Insurance Claims And Issues

Florida Office of Insurance Regulation Putins Allstate Insurance.

    For nearly a year, Allstate Insurance Company and its subsidiaries resisted investigations by the Florida Insurance Commissioner into its Reinsurance arrangements, its unauthorized Catastrophe Models that consistently predicted greater damage -- and thus the 'need' for greater Premiums -- than was predicted by the Catastrophe Models that have long been used in the industry and in Florida, and Allstate's relationships with raters and trade associations.  As readers of this web log know, many posts here have followed the developments during that time, until Allstate exhausted its appeals and Courts overruled its objections to the Insurance Commissioner's investigations.  Now, what the Florida Insurance Commissioner calls "'drastic actions'" have been agreed to by Allstate.  Tom Zucco, "Deal Cuts Allstate's Rates" (St. Petersburg Times Online, Friday, August 15, 2008).

    The capitulation to which Allstate has been forced to consent is as overwhelming in its own way, as the recent invasion of Georgia by the Russian Army.  Allstate's "agreeement" was released on Friday, August 15, 2008, the traditional day of the week to release bad news to the public and press.  The agreement includes these terms:

Allstate will pay a $5,000,0000.00 fine to the Florida Insurance Regulatory Trust Fund under its agreement with the Florida Office of Insurance Regulation, which is the Florida Insurance Commissioner's Office;

Allstate will write 100,000 new Insurance Policies in Florida over the next three years, breaking down into 50,000 new "basic" Homeowner's Insurance Policies and 50,000 new Condominium, Renters and other residential Property Insurance Policies;

Allstate will lower Premiums on its existing "Florida policies" by 5.6 %, it is reported in the linked article, although what kind of Insurance Policies they are is not reported;

Allstate will not seek a Premium Rate Increase for at least a year, although again, the linked article does not identify for what kind of Insurance Policies;

Allstate will continue to 'cooperate' with the Florida O.I.R. investigations; and

Allstate waives its rights to challenge this agreement in Court.

    Allstate is reportedly the Number 2 Automobile Insurance Company in Florida, writing an average of some $564,000.00 in new Premiums a month in that line of business.  It is also reportedly the Number 4 Property Insurance Company in Florida.

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Collateralized Debt Obligations, Credit Default Swaps, And Credit Insurance, Continuation ....

.... Part 3:  What Is The Prognosis?

     Merrill Lynch's recipe for settlements of CDO indemnity obligations may be "a template for Wall Street, Bank of America Corp. analysts said."  John Glover, "Merrill CDO Deal May Be Model, Bank of America Says (Update 1)" (Bloomberg.com, Friday, August 1, 2008).  

    Another description from a different analyst is that Merrill may have set a "benchmark".  John Glover, "Merrill Gives Up Gains, Is 'On Hook' For CDO Losses (Update 2)"  (Bloomberg.com, Wed., July 30, 2008).

    Yet a third description of this conduct is that Merrill Lynch has ushered in "a sea change in the way banks are approaching their holdings of troubled investments."  Jenny Anderson, "An Investment Firm That Prospered From Past Crises Turns to Mortgages" Business Day Section, p. C1, col. 3 (New York Times Nat'l Ed., Wed., July 30, 2008).

    Here is what Merrill arranged.  It held Collateralized Debt Obligations.  It sold them to Lone Star Funds.  The sale price was in the neighborhood of 22 cents for 100 cents or 22 cents on the dollar.  Merrill loaned Lone Star 75% of the 22 cents-for-100 cents purchase price.  Glover, "Merrill Gives Up Gains, is 'On Hook' for CDO Losses (Update 2)", supra.

    To fully understand the potential significance of this transaction, it is reported that some accounting information will help.  "Investment banks [like Merrill Lynch] can book a gain if an insurer is willing to pay more to terminate its liability on a default swap contract than the amount at which the bank has it on its books, Bank of America said."  Glover, "Merrill CDO Deal May Be Model, Bank of America Says (Update 1)," supra.  [Emphasis added.]  Unknown, unnamed "analysts" say:  "'Monetization of these gains, we feel, would follow.'"  Id.

     I think this means that right now, no-one can honestly say what these paper accounting "gains" are worth.  They do know enough to know, apparently, that an insurer shedding liability on "a default swap contract" is a postiive gain.  Insurance regulators will otherwise "probably" take over the Insurance Companies "and pay the holders of municipal bonds they guaranteed before the banks," according to "the analysts".  Id.

