Even though the workers’ comp industry is on track for a third consecutive profitable year — with one recent projection placing the 2017 combined ratio at 97% — a few comp carriers have struggled.

Multi-line carriers American International Group, or AIG, and AmTrust Financial Services reported multi-million-dollar losses in some quarters this year, leading to concern from rating companies.

And the 2nd Judicial Circuit Court for Leon County, Florida, last month ordered monoline comp carrier Guarantee Insurance Co. into liquidation.

The struggles at each of the three companies are related, at least in part, to an issue that has long plagued workers’ comp carriers: inadequate reserves.

“That is the most common reason why property and casualty insurers go out of business,” said Robert Hartwig, co-director of the Center for Risk and Uncertainty Management at the University of South Carolina Darla Moore School of Business.

Neither AIG or AmTrust seems at risk of going under, but both reported charges to reserves this year that raised eyebrows.

At Guarantee Insurance, Florida Insurance Commissioner David Altmaier reported last month that the company needed to boost reserves by $42,426,547 to cover its liabilities, but had a policyholder surplus of only $42,189,770. That meant the carrier was short $235,775.

Making matters worse, according to Altmaier, the carrier illegally diverted $15.7 million to majority owner Steve Mariano in 2016 and through the first half of this year “with no documented business purpose and no discernible benefit” to the carrier.

And in a domino effect, Guarantee’s insolvency is prompting a bankruptcy filing by Patriot National, which provides technology and other services to the insurance industry. Guarantee was Patriot’s largest customer, accounting for 60% to 70% of its revenue.

Mariano founded Patriot and had been its largest shareholder. The company is now being acquired by lenders Cerberus Business Finance LLC and TCW Asset Management, and said it is cutting all ties with Mariano.

The insurers’ struggles are noteworthy, as AmTrust was the third-largest workers’ comp carrier ranked by direct written premiums in 2016, according to a market share analysis by the National Association of Insurance Commissioners. Travelers ranked No. 1, and The Hartford ranked No. 2.

Acquisitions helped AmTrust rise rapidly in the market share ranks, from the No. 4 spot in 2015 and No. 6 in 2014.

AIG, in contrast, has been paring down, reducing its work comp net premiums written last year by 35%, or $833 million, according to A.M. Best in September. As of 2013, AIG stopped writing standalone workers' compensation policies, although it continued offering the coverage for customers purchasing other products.

AIG ranked No. 9 in terms of workers’ comp market share last year, according to NAIC, and it was large enough to sway industry-wide results. Fitch Ratings said in May that the workers’ comp combined ratio of 95.6% in 2016 would have been more profitable — 3.2 points lower — without AIG’s contribution.

Hartwig predicted that after stabilizing its finances, AIG would take another look at comp, which is a growing, profitable line.

“AIG is too large to ignore the fact that workers’ comp exposures are growing robustly,” Hartwig said.

In a September review of the workers’ compensation line, A.M. Best noted that the segment in 2016 enjoyed its most profitable year since the Great Recession. But the rating company expressed concern about the segment’s “persistent reserve deficiency,” which it pegged at $22 billion in 2016.

In particular, A.M. Best pointed to the threat of inflation increasing the level of reserves needed to cover claim expenses including medical and litigation costs, especially since inflation rates are currently low.

“If inflation increases these costs more than the insurers’ estimates, insurers must recognize these deficiencies, which will negatively affect earnings during the periods in which these deficiencies are recognized,” A.M. Best wrote.

AIG

The year got off to a rough start for AIG, which in February reported a $3.04 billion loss for the fourth quarter of 2016. The results reflected a $5.6 billion impact from prior-year adverse loss reserve development, including $1.8 billion from workers’ comp. For the full year 2016, AIG reported a loss of $849 million.

For a while, 2017 was looking better for AIG. The company reported net income of $1.18 billion in the first quarter and $1.13 billion in the second quarter. But last month, AIG reported a third-quarter net loss of $1.7 billion.

AIG attributed part of the loss to catastrophes. The carrier also said it strengthened loss reserves by $836 million, including $705 million attributed to accident year 2016 “in reaction to early unfavorable loss emergence, primarily in commercial long-tail lines.” Net income for the first nine months of the year was $576 million.

In a Nov. 17 column on investor site Seeking Alpha, WG Investment Research noted, "the hits just keep coming” for AIG in terms of reserve charges.

“Management made great progress in reducing operating expense, but the company again booked a material one-time (try not to laugh) reserve charge, which was not well received by the market,” WG Investment said.

However, the author said he expects AIG Chief Executive Officer Brian Duperreault, who took over in May from former CEO Peter Hancock, to resolve the reserve issues. The need for reserve charges can be attributed to previous management, according to the author, and Duperreault said in November that the company had completed a thorough review of about 80% of the company’s reserves.

