Zurich Financial Services, JP Morgan, and PriceWaterhouseCoopers.

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