Upon information and belief, representatives of SPARTA Insurance Company have been approaching policyholders in confidential settlement discussions and using SPARTA’s deteriorating financial condition to advocate for policy buyouts for American Employers Insurance Company (AEIC) coverage at discounted valuations. Is SPARTA in financial distress? Should policyholders be contemplating buyouts? What sort of discount is reasonable in the circumstances?
Policyholders are right to be confused. Even for this veteran of insurance company financial analysis, it took a few days to figure out what was going on. The news is not good, and it is worse than a casual review of the financials might indicate.
The blog format is not the place for detailed financial analysis. Please contact me directly for that. But the main points are summarized below. It is, I am sorry to say, yet another ripple from that disaster of insurance company regulation, the OneBeacon Insurance Group reorganization and sale.
The ultimate responsibility for paying AEIC Claims is with the insolvent OneBeacon Insurance Company, now renamed Bedivere, and insolvent since 2021.
In the meantime, SPARTA is fronting payments to AEIC policyholders. Through September 30, 2023, payments of $33.0 million are disclosed, $17.8 million of which were in 2023.
The payments are accounting for “below the line” as a reduction in surplus through the line item “Change in non-admitted assets”.
SPARTA is in solvent run-off and owned by Catalina Holdings, a run-off specialist that is ultimately owned by Apollo Global Management. Without a capital infusion, SPARTA does not have the financial resources to continue to front payments beyond the short term. It is therefore encouraging news that its parent, Catalina, has infused capital using “surplus notes” in the amount of $8.5 million in July 2023, and a further $5.0 million in October 2023.
Pennsylvania Insurance Company (PIC), the former parent of SPARTA, retains broad responsibilities for the payment of AEIC claims, having acquired SPARTA from the OneBeacon Insurance Group. Its disclosures are clear that it believes it acquired a clean shell company from One Beacon. It does not mention the declaratory judgement action from SPARTA seeking reimbursement.
Though financially sound and profitable, PIC is a small insurance company. Even if it did step in to fund AEIC liabilities, it does not have the resources to do so in the long-term.
PIC is ultimately owned by an individual, and it is a member of a group of companies with significant assets — none of which are under any obligation to assist PIC.
Entering into buyout settlement discussions and offering a discount to fair value is likely a prudent course of action for policyholders.
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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.