‘Titanic’ of Insolvencies Teaches Lessons

It’s been called “the Titanic of all insolvencies”—on Dec. 3, 1985, Transit Casualty Company, domiciled in Missouri, was declared insolvent by the Cole County Circuit Court. During the late ’80s, ill-fated Transit was the largest of three big insolvent companies in the news, along with Mission and Integrity. Now, 16 years later, “the Titanic” is back making headlines.

On Jan. 23, 2001, Judge Byron L. Kinder, a Cole County Circuit Court judge who is overseeing the bankruptcy, hiked payments to 60 cents on the dollar to Transit corporate claimants and 70 cents on the dollar for individual claimants. The ruling triggers an additional $140-million payment to policyholders and creditors of Transit Casualty and brings the total claims paid to date to $690 million.

Judge Kinder expects a landmark insurance insolvency case to close with the largest payout in Missouri history. He believes the defunct Transit Casualty should pay out a record $1.2 billion by the end of next year.

Tom Crone, the Transit receivership’s chief financial officer, projects that Transit’s $1.2 billion in payments will give Transit’s policyholders at least 75 cents on the dollar—or perhaps more—of their claims. “The judge’s decision to increase the dividend that is being paid to our policyholders is pretty routine,” Crone said. “We estimate that the total cost by the time Transit is fully liquidated will approximate $340 million.”

According to Linda Lasley, a specialist in reinsurance and insolvency, the receivership has been very successful. “Now that they’re talking about potentially being able to pay off as much as 75 cents on the dollar—well, that would be a pretty darn good payout considering the depth of the insolvency,” she said.

Larry Mulryan, chairman of the Insolvency Coordinating Committee for Transit, agreed. “[We’re] seeing them achieve terrific results—to the point where we expect to get 70-75 percent of our expenditures back from them in terms of recoveries,” Mulryan said. “In other words, they’ve done a great job in recovering assets in that very disorganized company that went down.”

Founded in 1945, Transit Casualty Company was an insurance company for transportation business—including bus lines—in the Midwest. The St. Louis company moved its headquarters to Los Angeles in 1964 and diversified operations.

“They insured buses and public transportation, which is why [the company] was called Transit,” Lasley said. “I think one of their failings is…they just didn’t stick to their knitting.”

And Lasley should know—she has been active in reinsurance and insolvency arbitration and litigation since 1977. In 1994, she formed Pasadena-based Reinsurance Counsel, a specialty firm focusing on reinsurance and insolvency issues. She is currently acting as special reinsurance counsel to Transit’s receivership, advising them on reinsurance issues.

“Here we are in 2001, and the company is still in the news and some people don’t understand why that is,” Crone said. “The primary reason is that a significant percentage of Transit’s claims are long-tail claims which includes mass tort claims, asbestos, environmental cleanup.”

Jim Owen, a partner in the Chesterfield law firm of McCarthy, Leonard, Kaemmerer, Owen, Lamkin & McGovern LC, described Transit as “the most complex insolvency in history.” “The Mission insolvency might have been as large dollar-wise, but it wasn’t nearly as complex…Transit wrote all over the world, and they basically covered every waste dump in the United States. They also covered every hauler and every tobacco plant and every breast implant.”

There are lessons to be learned from Transit’s downfall. “Stick to what you know how to do, or if you want to expand, do it in-house—do it with people who are accountable to you and have your company’s bottom line at interest,” Lasley stressed.

Companies need to control their managing general agents in order to stay afloat. In Transit’s case, it had 17 big MGAs underwriting for the company. “When the receivership took over, Transit had no files, because all of the recent business had been done through MGAs,” Lasley explained. “So literally, they’d be lucky if they even had a piece of paper sitting in the home office reflecting that a policy had been issued.”

In addition to Transit having many risks it didn’t even know about, the reinsurance was often inadequate or nonexistent. And often the reinsurers were provided by the MGA as part of a package. “So you have two things the carrier is not doing: 1) they’re not underwriting their own risks, 2) nor are they vetting the security behind them,” Lasley said. “If you delegate off those two functions…it’s almost a foregone conclusion that at some point you’re going to be so far out of control.

“…The combination of relying on a large number of marginally investigated reinsurers and then basically handing the keys to the company to a bunch of MGAs who all had their own little agendas to advance…is deadly,” she concluded.

Crone agreed that what forced Transit into insolvency was the placement of reinsurance with several offshore captive companies who were not adequately capitalized. “They themselves went into insolvency which forced Transit then to pay out the risks with no source of recovery,” he said.

In fact, the huge number of non-admitted foreign and offshore reinsurers—more than 800 reinsurers in total, according to Crone—was trouble in itself.

Tracking down some of the foreign reinsurers posed another problem in Transit’s situation. “When you have companies like this, many are not doing business in the United States, so you really don’t have much in the way of assets—if anything—to go after,” Lasley explained. But she said the receivership went about the operation in a very businesslike manner. “I think one of the keys to their success has been their willingness to get reinsurance professionals involved…and they’ve been pretty innovative in their approach.”

According to Crone, the receivership has collected in excess of $930 million thus far from reinsurers. “No single one has paid out more than 15 percent of the total amount recovered,” he said. “So we’ve been remarkably successful against our reinsurers.”

Ironically, Transit was not the only company stuck between a rock and a hard place during the time it was declared insolvent. “We wrote the same business that everybody else wrote for the same rates—it’s that Transit’s parent…just dumped it in 1985; they just dropped it, didn’t put more money into it and got away with it, and that’s the regulator’s fault,” Attorney Owen said.

In order to determine this, Owen and Lasley had the actuaries evaluate balance sheets of Transit’s competitors. The end result: more than 90 percent of the companies writing the same business were technically insolvent during that period.

Obviously, when a company is declared insolvent, it eliminates its ability to write future business and to make it up by charging higher premiums to current policyholders. On the other hand, a solvent company has the benefit of using its sufficient capital and surplus, which allows it to avoid going under.

“There were very few companies that were writing this same kind of business back in the ’70s and middle-’80s who were immune to the kinds of losses that Transit ended up succumbing to,” Crone said. “But they either had rich parent companies who were able to infuse millions of dollars of additional capital, or they were able to merge or combine with other companies, or in some other way, they were able to weather the storm.”