Insurance Claims And Issues

Irag. Katrina. Recession. Now, Insurance?

    One of the few things that the people currently holding power in the Federal Government want to regulate is something new:  Insurance.  A proposal to regulate Insurance on a national scale is hidden in the 'reforms' proposed by the current Federal Government to 'deal' with the current financial crisis.  Edmund L. Andrews, "Treasury's Plan Would Give Fed Wide New Power" p. A1, col. 5 (New York Times Nat'l Ed., Saturday, March 29, 2008).

    Not by these people, please.

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Property Insurance and the Florida Legislature: Reforms or Risks?

    Property Insurance is a focus of the 2008 Florida Legislature.  This is not always to the good, according to an editorial on the subject in an influential Florida newspaper, "Insurance Risks Still Looming" (St. Petersburg Times Online, Thursday, March 27, 2008).

    The editorial highlights many areas of interest addressed by various bills passed or pending in the Florida Senate.  Some of these areas of interest are shared in varying degrees by the Florida House of Representatives and by other State officials such as Florida's current Chief Financial Officer.  Some were put in place by the 2007 Special Session of the Florida Legislature; some are new.  Here are the more significant areas of interest addressed in the editorial:

• Expanding Citizens Property Insurance Corporation.  Citizens is a public corporation owned by the Taxpayers of Florida.  A Senate bill, according to the editorial, would allow Citizens to issue Insurance Policies "insuring homes worth $1-million or more."
• Extending the current rate freeze through 2009.
• Providing incentives through "a $250-million state incentive program" for private Insurance Companies to remove and take over the risk on  Insurance Policies on which Citizens is currently on the risk.
• Reduce Florida's exposure to Reinsurance risk.
• "[R]esponsibly reduce exposure with both the CAT fund and Citizens, which can each assess policyholders when they run deficits."

Time, Hurricanes, the Florida Legislature, and Florida State officials will determine the outcome of these and other proposals.  That is, if there is enough Time.  And whether there is another Year of Hurricanes in Florida.  Much remains to be seen.

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The Ten Percent Rule, Rules!

"If it is too complicated for most of us to understand in 10 to 15 minutes, then we probably shouldn't be doing it."
Christopher Whalen of Institutional Risk Analytics, quoted in
Nelson D. Schwartz & Julie Creswell, "What Created This Monster?/Yes, the Markets Can Bite Back" p. 1, col. 1 "Sunday Business" Section (New York Times Nat'l Ed., Sunday, March 23, 2008).

Then there are these thoughts in the same newspaper article:

    Credit rating agencies, which banks paid to grade some of the new products, slapped high ratings on many of them, despite having only a loose familiarity with the quality of the assets behind these instruments.
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    Ratings agencies have similarly been under fire ever since the credit crisis began to unfold, and new regulations may force them to distance themselves from the investment banks whose products they were paid to rate.

There is nothing like a hands-on inventory or, if that is not an option, then there is nothing like knowing enough to know that you do not know, everything.

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Bond Insurance Continues On?

    Dexia, SA is rushing in where angels fear to tread:  the inferno of Bond Insurance.  Fabio Benedetti-Valentini & Christine Richard, "Dexia Picks Up Bond Insurance Market Share; Buffett Enters Fray" (Bloomberg.com, Friday, March 21, 2008).
   
    Dexia is billed as the largest lender to Local Governments on the face of Earth.  Dexia boosted the credit rating of Bond Insurance Company Financial Security Assurance Holdings Ltd. ("FSA") by giving it a major transfusion of capital.  (Dexia owns FSA.)  FSA's goal in 2008 is to sell 50% or more of all new Bond Insurance Policies written in the United States.  It is reported also that of the $430 Billion in Municipal Bonds that were sold in 2007, nearly $215,000,000,000.00 or nearly one-half was insured.

    This rosy picture is not without thorns, however.  FSA wrote down or "adjusted" $418,000,000.00 in 2007 mostly from "insured credit-default swaps on pooled corporate risk," it said in a statement quoted in the linked Bloomberg article.
   
