Two Calif.-Domiciled Workers’ Comp Companies Conserved by CDI
The toll from the ongoing adverse streak for the California workers’ compensation market just keeps rising. The California Department of Insur-ance (CDI) recently conserved two more insurance companies domiciled in the state.
On March 30, Insurance Commissioner Harry Low anno-unced that officers of the CDI Conservation and Liquidation Office (CLO) had served Seizure Orders on HIH America Comp-ensation and Liability Company (HIH America Compensation) and Great States Insurance Company (Great States). The same day, conservation orders were requested from the Superior Court of San Francisco, the city in which both companies are headquartered.
“We had our financial examiners on site, and they did a limited scope financial examination. As a result of that, we determined that the companies were insolvent,” said Harry LeVine, acting chief executive officer for the CLO. “As soon as we completed our exam, and a lot of that depended on getting…updated actuarial numbers, the decision was made to conserve the company.”
According to the CDI, the findings of an independent actuarial study revealed that HIH America Compensation, Great States and Hawaiian affiliate HIH America Insurance Company of Hawaii Inc.—collectively HIH America Group (HIH America)—would have to “increase their liabilities for workers’ compensation losses and loss adjustment expenses by a combined $81 million. This increase, combined with the existence of uncollectable intercompany receivables, made the two California companies and their Hawaiian affiliate insolvent.”
LeVine noted that the companies were still in operation and emphasized that all injured workers’ claims will be paid. “That’s the highest priority,” he said. “There should be no interruption of any claim.
“We will basically spend some period of time gaining control of the operation, and looking at how they’re run and what their prospects are for the future,” LeVine continued. “We’ll make a recommendation to the Comm-issioner on whether there’s some way to salvage the company, or whether it’s best for all the creditors and policyholders to put it into liquidation.”
To that end, CLO managers were placed onsite at the companies to supervise accounting, financial, reinsurance and claims operations. “By being appointed as conservator, the Commissioner actually takes control of the company and, according to the statute, can run as much of it or as little of it as he deems appropriate.” LeVine said.
HIH America’s Australian parent, HIH Insurance Ltd., placed itself into provisional liquidation on March 15, 2001 (see page 43 for related story). Losses by HIH Insurance’s California workers’ comp operations were at least partially responsible for its financial woes. Late last year, a run-off plan was adopted for HIH America, which ceased accepting new workers’ comp business on Oct. 30. Subsequently, renewal rights and other tangible assets associated with HIH America’s large account California workers’ comp business and non-California workers’ comp business were sold to Alaska National Insurance Company and Argonaut Insurance Co., respectively.
The CDI noted that before the runoff, HIH America Compensation wrote business in California, Florida, Colorado, Hawaii and Michigan; while Great States wrote business in Colorado, Arizona, Illinois and California.
“The companies have a reinsurance pooling arrangement, so the bad financial position of one company affects all of them,” LeVine said.
As a result of the CDI’s actions on March 30, A.M. Best downgraded the financial strength rating (FSR) of HIH America from “C” to “E,” Best’s rating for companies in receivership or in conservation. Just nine days previously, A.M. Best had downgraded HIH America’s FSR from “B+” (Very Good) to “C” (Weak), citing the group’s run-off status and the liquidation of its Australian parent as major factors in the rating action.
“Although technically the California action didn’t involve the [Hawaiian affiliate], we downgraded the Hawaii company to “E” just because of its relationship…with the California companies,” said Robert Farnam, financial analyst and actuary for A.M. Best. It is believed that the Hawaii Department of Insurance is considering an appropriate course of action to take with regard to HIH America Insurance Company of Hawaii.
Farnam also said that no additional rating actions would be taken on HIH America pending California’s decision regarding a possible liquidation of the companies.