Earlier his month I attended the American Bar Association Insurance Coverage Litigation Committee CLE Seminar in Tucson with other members of our team: Nancy Gutzler, Elizabeth Hanke, and Nick Sochurek.

Each of us spoke about an area of our expertise, mine being a subject that I have tackled here on “Risky Business” many times before in posts detailing the reasons behind my entrenched opposition to a certain type of insurance company financial reorganization.

My co-leader for a lunch roundtable at ABA in Tucson was William F. Greaney, Covington & Burling LLP, Washington, D.C. Our “Everybody Hurts: Insurance Company Run-Off Divestitures” discussion took place on Friday, March 4. We were joined at the table by attorneys from both the policyholder and insurance company camps, indicating the great relevance of the subject matter.

Bill and I provided an overview of the failure of most changes in control and the negative consequences they have caused for policyholders and the insurance industry.

We started with a look at significant examples of change of control and the clear, resulting difference if the acquisition was by an insurer versus a non-insurer:

We discussed who gets hurt in these transactions …

• Direct policyholders, who are deprived of protection during lengthy liquidation
• Reinsurers, whose obligations are accelerated when runoff companies are liquidated
• Insurance buying public
• State guaranty funds
• Other solvent insurers, who face increased assessments from state guaranty funds
• Fair-minded regulators/confidence in state insurance departments

… and who benefits:

• Shareholders of divesting insurers
• Management of divesting insurers
• Shareholders and management of thinly capitalized acquirors (e.g., Armour Risk), which extract large management fees for several years by slow-paying claims until the acquired runoff companies are placed in liquidation.

Next, we provided an overview of the statutory authority regulating actions by state insurance commissioners: NAIC Model Law “Insurance Holding Company System Regulatory Act” Section 3, “Acquisition of Control…”. We also stepped through the list of “tests” that commissioners must consider to approve a reorganization.

Finally, we shared our thoughts of what can be done to avoid such disastrous restructurings in the future.

Among them, policyholders and/or solvent insurers should:

• Insist on early involvement in restructuring negotiations between divesting insurers and state regulators. Too many ill-conceived restructurings have effectively been agreed to in advance of any announcement and public hearings.
• Coordinate better and object to changes of control designed to “dump” legacy liabilities in overwhelming numbers in filings and at public hearings. Policyholder input in many such restructurings has been late and sporadic.
• Coordinate better and oppose such divestitures at public hearings. AIG has been the only major insurer that has devoted resources to challenging such divestments with any consistency.
• Undertake a thorough debunking of the demonstrably flawed actuarial modeling that provides cover for regulatory approval. In the OneBeacon restructuring, a major actuarial firm retained by OneBeacon produced a stochastic modeling report, based on financial information and a methodology not disclosed to the objectors, stating that the divested run-off companies had sufficient assets and surplus to pay out the last dollar of all claims from 800 A&E policyholders. Bedivere was placed into liquidation six years later.
• Insist on full disclosure of all financial data and actuarial assumptions and demand an adjudicatory hearing with opportunity to cross-examine facts and expert witnesses. Too many of these transactions have been approved with no semblance of procedural due process.
• Challenge the independence and impartiality of insurance commissioners and staff where appropriate. Regulatory personnel who approve divestitures in advance of any announcement or public hearing should not be the adjudicators.
• Engage respected journalists and media to bring attention to these abuses of insurance regulation and failure of oversight.

The incentives outlined above make it inevitable that insurance company executives will continue to look for ways to escape their obligations to policyholders. And regulators will continue to waive such reorganizations through, especially in the worst jurisdictions like Pennsylvania.

The only way forward is for policyholders and insurers to organize and resist as never before.  I hope that the roadmap outlined will gain some traction. 

For more reading on this subject, see these past posts:

If This Isn’t Wrong, Nothing is Wrong

OneBeacon Five Years On: We Told You So!

OneBeacon 2019 Financials – It’s Not Pretty

OneBeacon – From Bad to Worse

Arrowood: Updated Analysis and Opinion

AIG Policyholders Wonder: What’s Next?