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Rate Rejection Redux.

 This Updates a Previous Post.

    Florida Farm Bureau's 2007 Premium Rate Increase was rejected in 2008.  FFB's 2007 Premium Rate Hike Request was for a 26.8 % increase.

    FFB also requested a Premium Rate Increase in 2008, upping the ante so to speak to 28.4%.  It was recently rejected by the Florida Office of Insurance Regulation.  FFB may now request an Administrative Hearing with a Florida Administrative Law Judge, or Hearing Officer.  Florida Farm Bureau has reportedly issued some 100,000 Homeowner's Insurance Policies in Florida.  Tom Zucco, "Farm Bureau Rate Hike is Rejected" (St. Petersburg Times Online, Tuesday, August 5, 2008).

Please Read The Disclaimer.

Collateralized Debt Obligations, Credit Default Swaps, And Credit Insurance, Continuation ....

.... Part 2:  Devalue, Destroy, or Divest.

    Ambac Financial Group Inc., a Bond Insurance Company that ventured into the dangerous land of Collateralized Debt Obligations and hoisted packages of subprime mortgages in exchange for real money, agreed with Citigroup Inc. that Ambac would get out from under a guarantee of CDOs.  Christine Richard & Jody Shenn, "Ambac to Pay $850 Million in Citigroup CDO Settlement (Update 7)" (Bloomberg.com, Friday, August 1, 2008).   Here is how the Ambac-Citigroup deal has been reported.  Recall that a very broad definition of Collateralized Debt Obligations is that they "package pools of securities," including subprime mortgages, "and slice them into pieces of varying risk."  Id.

    Not long ago, Ambac guaranteed a Collateralized Debt Obligation of $1,400,000,000.00 or $1.4 Billion.  After the subprime collapse and the credit crunch began, Ambac wrote down the value of the CDO by $1,000,000,000.00 or $1 Billion.  (Could this have been accurately reported instead as written down the value of the CDO to $1 Billion?  See below.)

    Next, Ambac paid $850,000,000.00 or $850 Million to Citigroup to get out from under Ambac's guarantee of the CDO.  By an accounting charade, Ambac reported that it gained $150,000,000.00 or $150 Million on the transaction.  See Christine Richard, "Ambac Posts Record Net Income on Accounting; New Business Falls" (Bloomberg.com, Wed., August 6, 2008).

    This accounting sleight of hand works on Wall Street.  After Ambac reported its settlement agreement with Citigroup, the shares of Ambac rose 50% to $3.79 a share.  The share price of its rival Bond Insurance Company MBIA also rose, by 29% to $7.67 a share.  Associated Press Report, "Stocks & Bonds/A Rough Week With a Sedate Conclusion," Business Day Section, p. B7, col. 2 (New York Times Nat'l Ed., Saturday, August 2, 2008).

    This is suddenly the preferred way of shedding exposure by shedding previously given guarantees of Collateralized Debt Obligations.  "Somehow, $4.4 billion just evaporated at Merrill Lynch."  Louise Story, "A Sale of Troubled Mortgage Assets Raises More Questions Than It Settles," Business Day Section, p.C1, col. 1 (New York Times Nat'l Ed., Wed., July 30, 2008), published Online as "A Deal at Merrill Puts Spotlight on Others".  Once again, CDOs are described in this newspaper report as "toxic mortgage investments".  Not long ago, Merrill Lynch assigned a value of $11,100,000,000.00 or $11.1 Billion to the "toxic" CDOs on its books.  At this time, it is selling those CDOs for the lesser value of $6,700,000,000.00 or $6.7 Billion.  That is not all.

    Merrill Lynch is loaning the buyer, Lone Star Funds, most of the purchase price.  It wrote down the value, and put it back on the balance sheet as a loan.  This arrangement is reportedly all about the corporate balance sheet.

    As reported in the newspapers and other media, Merrill Lynch's arrangement removes the iffy valuation of CDO ownership from its books.  It is replacing ownership of a likely low value asset on its books, with a loan.   However, as noted in the linked newspaper article, the risk of the CDOs remains.  That said, however, something else may have been gained besides a balance sheet balancing better.

    If CDOs are the new Credit Insurance, then not owning nor guaranteeing the payment of CDOs may mean that the party that sold them, even if it devalued them, no longer runs the additional risk of issuing an Insurance Policy without the authority of any State to do so.  That exposure means potential penalties.  It is generally unknown how to accurately calculate that unwanted exposure.  Dumping the CDOs may dump that additional "toxic" exposure, too.