    Further, there are those who question loudly why Municipal Bonds need Bond Insurance at all.  Anyone got a good reason?

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Credit Raters' Degrees of Separation Affect Bonds and Bond Insurers.

   The three major credit raters in the United States have responded to concerns recently expressed by State and Local Governments issuing so-called Municipal Bonds.  The credit raters have each responded differently to concerns that Municipal Bonds are set on an inferior footing.

   Municipal Bond issuers are concerned that, compared to Corporate Bonds, the two-tiered rating system invented by the raters favors Corporations over local and State Governments.   That double-rating system has been in use for the better part of not much more than 30 years, if that.  (See many recent previous posts on the Issues in this space addressing "Bond Insurance" and "Market Performance".)

    Moody's Investor's Service:  1 of the 3 Credit Raters Announces a Plan.

Moody's Investor's Service has responded to these concerns by announcing  an ambiguous program with these features:

1. It has surfaced a plan to provide State and Local Governments an option to obtain "a so-called global rating," which would be based on the same factors that are used to rate Corporate Bonds, for Government-issued "tax-exempt bonds".  This would give State and Local Governments a second Moody's rating in addition to Moody's rating of Munis under the current rating system, which Moody's would keep unchanged.
2. Moody's has not taken a position whether it will try to charge State and Local Governments to obtain the global rating option it has surfaced.  However, past experience with Moody's Municipal Bond ratings reportedly shows the following.   In October, 2007, the State of California issued $250,000,000.00 in Bonds to fund stem-cell research.  California reportedly paid $46,200.00 to Moody's to obtain the existing type of "municipal scale rating".  California also paid an additional $25,000.00 to Moody's for the global scale rating.  It is unclear what for, but California also reportedly agreed to pay $6,250.00 "a year for the life of the bond".  Moody's rated these same California Bonds A1 under the existing credit rating system, and AAA on the global scale, i.e., on the same scale using the same criteria as are used to rate the credit of Corporate Bonds.
3. The global rating option would not be automatic; issuers of Municipal Bonds would have to ask for it.
4. Two sets of ratings for Municipal Bonds would be good for issuers of Municipal Bonds, Moody's said in a statement, at the same time that Moody's asked for comment on whether two sets of ratings would be good for issuers of Municipal Bonds.

Fitch Ratings Issues a "Yatta Yatta Yatta" Statement.

Fitch Ratings is another one of the three credit rating corporations in question.  Fitch issued what might be called a yatta yatta yatta statement, or much wind signifying nothing much.  Fitch used the word "'harmonization'" in its reported statement, but it is not clear what Fitch meant.

Standard & Poors is in Denial.

Standard & Poor's ("S&P") says it has only one set of standards.  This would not appear to reflect recognition of a two-tiered system for rating the credit of Municipal Bonds and Corporate Bonds.

   These developments are reported by Vikas Bajaj, Moody's Weighs Changes to Its Municipal Ratings" p.C6, col. 1 "Business Day" Section  (New York Times Nat'l Ed., Friday, March 21, 2008); Jeremy R. Cooke & Michael B. Marois, "Moody's, Fitch Weigh Muni Rating Shift on Pressure From States" (Bloomberg.com, Friday, March 21, 2008).

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Let Coverage (and a Smile) be Your Umbrella.

    The problem with Umbrella Insurance Policies is not that Policyholders do not buy them.   The Premiums are way lower on average than the Premiums charged for the same amount of Primary Insurance Coverage.

    Rather, the problem with Umbrella Insurance Coverage is that the vast majority of Policyholders are not insured with adequate limits on their Umbrella and other Excess Insurance Coverages over and above their Primary Homeowner's Insurance or Automobile Insurance Policies, for example.  Joseph B. Treaster, "Umbrella Coverage for Preventing Your Ruin" (New York Times.com, Tuesday, March 18, 2008).

