The arrival of Arrowood's 2022 Annual Statement on March 1, 2023, was an event of extreme interest to policyholders. This is because Arrowood, formerly known as Royal and SunAlliance, had put its U.S subsidiaries into run-off and then sold them, in 2006, to a special purpose vehicle controlled by former management. In fairly short order, this was renamed Arrowood. Ever since, policyholders have watched with growing alarm as its financials have deteriorated and its solvency now hangs by a thread. The former subsidiaries had written general liability corporate insurance very widely for decades in the U.S. This significant exposure, coupled with its parlous financials, amounts to yet another perfect storm for corporate policyholders still reeling from that other, more recent abject failure of insurance regulation: the OneBeacon insolvency.

I undertook a detailed financial analysis on behalf of KCIC clients last week. In brief, Arrowood's statutory surplus, a regulatory equivalent of equity, is down to $13 million and its Risk-Based Capital (RBC) Ratio is down to 26% from 96% only a year ago. This places it firmly into "mandatory control" capital levels, which trigger mandatory control by the Delaware Department of Insurance. Except that the department has not taken control.

“Going concern” is an accounting term of art. Values ascribed to various company balance sheet items assume that the entity will continue in business and not be subject to near-term insolvency, generally considered to be in the next year. The disclosure in the annual statement for 2022 reads:

“Based on the Company’s evaluation, the Company has sufficient liquidity to continue as a going concern...”. The disclosure goes on to highlight the fact that although the RBC Ratio is below the mandatory control level, an exception can be made in the case of a company like Arrowood. The exception is possible for a “property and casualty insurance company that is no longer writing new business and is running off its existing liabilities. Under these circumstances the Commissioner has discretion to allow the continued run-off of the Company.” 

In fact, no property and casualty insurance company could possibly be writing new business with a RBC Ratio remotely close to mandatory control levels. With the insurance marketplace highly sensitive to credit ratings of insurance companies, it is inconceivable that an insurer with RBC ratios in the mandatory control category would be able to do so. The apparent exception that the regulator has taken is, therefore, nonsensical. 

We are given to understand from the disclosure that the Delaware Department of Insurance could seek to place the Company in rehabilitation or liquidation (a “formal proceeding”) at any time based on its financial condition. Certain eventualities are recited as factors that could increase the risk of a formal proceeding, including if the Company reported that its liabilities exceeded its assets. This is just another way of say that the Company would be insolvent. These are also very surprising statements. They appear to indicate that statutory insolvency is a risk factor only in deciding whether a formal proceeding is required and not, in and of itself, determinative. At face value, these statements would appear to suggest that Arrowood could continue in run-off even when insolvent. 

Now that the company has survived the most intense actuarial and accounting scrutiny in closing its year-end, an insolvency proceeding is unlikely before the first quarter of 2024. The company does have cash and invested assets of $768 million, and there is no doubt it can meet its liabilities as they fall due for some time. However, the discretion of the Commissioner is now the be all, and end all, of Arrowood’s future. 

Substantial doubt exists as to whether Arrowood will be able to meet ALL of its liabilities. The fact that it has sufficient assets on hand to meet its liabilities as they fall due, perhaps for some time, does not change the fact that Arrowood will eventually be unable to do so.

It remains my opinion that it is only a matter of time before Arrowood enters into an insolvency proceeding. 

My past posts on this subject:

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?

If This Isn’t Wrong, Nothing is Wrong

OneBeacon Five Years On: We Told You So!

OneBeacon 2019 Financials – It’s Not Pretty

OneBeacon – From Bad to Worse