    Merrill Lynch is not only moving its CDOs to Lone Star Funds, however.  It also reportedly settled recently with a Reinsurance Company, XL Capital Assurance, "which had insured some of the firm's C.D.O.'s."  Merrill is writing down those CDOs' value in the 3Q 2008.  Merrill Lynch's settlement agreeement with XL Capital will cost Merrill a reported $500 Million, while other settlements with "other reinsurance companies" will add another $800 Million in Merrill's obligations.  Louise Story, "Write-Down Is Planned At Merrill" p. C1, col. 5, Business Day Section (New York Times Nat'l Ed., Tuesday, July 29, 2008).

    What is not necessarily understood in all these stories, and what the linked article does not mention, is that reinsurance is insurance purchased by an Insurance Company.  If a Reinsurance Policy was issued to "insure some of Merrill's C.D.O.'s," that means that the Reinsurance Company and Merrill both implicitly viewed the CDOs as insurance for which Reinsurance was a good idea in their judgment.

    CDOs, the New -- and unauthorized and, so far, unregulated -- Credit Insurance.  The next post in the Continuation of this subject, Part 3, will address the Prognosis.

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FFB Raises Rejected Rate Request.

     In 2007, Florida Farm Bureau requested a Premium Rate Increase of 26.8% in Florida.

     In early July, 2008, FFB exhausted its appeals of the Florida Office of Insurance Regulation's denial of that request.

     In late July, 2008, FFB asked for a Premium Rate Increase of 28.4% in Florida.  Tom Zucco, "Insurer Still Seeks Rate Hike" (St. Petersburg Times Online, Wed., July 30, 2008).  FFB reportedly has 100,000 Florida Policyholders.

Please Read The Disclaimer.

    

Collateralized Debt Obligations, Credit Default Swaps, And Credit Insurance, Continuation ....

.... Part 1 -- What Are These Things?

      Collateralized Debt Obligations and Credit Default Swaps belong to a group collectively labeled "toxic securities" in the media.  See "Merrill CDO Sale Not As Good As It Looks:  Analyst," a Reuters report published online at washingtonpost.com, Wed., July 30, 2008.  A more polite name that they go by is "structured finance revenue," meaning revenue from "structured products" like CDOs and other securities backed by mortgages on peoples' houses or commercial properties, "and credit derivatives."  Jonathan Stempel, Reuters report, "Moody's Profit Tumbles, To Be Sued By Connecticut" (washingtonpost.com, Wed., July 30, 2008).

     Perhaps a little more sharpness in definition will aid in understanding.  Perhaps not.  It is worth a try.  CDOs are securities.  They "repackage pools of bonds and loans and divide" the cash flow from these pools of bonds and loans "into notes of varying risk and returns that are sold to investors."  John Glover, "Merrill CDO Deal May Be Model, Bank of America Says (Update 1)" (Bloomberg.com Friday, August 1, 2008).

     CDOs "package pools of securities, including those backed by subprime mortgages, and slice them into pieces of varying risk."  Christine Richard & Jody Shenn, "Ambac to Pay $850 Million in Citigroup CDO Settlement (Update 7)" (Bloomberg.com, Friday, August 1, 2008).  More simply put, "CDOs repackage bonds, loans and credit-default swaps and use the income to pay investors."  John Glover, "Merrill Gives Up Gains, Is 'On Hook' For CDO Losses (Update 2)" (Bloomberg.com, Wed., July 30, 2008).  [Emphasis added.]  

     So, then, "Collateralized Debt Obligations" include "Credit Default Swaps," it appears.  CDSs have been defined by the same financial reporter as "contracts conceived to protect bondholders against default, [they] pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements."  John Glover July 30, 2008, supra.  CDSs, in addition, are defined by their use "to speculate on a company's ability to repay debt."  John Glover, August 1, 2008, supra.  See also Christine Richard & Jody Shenn, August 1, 2008, supra.

     If this is confusing, try wrapping your mind around what the media describes simply as "complex European products known as constant proportion debt obligations (CPDOs)".  Jonathan Stempel, July 30, 2008, supra. 