    There is no time like the present to take the counsel of this respected reporter in the article linked above, and check on your own Umbrella Insurance Policy Limits, or to counsel others you may represent to do the same.

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Bond Insurance on Auction-Rate Bonds, Too?

   Among the revelations emerging from the financial fiasco is that Insurance Companies reportedly have "issued policies guaranteeing so-called auction-rate bonds."  Mike Boehm, "Mortgage Crisis Hits Cultural Institutions" (Los Angeles Times Online, Friday, March 21, 2008).   Issuers of auction-rate bonds for construction projects in particular, are listed in the linked newspaper report as including the Los Angeles County Museum of Art, the Orange County [California] Performing Artscenter, and the Natural History Museum of Los Angeles County.

   One of the Insurance Companies that used to issue Bond Insurance Policies for "auction-rate bonds" is reportedly the now imperiled Financial Guaranty Insurance Company.  "With the bond insurance no longer ironclad, investors are demanding higher interest -- if they are willing to bid at all," it is reported in the newspaper article.

   These troubles are leading Bond Issuers "to restructure the bonds or find bankers to vouch for them in lieu of the now-suspect bond insurers."  One restructuring method currently being explored is negotiating with banks to back these construction Bonds with letters of credit.

   Another financial alternative reportedly is to seek out County, State and other Government bodies which may have an interest in investing in these outstanding construction Bonds.  For example, Los Angeles County is reportedly in such negotiations right now with the  Los Angeles County Museum of Art and the Natural History Museum of Los Angeles County, both of which are governed separately from the Government of Los Angeles County.

   In the meantime, other "cultural institutions" are moving forward with construction projects for which funding was obtained by issuing "unaffected fixed-rate bonds."

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"Credit Default Swaps": The New "Insurance"? When Cometh Outraged Regulation?

    Recently, informed and respectable journalists have taken to referring in shorthand to "credit default swaps" as "insurance".  See, for example, Gretchen Morgenson, "Fair Game/In the Fed's Cross Hairs:  Exotic Game" p. 1, col. 2 "Sunday Business" Section (New York Times Nat'l Ed., Sunday, March 23, 2008):  "Credit default swaps were created as innovative insurance contracts that bondholders could buy to hedge their exposure to the securities."  They may know more than they say, or than they write.

    Wikipedia Encyclopedia defines a "credit default swap" as "a bilateral contract under which two counterparties agree to isolate and separately trade the credit risk of at least one third-party reference entity."  The buyer receives credit protection, this definition continues; the seller guarantees that the product is creditworthy.  Wikipedia's definition contains the further observation that credit default swaps "resemble an insurance policy, as they can be used by debt owners to hedge, or insure against credit events such as a default on a debt obligation." Wikipedia Definition of "Credit Default Swap."  This may be so close a resemblance as to be the same thing.

    A typical State Statute provides that "Insurance" is defined as "a contract whereby one undertakes to indemnify another or pay or allow a specified amount or a determinable benefit upon determinable contingencies."  Florida Statute Section 624.02.     A decision in a Depression-era case provided a similar, widely followed definition:  "The insurance policy ... was merely a simple contract whereby the insurer in return for a stated consideration agreed, upon the happening of a specified event to pay the insured a fixed or ascertainable sum of money."  In re Hilpern's Estate (In re Martin), 165 Misc. 430, 433, 300 N.Y.S. 886, 890 (Surrogate's Ct., Kings County 1937)(subscription required to access via Westlaw).

    It should perhaps come as no surprise that during the Great Depression, Courts were called upon in many cases to decide what was Insurance, and what was not.

    In particular, the Courts were called upon to decide then, similar questions to  what they may be called upon to decide now.  In the case of National Surety Co. v. Mutual Veneer Co., 66 F.2d 88, 89-90 (6th Cir. 1933)(Michigan law)(subscription required to access via Westlaw), "Credit Insurance" was held to be a form of "Casualty Insurance" subject to Michigan's laws then extant regarding the giving of false statements in applications for Insurance.

