A Hard Sell for the CDI

By | May 29, 2000

Although the California Department of Insurance (CDI) is still tied up in the defense of its Insurance Commissioner, the sale of Superior National Insurance Co. remains a high priority item on the department’s “To Do” list.

After the CDI seized Superior’s four California-domiciled units on March 3, citing the workers’ comp carrier’s dangerous financial position, the case was assigned to the CDI’s Conservation & Liquidation Office.

Chief reinsurer John Horner has reportedly stated that he anticipates no problems selling Superior. However, the package is none too appealing to buyers thus far.

A request for proposals
On May 3, the CDI issued a request for proposals (RFP) for the book of business and related assets to all “parties interested in financial participation in a Superior National Insurance Companies rehabilitation plan.”

The RFP states that “rehabilitation of the Companies’ insurance businesses is feasible and should be accomplished in the shortest time reasonably possible.” The deadline set by the court is June 30, 2000, at which time the agreement will be submitted to the court for approval.

Marsh & McLennan Securities (MMSC) is acting as financial advisor on the RFP. “From what I’m hearing the process is going well, but it’s still in the early stages at this point,” said a spokesman for MMSC in New York. “We expect to receive a number of proposals when they’re due on June 1.” The spokesman could not name any names, saying that “anyone participating is doing so with the expectation of full confidentiality.”

Kemper stepping up
The rumble in the industry is that Kemper is the front-runner for purchasing honors, but Linda Kingman, vice president of corporate communications for The Kemper Insurance Companies in Long Grove, Ill., said that Kemper has not yet submitted a bid (as of May 24). “We are currently reviewing the Request for Proposals and determining whether to make a bid,” Kingman said.

According to the RFP, “Kemper will be permitted to submit a further proposal in accordance with this RFP and the provisions of the cut-through agreement.”

On April 5, the CDI entered into an interim cut-through reinsurance agreement with Lumbermans Mutual Casualty Company, an A.M. Best-rated “A” member of The Kemper Companies.

Standard & Poor’s (S&P) expressed its confidence in the cut-through arrangement in a commentary issued on April 10. “Kemper’s liability is somewhat limited, as the agreement is to assume new and renewal direct workers’ compensation, employers liability, and U.S. life and health policies issued by the Superior National companies from April 5, 2000, to July 3, 2000. Kemper will co-underwrite the policies and approve the pricing and risk selection, and it has the discretion to decline business offered.” However, S&P is not quite as cheerful when it comes to the bidding for the existing liabilities of the Superior National companies, describing acquisition of the business as “potentially harmful” to companies that assume it. “S&P believes companies bidding on this business will find it difficult to increase rates sufficiently to make the business profitable without losing it to competitors.”

If Kemper makes a successful bid and is not able to assure S&P of its long-term return objectives and strategies, S&P may take a negative view, potentially leading to a rating downgrade.

Is Kemper willing to take this risk? It’s still too soon to tell, but “Kemper understands S&P’s position,” Kingman said in response.

Taking it to court
The holding company, Superior National Insurance Group (SNIG), filed for Chapter 11 protection on April 26.

According to SEC Form 8-K, filed March 21, 2000: “The Company is in default on numerous covenants associated with its bank debt and trust preferred securities, and will default on interest and principal payments for the foreseeable future.”

U.S. Bankruptcy Court granted an emergency petition to assure the salaries and benefits of employees of SNIG, Business Insurance Group, SN Insurance Services, and SN Insurance Administrators. SNIG threw another log onto the fire by announcing its intention to file a $585-million lawsuit against Foundation Health Corp., a subsidiary of Foundation Health Systems (FHS). The suit charges that Superior was misled about solvency issues when it purchased Business Insurance Group (BIG), its workers’ comp operations, from FHS in 1988. The acquisition made Superior California’s largest private sector workers’ comp provider.

“We will vigorously defend ourselves,” said Lisa Haines, spokeswoman for FHS in Woodland Hills, Calif. Haines described the lawsuit as “entirely without merit.”

A Foundation press release described the suit as “an attempt by Superior to pin its financial problems on the acquisition rather than California’s poor-performing workers’ comp market.”

The causes of Superior’s woes are many, but California’s turbulent marketplace does play a major role in its downfall, S&P analyst Darin Feldman pointed out in his analysis, titled “The Unraveling of an Insurance Franchise.”

“With more than 75 percent of the company’s premium based in California, Superior was obviously subject to the vagaries of the competitive, regulatory, legislative and economic risks of the state,” Feldman stated.

However, Feldman pointed out one bright spot in the drama. “The failure of Superior, which had a highly visible profile, makes the premium increase an easier sale for the agent. If it is easier for the agent to sell, carriers will find it easier to continue raising rates.”

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