     There is no present need to venture into the world of CPDOs.  It is enough to recognize that reporters, through no fault of their own, do not appear to understand what Collateralized Debt Obligations and Credit Default Swaps are all about, how they function, what they actually do.  They function like Insurance.  Although it is the job of reporters to report to the public what these things are all about, it is not at all the fault of reporters that they do not understand financial vehicles backed by or involving packages of subprime mortgages.  People and particularly regulators were never supposed to understand that CDOs and CDSs are really Insurance.  They function just like Insurance, and they insure credit obligations every bit as much as regulated Credit Insurance.  They are called seemingly impenetrable names for a reason, which is that their makers do not wish them to be understood for what they are:  Insurance.

     The title of this post reflects that it is a Continuation.  In many posts in this space, see, e.g., the post here of July 10, 2008, the similarity between these seemingly mystical securities and Credit Insurance was found to be identical.  The disguise worn by these securities has so far deflected closer examination and prevented any kind of regulation.  The damage done by this deception is the subject of the next post in this series, Continuation Part 2, Devalue, Destory and Divest.

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Thanks for the Insurance and Your Service, Citizen Douglas!

     Thursday, July 31, 2008 is the last day that Mr. Bruce Douglas will serve as the Chair of Citizens Property Insurance Corporation.  Reportedly, Citizens is the largest Homeowner's Insurance Company in the United States that operates as an arm of State Government, and in this case, the State is Florida.

     Citizens also reportedly has 1,200,000 or 1.2 Million Policyholders.  In the 6 years that Mr. Bruce Douglas has been the Citzens Chair, "its exposure to storm damage" has more than doubled, "to $425-billion, but reserves have been rising, thanks to no recent storms."  Mr. Douglas is virtually everyone's dictionary definition of a fine human being.  His public service has been performed with honor.  Consistent peformance of his duties with honor, and a good sense of humor rarely found in those in modern public life, are both on display in this interview by Tom Zucco, "He Leaves Citizens More Stable" (St. Petersburg Times Online, Friday, July 25, 2008).

     Thank you, Bruce Douglas.

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"Post-Claims Underwriting" or "Rescission": Feds, States, Cities Battle Health Insurers.

     The State of California's Department of Managed Health Care has reached an agreement with two of the larger Health Insurance Companies in California, Blue Cross and Blue Shield, to resolve complaints investigated by the Department about the Companies' alleged "post-claims underwriting" practices.  Lisa Girion, "California Fines Two Health Plans $13 Million" (Los Angeles Times Online, Friday, July 18, 2008).  By those practices the Health Insurance Companies allegedly attempted to rescind Health Insurance Policies for supposed misrepresentations made in the application at the beginning of the underwriting process, after the Policyholder made a claim for a lot of Health Insurance Benefits under the Policy.  The agreement includes these features:

     1.  Payment of a fine.  The two Health Insurance Companies together agreed to pay $13,000,000.00 or $13 Million in fines, $10 Million by Blue Cross and $3 Million by Blue Shield.

     2.  Payment of amounts which most lawyers would view as "consequential damages" or money for damages that are a consequence of the alleged unlawful actions.  No amount was reported, but instead a "process" was agreed to by which former Policyholders could "recover medical expenses they paid out of pocket after they were dropped as well as other damages, such as homes or businesses that were lost because unpaid medical debts ruined the former members' [i.e., Policyholders'] creditworthiness."

     3.  Offer of new policies.  Both Blue Cross and Blue Shield agreed to offer new policies to certain of their Policyholders whom they canceled since 2004.

     4.  Finally, both Companies agreed to write new application forms that would somehow be "easier for consumers to understand."

     The Director of the California Department of Managed Health Care is quoted in the article as saying that the fine is a record.  On the other hand, the Director of healthcare policy for "Consumer Watchdog" is also quoted in the article as saying that the agreement is "'obstructing justice'".

    In related developments, the Los Angeles City Attorney is pursuing his own previously filed lawsuit based on accusations of false advertising, unfair practices, and using intentionally misleading application forms, also reported by Lisa Girion, "Blue Shield Sued for Allegedly Lying About its Coverage" (Los Angeles Times Online, Thursday, July 17, 2008).  The president of the California Medical Association and the president-elect of the Los Angeles County Medical Association are both identified in this article as praising the efforts represented by this lawsuit against these alleged rescission practices directed at Health Insurance Policies.  On the other hand, a spokesperson for Blue Shield announced that it has 400,000 "individual policyholders," that Blue Shield has paid "nearly $4 billion in claims for those policyholders" since 2002, that Blue Shield's application forms "were reviewed and approved by two state regulators," and that its investigative and underwriting practices are in essence top notch, which he said, "'is why we have rescinded a fraction of 1% of individual and family policies.'"