    And so it is today.  A typical State Statute includes "Credit Insurance" among a long list of definitions of types of "Casualty Insurance".  Credit Insurance is in pertinent part "[i]insurance against loss or damage resulting from failure of debtors to pay their obligations to the creditor ...."  Florida Statute Section 624.605(1)(i).

    Well, then:  Is a "Credit Default Swap" just another type of "Insurance" at the present time?  If it is "Insurance," why has it not been regulated by the States or, if it has been regulated by the States, why are there no known accounts of it?  Readers of this Insurance Law Web Log are invited to respond with any sources and cites they may have.

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Storm Clouds in Florida: Legislature Divided Over Rollback, Writedowns.

   The current credit crunch and crisis, problems with issuing and insuring the payment of Bonds, and at least one of the questioned credit rating corporations used in the Insurance industry, have recently made appearances together in the Florida Capitol.

   The current credit crunch has appeared together with the specter of a failure in the market for Florida Bonds.  "In light of the troubled housing and credit markets, state leaders have expressed doubt that they'd be able to sell $27 billion in bonds needed to pay storm claims if a Katrina-sized hurricane hit a major population center in Florida."  Julie Patel, "State Legislators Say Property Insurance Law Has Deep Flaws" (South Florida Sun-Sentinel.com, 10:24 PM EDT, Monday, March 24, 2008). 

   In addition, embattled credit rating company Fitch Ratings just issued a timely report.  In its report, Fitch reportedly takes the position that Homeowner's Insurance Coverage would "'effectively collapse'" if there is a Hurricane in Florida in 2008.  The Fitch report comes just as the Florida Legislature is debating whether to writedown and rollback, or extend, the emergency laws it passed in Special Session in January, 2007.

   A majority in the Florida Senate reportedly is in favor of extending and expanding the 2007 Special Laws on Hurricane Insurance.   For example, a majority of the Florida Senate reportedly supports extending a moratorium on Premium Rate Increases by Citizen's Property Insurance Company.  The moratorium or "freeze" on Rate hikes is due to expire on January 1, 2009.    Citizen's is owned and operated on behalf of Florida Taxpayers as a State agency offering circumscribed Homeowner's and other Property Insurance Coverages.  That its offerings became suddenly more popular in 2006 and 2007 was taken then as a sign of a desperate Homeowner's and Property Insurance Market in Florida.

   On the other hand, a present majority in the Florida House of Representatives reportedly opposes extending the moratorium on Citizen's Property Insurance Premium increases.  Further, a majority in the Florida House is reported to support "scaling back the catastrophe fund" that the Florida Legislature rushed into place in its 2007 Special Session.

   More to come in the struggle among and between Premium Rate Increases and the availability of credit, the performance and issuance of so-called Municipal Bonds such as the Florida Bonds in question in the Florida Capitol, and the very existence and availability of Homeowner's Insurance Coverage in Florida.

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Merrill Lynch Sues Bond Insurance Company: Writedowns vs. Control Rights?

   Merrill Lynch sued XL Capital Assurance, a unit of Security Capital Assurance, in Federal Court for allegedly failing to honor "seven credit guarantee contracts".

   One of the speculative reasons for the lawsuit is Merrill Lynch's apparently well-founded fear that it will now have no choice but to writedown (i.e., report as worthless) the debt allegedly guaranteed by these seven credit guarantee contracts.

   These "credit guarantee contracts" appear to be the functional equivalent of Insurance Policies.

   For its part, XL reportedly answers that its contracts with Merrill Lynch gave XL "control rights" on the portfolios it had guaranteed, but that Merrill Lynch gave those rights away to others regardless.

   The amount of money invested in the portfolios in question is $3.1 Billion.  See "Insurer Gives Its Reasons for Severing Merrill Pacts" p. C5, col. 6 "Business Day" Section (Reuters Report published in New York Times Nat'l Ed., Friday, March 21, 2008).

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