Update: The Delaware Court of Chancery Civil Action entered the liquidation order on November 8th and appointed the insurance commissioner as receiver. All claims against Arrowood must be filed with the receiver by January 15, 2025.

Arrowood Indemnity Company is insolvent.  Yesterday, November 7^th, the insurance commissioner of Delaware petitioned the court for an order of liquidation. Arrowood’s board of directors has unanimously consented to the liquidation. The petition stated that Arrowood has a negative surplus of approximately $17 million, driven mostly by a $25 million increase in reserves for certain coverage lines. We hope to get more information on this change as the petition does not give more detail on which lines, but Arrowood’s third-quarter financials are due to be filed November 15^th and will hopefully elaborate further.

Arrowood is comprised of the consolidated US-based insurance operations of Royal Sun Alliance (RSA) pursuant to a management buyout approved by the Delaware insurance commissioner in 2007.  It represents yet another abject failure of insurance regulation in the United States. Like the Armour-OneBeacon transaction that created Bedivere Insurance Company in 2014, the 2007 Arrowpoint-RSA transaction separated the legacy, unprofitable, run-off insurance operations from the actively underwriting businesses and removed the support of a strong and profitable parent and group of companies. Parental support is critical for legacy insurance operations because it provides reputational support (it looks bad for an insurance holding company if it lets one of its insurance companies go bust) and financial support, in many instances.  KCIC’s Jonathan Terrell testified in opposition to the transaction back in 2007.

We take no pleasure from having correctly predicted Arrowood’s demise. KCIC has been reporting on Arrowood’s financial condition for over two years, tracing the decline of its statutory surplus from $173 million on December 31, 2018, $9 million on December 31, 2022, $7 million on June 30, 2023, and negative $17 million today. Left to its own devices, Arrowood’s reserves proved inadequate to respond to both legacy asbestos and environmental risks, to say nothing of emerging torts like sex abuse claims, PFAS, opioids, talc, and others. Lacking access to capital outside of its own investment returns and reinsurance commutations, it was really only a matter of time before Arrowood became insolvent.

What Happens Now

When Arrowood is ordered into liquidation (and we expect that it will any day now), litigation against Arrowood would be automatically stayed and insureds receiving a defense from Arrowood would lose that benefit. The liquidation order will also trigger the activation of the state guaranty funds. Many corporate policyholders may however be unable to access these funds because of net worth restrictions. Even those who can are typically required to exhaust all other available coverage for their claims first. Maximum recoveries per claim may also be subject to restrictions.

Those policyholders who cannot access a guaranty fund will be stuck seeking recovery from Arrowood through court proceedings in Delaware. First, policyholders will have to submit their proof of claim forms by the appointed filing deadline. Thus begins the long process of updating claims and policy information, responding to liquidation staff’s information requests, and ultimately negotiating an agreed claim value. Arrowood will likely not set an initial payout percentage and issue initial claim distributions for agreed claims for at least five to seven years. The final payouts and closing of the estate are likely at least a decade in the future.

A Cautionary Tale

The lesson for policyholders and their attorneys is the same as with Bedivere: be extremely skeptical of any insurance company reorganizations that involve your insurers. Interested parties often have the opportunity to submit briefs and to testify in proceedings before insurance commissioners charged with evaluating such proposed transactions. Emerging torts like PFAs and sex abuse claims demonstrate that there is still significant value in old occurrence-based insurance policies; they should be treated as a valuable asset and protected.

KCIC will continue to report on Arrowood, including when a liquidation order is entered and their third quarter financials are available. Further background and analysis on Arrowood can be found in our prior posts.

Prior Reporting on Arrowood:

Another Perspective: Arrowood is Like Kemper

Arrowood Indemnity Second Quarter 2023 Update

Arrowood First Quarter 2023 Update: Hanging by a Thread to Solvency

My Latest Arrowood Analysis: Only a Matter of Time

Arrowood: Another Dour Update

Arrowood: The Inexorable Decline Continues

Arrowood: Updated Analysis and Opinion

Here We Go Again. Is Arrowood on the Path to Insolvency?