As Jonathan Terrell discussed in a blog post earlier this year, the 2021 insolvency of Bedivere Insurance Company (formerly known as OneBeacon Insurance Company) has created an uncertain future for policyholders of SPARTA Insurance Company (f/k/a American Employers’ Insurance Company or AEIC).

With Bedivere out of the picture, short-term responsibility for handling AEIC claims rests with SPARTA Insurance Company. However, SPARTA maintains that ultimate responsibility for AEIC liabilities rests with Pennsylvania Insurance Company (PIC) (formerly known as Pennsylvania General Insurance Company or PGIC) due to various reinsurance and assumption agreements forged in 2005 and 2007. PIC asserts that a 2012 agreement transferred all of PGIC's material assets and liabilities to OneBeacon Insurance Company.

The facts of these transactions are being sorted out in court. In October 2021, SPARTA filed a declaratory judgment action in federal court in Massachusetts against PIC, seeking relief for AEIC policy responsibilities. As of this writing, the case is still underway, with both parties’ motions for summary judgment on various pleadings having been denied.

It is unclear how the court will ultimately rule in this case. What is apparent is that SPARTA is carrying the torch for payments to AEIC policyholders, to its great detriment. In the first six months of 2024, SPARTA paid out $19 million to AEIC policyholders, bringing the total amount to $60.7 million, dating back to when PIC first refused to pay the claims in May 2021.

Rather than the normal practice of reserving for any expected loss payments by expensing additions to reserves through the Statement of Income, these loss payments are accounted for as reductions from total surplus directly, which declined from $23.7 million to $13.8 million during 2023, and further declined to $11.1 million in the first six months of 2024. This practice is highly unusual, but it has likely been blessed by SPARTA’s regulators.

In the first six months of 2024, SPARTA’s reserves were reduced considerably by loss and loss adjustment expense payments totaling $36 million, an amount much greater than payments at this time last year. However, its loss development (unrelated to AEIC) of $842k is more on par with last year’s figure at this point in time.

The consistent good news is SPARTA, and its insureds, continue to benefit from much-needed cash from its parent, Catalina Holdings. A total of $53.5 million of cash was provided to SPARTA in exchange for surplus notes in 2023. In the first six months of 2024, an additional $20 million of surplus notes has been issued. By definition, surplus notes are subordinated to policyholder claims. While it is uncertain how long this support will last, Catalina – itself ultimately owned by financially healthy Apollo Global Management – is clearly willing to keep the company afloat for now.

SPARTA’s reliance on parental support, deteriorating financial condition, and the uncertainty of litigation success with PIC do not necessarily suggest long-term viability. As we’ve stated before, engaging in buyout settlement discussions at a discount to fair price may be a sensible course of action for some, if not many, policyholders.