Maybe I'm missing something maybe we're all missing something. But I'm pretty confident that what you're seeing is some bug or other gaff that is not normal behavior.

That setting should be part of your iPhone and not the software installation. I mean, if you connect that iPhone to a new computer it should be able to show you the setting as it was set and preserved on that particular phone. It's like in this case that setting has somehow been reset. However, I still believe it's not supposed to format your phone when switching from automatic to manual.