Arrowood Indemnity Company released its 2023 first quarter statutory financial statements on June 8. Typically, statements are due 45 days after the close of the quarter, i.e., May 15, August 15, and November 15. No reason was given for the late filing.

According to the statements, while Arrowood remains solvent as of March 31, 2023, its policyholders’ surplus (the difference between its assets and liabilities, akin to stockholders’ equity) fell to merely $6.5 million. Importantly, the statements disclose a mistake made in the prior year-end financials. Arrowood had reported a surplus of $12.9 million as of December 31, 2022. However, that number should have been $9.0 million — an even more severely depleted surplus at year-end. Allowing for the error, the decline in surplus during the first quarter of 2023 was $2.5 million.

A certain degree of volatility is to be expected with quarterly data. The most material item on the balance sheet — loss reserves — typically do not receive the most comprehensive analysis until year-end. Given the precariously thin surplus, any decline will be alarming to policyholders. Arrowood will soon be insolvent simply at its current pace of decline.

All our previous concerns remain, including:

• Lack of insurer parent support
• Inadequate loss reserves
• Exposure to opioids, PFAS, talc, sex abuse and other emerging torts
• Depleted reinsurance protection.

The notes to Arrowood’s financial statement include a “Going Concern” section detailing management’s substantial doubt as to whether the company can continue to operate. The company continues to operate under its confidential Risk-Based Capital (“RBC”) Plan that was submitted to and approved by the Delaware Department of Insurance last year. However, a run-off insurer like Arrowood with no premium income has few options to generate significant surplus gains beyond commuting policies for less than the carried reserves on those policies.

KCIC will continue to analyze and report on Arrowood and other run-off insurers’ financial health. Arrowood’s next financial statements should be published in mid-August. Whether surplus further declines or if the Department of Insurance takes any actions to rehabilitate or liquidate the company is hard to predict, though our expectation is that it is only a matter of time before the Department steps in to take control.