Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

You are here: Home / Archives for Reinsurance Regulation

Reinsurance Regulation

BANKRUPTCY COURT VALUES CAPTIVE REINSURANCE SUBSIDIARY OF WASHINGTON MUTUAL

by

Recently, the US Bankruptcy Court for the District of Delaware denied the request of Washington Mutual and WMI Investment Corp. (collectively the Debtors) for confirmation of the Modified Sixth Amended Joint Plain of Affiliated Debtors. Among a number of issues, the Bankruptcy Court determined that the valuation of a captive reinsurance subsidiary (WM Mortgage Reinsurance Company – currently in run-off), which would serve as the most valuable asset of the proposed reorganized debtor was flawed. The Court valued the company at the high end of the range the debtors’ expert had concluded, assuming no new business would be generated or acquisitions made. The Court noted that the expert used an incorrect figure for the weighted average cost of capital, which had fallen by 5-10 percentage points, increasing the value of the company. Further, the expert gave little weight to the value of precedent transactions, accorded the most weight to discounted cash flow analysis, and failed to apply the proper historical (or current) returns on equity for similar businesses. For these and a number of other reasons, the Court denied confirmation of the plan, and directed the parties to mediation. In re: Washington Mutual, Inc., No. 08-12229 (D. Del. Bankr. Sept. 13, 2011).

This post written by John Black.

PROGRESS IN DODD-FRANK IMPLEMENTATION

by

A number of activities of potential significance have occurred in the implementation of the Dodd-Frank Act:

Surplus Lines Regulation:

  • The Kentucky Insurance Commissioner has proposed a compromise position which would result in the merger of the NAIC sponsored NIMA and the NCOIL sponsored SLIMPACT interstate compacts into a single agreement for the regulation of surplus lines insurance. Many questions remain, including whether such a compromise will be agreed to by the two competing groups, whether the new entity would regulate anything other than premium taxes, and whether the states with the greatest percentage of surplus lines premium tax collections will join such a compact and voluntarily give up a substantial part of their tax revenues.

Systemic Regulation of Companies:

  • The Financial Stability Oversight Council has a final rule exposed for comment addressing the factors and process for the designation of certain non-bank financial companies for supervision and prudential regulation by the Federal Reserve. It proposes a three step process, with all companies with total consolidated assets of more than $50 billion which satisfy one or more of five financial ratios or thresholds satisfying the first step of the process, with no exemption for any industry or type of company.

  • The Federal Reserve and the FDIC have approved a final rule requiring that bank and non-bank financial companies which will be subject to its prudential regulation under Dodd-Frank prepare and submit a “resolution plan,” i.e., liquidation plan, as required by Dodd-Frank.

Liquidation of Insurance Companies:

  • The NAIC is considering for final approval guidelines for state insurance departments designed to assist departments prepare for the implementation of the receivership provisions of Dodd-Frank as they may apply to insurance companies. Although insurance companies would be liquidated pursuant to applicable state law, the timing of the initiation of a liquidation and certain administrative aspects of a liquidation would occur pursuant to the provisions of Dodd-Frank, and would occur much faster than in liquidations conducted strictly under existing state laws.

Insurance Regulation Modernization:

  • Dodd-Frank requires that the Federal Insurance Office (“FIO”) submit a report to Congress on how to “modernize” and improve the regulation of insurance in the United States, and the FIO has issued a request for comments on that topic. Although the FIO’s Director has testified that his office is not an insurance “regulator” or “supervisor,” the prospect of such a report may cause unease among some advocates of the state regulation of insurance.

This post written by Rollie Goss.

BANKRUPTCY COURT PARTIALLY GRANTS OBJECTIONS ARISING OUT OF CAPTIVE REINSURANCE PROGRAM

by

Frontier Insurance, in rehabilitation, filed proofs of claim following the Chapter 11 bankruptcy of Black, Davis & Shue Agency. The claims related to captive reinsurance program with Frontier. In turn, Westport Insurance, which had issued a professional liability insurance policy to BDS, objected to Frontier’s claims, asserting affirmative defenses and counterclaims. Frontier moved to dismiss those objections, or in the alternative, for a stay pending a ruling on BDS’s own objections to Frontier’s claims. The court found that Westport had standing to object to Frontier’s claims and was not precluded from doing so merely because its interest were adverse to BDS’s. Furthermore, it was premature to dismiss Westport’s objections, and the court reserved the issue for trial. However, the court ruled that amendments to Frontier’s claims to include interest under New York law and to plead negligence were proper. Accordingly, the motion to dismiss Westport’s objections altogether was granted in part, and denied in part. In re Black, Davis & Shue Agency, Inc., No. 06-00051 (USDC Bankr. M.D. Pa. Sept. 29, 2011).

This post written by John Black.

COURT DENIES PRE-PLEADING SECURITY AND DISMISSES SURETY CASE BASED ON STAY IN REHABILITATION PROCEEDING

by

General Security National Insurance Company brought an action in New York federal court against Aequicap Insurance Company, in connection with Aequicap’s alleged failure to perform under a surety bond it issued to General Security.  After Aequicap filed an answer in the case, General Security filed a motion seeking to compel Aequicap to post security pursuant to New York’s pre-pleading security statute.  Aequicap objected on various bases, including the fact that, after the filing of General Security’s motion, a stay had been entered in Aequicap’s Florida rehabilitation proceeding.  The New York court denied General Security’s motion, citing the Florida court’s stay Order, and dismissed the case without prejudice to re-filing, pending the outcome of the Florida proceeding.   General Security Nat’l Ins. Co. v. Aequicap Ins. Co., No. 10-9685 (USDC S.D.N.Y. April 29, 2011).

This post written by John Pitblado.

LLOYD’S PERMITTED TO OPERATE IN FLORIDA WITH REDUCED COLLATERAL AS “ELIGIBLE REINSURER”

by

Underwriters at Lloyd’s, London was approved by Consent Order of the Florida Office of Insurance Regulation to become the seventeenth reinsurer admitted under Florida’s law allowing foreign reinsurers to post reduced collateral, upon demonstration that it is financially sound and highly rated by eligible ratings institutions. As set forth in the Consent Order, Lloyd’s reported capital and surplus of $29.9 billion, well-exceeding Florida’s $250 million requirement. In re Underwriters at Lloyd’s, London (Fla. O.I.R. Oct. 6, 2011).

This post written by Michael Wolgin.