     Not to  be outdone, perhaps, the United States Congress has reportedly scheduled hearings on the accusations that Health Insurance Companies engage in post-claims underwriting or rescission of certain Health Insurance Policies.  Avram Goldstein, "U.S. to Probe Health Plans That Cancel Sick Members (Update 3)" (Bloomberg.com, Thursday, July 17, 2008).  It is noteworthy that, according to this article, the Health Insurance Policies that are the alleged targets of rescission are only Health Insurance Policies issued to individual persons.

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"The scope of OIR's investigation ...."

".... cannot be limited by Allstate's unilateral actions."

Page 17 of the attached Official Opinion Denying Rehearing by Florida's First District Court of Appeal in Download Allstate_v. Office of Insurance Regulation (Fla. 1st DCA Case No. 1D08-0275, Opinion Filed May 14, 2008).pdf.

Florida's Office of Insurance Regulation (OIR) has prevailed in its judicial dispute with various Allstate Insurance Companies about OIR's right to receive subpoenaed documents and to impose a ban on selling new Insurance Policies until Allstate provided the subpoenaed documents:

The facts of this case are unique.  In order to conduct insurance business in Florida, Allstate is statutorily required to comply with OIR's investigation and make 'freely available' documents sought by OIR....  To the extent Allstate believed any documents OIR sought were privileged, Allstate was required to timely seek a protective order in circuit court.

Id.  Allstate did not seek a protective order in circuit court.  The First District denied rehearing of its earlier Order upholding the OIR's suspension of new policies until the Insurance Company complied fully with OIR's subpoenas.

     The same day that the First District Court of Appeal denied rehearing, Allstate provided a sworn affidavit to the Florida Office of Insurance Regulation that all the subpoenaed documents had now been provided.  The OIR lifted the suspension as a result.   See Florida Office of Insurance Regulation Press Release, "Florida Insurance Commissioner McCarty Stays Allstate Suspension, Continuing Compliance Required," Wed., May 14, 2008.  Anika Myers Palm, "State Lifts Allstate Ban, Allows Insurer to Take New Customers" (OrlandoSentinel.com, Saturday, May 17, 2008).

    On Wednesday, May 21, 2008, Dennis Wall will discuss these and other major developments affecting Hurricane Insurance Preparation before the 2008 Hurricane Season.    This presentation is open to the public and there is no charge.  It is offered by the Insurance Law Committee beginning at Noon and scheduled to run through 1:00 P.M. at the Orange County Bar Association Center, 880 North Orange Avenue, in Orlando, Florida.  Dennis Wall, Chair of the Insurance Law Committee, will speak about many ways of "Preparing for Hurricane Insurance".  You are cordially invited to attend this free presentation.  As a reminder:  In Florida, the 2008 Hurricane Season officially begins on June 1, 2008.  There is no better time to begin preparing.

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Florida O.I.R. Lifted Suspension of New Allstate Policies...

... The Same Day Florida's First District Court of Appeal Denied Rehearing of its Opinion Upholding O.I.R.'s Order Suspending New Allstate Policies.

     Press reports published on Saturday, May 17, 2008 made it appear that the Florida Office of Insurance Regulation (O.I.R.) lifted its suspension on new Allstate Insurance Policies on Florida on the day before, or Friday, May 16, 2008.  As you will recall, the O.I.R. issued its Suspension Order in the first place because Allstate failed to comply with O.I.R. subpoenas for various groups of documents including unauthorized Catastrophe Computer Models purchased by Allstate in connection with its Premium Rate Increase requests.

     According to the O.I.R., it announced a stay of its Suspension Order on Wednesday, May 14, 2008, immediately after the Florida appellate court denied rehearing of its Opinion upholding the O.I.R. Order.  The reason given by the O.I.R. was its receipt of a sworn affidavit from Allstate "certifying that it has complied with Florida law by freely providing all documents requested" by the O.I.R.  See Florida Office of Insurance Regulation Press Release, "Florida Insurance Commissioner McCarty Stays Allstate Suspension, Continuing Compliance Required," Wed., May 14, 2008.

     Dennis Wall, Chair of the Insurance Law Committee, will speak at the Orange County Bar Association Center in Orlando, Florida about Preparing for Hurricane Insurance, on Wednesday, May 21, 2008 from Noon to 1:00 P.M.  The Orange County Bar Association Center is located at 880 North Orange Avenue in Orlando, Florida.

    You are cordially invited to attend this free public event.  Hope to see you there. 

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