“Mr. Duperreault is known in the insurance world as a turnaround expert, and I have faith that he will do just that for AIG, but, in my opinion, it would be misguided to think that he could right the ship in only a few quarters,” the column said.

Rating firms have taken a cautious view of AIG. In June, Standard and Poor’s revised its outlook for the company to negative from stable, while affirming its ratings for the company, including an insurer financial strength rating of A.

S&P wrote favorably about Duperreault, but noted he was the company’s sixth CEO in nine years, in addition to other recent senior management changes. S&P said it was a “precarious time” for AIG and would likely take awhile for the company to meaningfully improve operating performance and earnings quality.

Fitch Ratings revised AIG's outlook to negative in February, following the large 2016 loss reserve charges and net loss for the year. During its annual review of AIG in September, Fitch restated the negative outlook for the company.

“Commercial Insurance remains the greatest source of potential profit improvement and also near term uncertainty,” Fitch said.

Fitch analysts are keeping an eye on AIG’s use of $20 billion in retroactive reinsurance the company purchased from National Indemnity Co. in January, covering about $34 billion of long-tail U.S. commercial lines reserves from accident year 2015 and earlier.

Fitch said factors that could move AIG toward a rating downgrade include “further reserve development within the NICO cover that approaches exhaustion of available limits and/or material development in the 2016 accident year,” as well as failing to move toward underwriting profit for its commercial lines.

AmTrust

AmTrust also turned to reinsurance to cover adverse reserve development, announcing in July a deal with Premia Reinsurance that CEO Barry Zyskind said would leave the company “well insulated from any potential reserve volatility in the future.”

But last month, AmTrust said it would be increasing its prior-year loss reserves by $327 million for the third quarter, following a $63 million reserve charge in the second quarter. The two charges combined have already used up the $400 million in adverse development coverage provided by the Premia deal.

About $88 million of the third-quarter adverse development was from workers’ compensation claims in the company’s small commercial segment, primarily from accident years 2013-2016, company officials said.

The announcement of the reserve charge prompted A.M. Best last month to place the company’s rating under review, with negative implications. A.M. Best analysts said they had concerns about future adverse development of reserves, which would not be covered under the Premia agreement, as well as the company’s pricing and underwriting practices.

That followed A.M. Best’s move in February to revise its outlook for AmTrust from stable to negative, after the company announced a delayed filing of its annual report with the U.S. Securities and Exchange Commission and a restatement of some previous filings. A.M. Best said the delay highlighted the strain AmTrust’s substantial growth in recent years had placed on resources. The company is now current on its SEC filings.

Also last month, AmTrust announced a net loss of $175 million for the third quarter and a net loss of $146 million for the first nine months of the year. That compared to a net income of $292 million in the first nine months of 2016.

In April, the Wall Street Journal reported an investigation of AmTrust by the Securities and Exchange Commission. The article also referenced an alleged a 2014 Federal Bureau of Investigation probe of AmTrust related to accounting practices.

AmTrust responded in a news release: “AmTrust is not aware of any such investigation, nor for that matter, has it ever been contacted by the FBI with respect to such an investigation. … AmTrust has no direct knowledge of any of the individuals, named or unnamed, referenced in the article and is certainly not aware that they have any credibility with respect to their understanding of AmTrust or its regulators.”

In the latest twist reported by WSJ, an aspiring Israeli actress has allegedly been working as an undercover operative to dig up information on critics of AmTrust as well as movie mogul Harvey Weinstein. An AmTrust spokeswoman told WSJ that the company hadn’t hired anyone to investigate its critics.

On the positive side, A.M. Best said, AmTrust has taken steps to strengthen capital, including a sale of part of its fee business that is expected to generate about $950 million in cash proceeds at closing. The company has also been working to improve financial controls.

Guarantee Insurance Co.

Guarantee Insurance was ordered to stop writing new business in August. Any policies that haven’t already been terminated were to be canceled on Wednesday.

Guarantee’s total estimated claims liability as of last month was about $264 million, spread across 31 states and the District of Columbia. The Fort Lauderdale-based workers’ comp carrier had about 8,600 active policies as of Nov. 13, including 1,250 in Florida.The amount of liability could turn out to be higher after guaranty associations have a chance to review the claims.

As for Patriot National, the company’s new owners — Cerberus and TCW Asset Management — have not yet revealed their plans for the business. Patriot said it doesn’t expect its Chapter 11 bankruptcy filing to affect day-to-day business. The company expects the reorganization to be completed early in the second quarter of 2018.