I am feeling a little like Johnny One Note of late given my frequent blogs about the alarming financial deterioration of the OneBeacon run-off companies.  I wrote about their 2019 financials in my blog "OneBeacon 2019 Financials – It’s Not Pretty," and hosted a webinar on the same subject on May 28th. 

I now have the March 31, 2020 Quarterly Statement of Bedivere Insurance Company (formerly OneBeacon Insurance Company) before me. Statutory surplus has halved since the end of the year, now $12 million versus $24 million. This was mainly driven by unrealized changes in the value of their investment portfolio, an $11 million decline. You may recall from my earlier commentary that management invests a surprisingly high percentage of their portfolio in common and preferred stocks. This high-risk strategy backfired during the stock market decline associated with the pandemic. Another reason for the decline in surplus was further deterioration in their loss reserves with $3 million incurred in the quarter, somewhat offset by investment income and realized gains.

As of December 31, 2019, the risk-based capital ratio had catastrophically declined to 52%, well below the mandatory control level of 70%. If the March 31, 2020 statutory surplus were to be substituted in the calculation, the percentage would be 26%.

In the year-end financials, a "going concern" disclosure was introduced for the first time, acknowledging the material decrease in surplus to below the mandatory control level. Management disclosed that "[f]urther material adverse loss development may impair the Company's ability to continue as a going concern." How is that for an understatement?

The March 31, 2020 Quarterly Statement adds on to that, disclosing the following: "As of March 31, 2020 the Company is currently working with the Pennsylvania Department of Insurance on a Corrective Action Plan." I, for one, cannot wait to see what that might contain! I will continue to monitor developments and will report on the second quarter financials, if the company makes it that far. My prediction is that the Department will permit the Company to depart from recognized statutory accounting practices and allow it to discount its loss reserves to present value, thereby manufacturing surplus with an accounting sleight of hand.

I sincerely hope that I am not the only one calling for answers to important questions:

1. Michael Consedine is the insurance commissioner that shepherded through the 2014 sale by OneBeacon Insurance Group of its subsidiaries, in which all of their long-tail liabilities had been concentrated, to The Armour Group Holdings. After this transaction, that showed near complete disregard for the interests of policyholders, he went on to become the CEO of the National Association of Insurance Commissioners. Why has he not been fired in disgrace? Why would he be entrusted with ANY regulatory responsibility to the insurance-buying public, now or in the future?

2. The foundation of the transaction was laid in the Towers Watson actuarial analysis and the infamous 10,000 scenarios run in their stochastic model. Towers Watson argued, and the Department agreed, that given the proprietary nature of the model, independent scrutiny should not be permitted. The consulting actuaries in their reporting and testimony presented numerous questionable assumptions, some that were even at odds with the published research of their own firm. Criticisms offered by me and other experts were hotly and arrogantly countered, even resorting to ad hominem attacks. Nevertheless, considering the value and implications of this transaction, and given the known limitations of this type of modeling, why didn’t the Department permit a proper examination of these assumptions by those with the most at stake, policyholders??

3. Constance Foster, the Saul Ewing LLP partner who represented OneBeacon Insurance Group in the transaction, was herself, conveniently, a former insurance commissioner of the Pennsylvania Department of Insurance. Michael Consedine, the insurance commissioner that approved the transaction, had until his appointment been the Vice Chair of the insurance practice group of the same law firm, Saul Ewing. Why are there not stronger ethical rules to prevent such extremely cozy arrangements? Even if there was no actual wrongdoing, there is the appearance of a lack of proper independence and the whiff of self-interest which undermines trust in the regulatory regimen.

It is not likely that the Corrective Action Plan will provide any answers, but I assure you that I will continue to ask the difficult questions. Any new information that we come across will be shared in a future blog post.