ustxtxb_obs_1991_04_05_50_00008-00000_000.pdf

Receiverships By Fiscal Year Balance Receiverships Fiscal Year Beginning New Receiverships and Receiverships Closed New Receiverships Receiverships Closed 1980 52 1 4 1981 49 8 7 1982 50 11 19 1983 42 13 0 1984 55 3 3 1985 55 20 1 1986 74 19 1987 91 18 1988 108 25 2 1989 131 40 14 1990 157 33 28 As of August 31, 1990 -162 Active Receiverships Lawsuits Pending Liquidation Division: Fiscal Year New Ending Lawsuits 1980 1990 Closed Lawsuits Pending Lawsuits 1980 111 70 406 1981 8 106 308 1982 29 120 217 1983 69 17 269 1984 31 26 274 1985 150 119 305 1986 203 89 419 1987 167 148 438 1988 227 131 534 1989 296 254 576 1990 382 270 688 SOURCE: TEXAS STATE BOARD OF INSURANCE 1990 ANNUAL REPORT as many Texas insurance companies teeter on the brink of collapse. \(From 1985 to 1988, Texas assessments against the solvent insurers to pay the claims of the bankrupt compathe Governor are serious about protecting the public from insurance insolvencies, they will have to take strong measures to protect taxpayers by shoring up the Guaranty Fund. The Guaranty Fund Boondoggle S 0 WHAT IS the insurance guaranty, if not a fund? In theory, the Insurance Guaranty is a plan whereby the SBI assesses the solvent companies to pay the claims made against the insolvent ones. But then, Texas permits its 100 percent of their assessments from their state taxes. In essence, therefore, the claims of the defunct insurance companies are paid out of the state’s general revenues in other words, by the taxpayers. The total cost to taxpayers could be enormous. According to one SBI spokesman, the insurance guaranty fund assessed solvent insurance companies $61,962,231 for 1990 Claims against 21 life/accident/health/and annuity companies, another $60 million for a recalculation of 1989 claims, plus $41,750,024 for 1990 claims against nine property/casualty companies. Even the nonmember assessments came to $1,014,290, according to the SBI Annual Report, and title company claims reached $5,560,457. That’s a total bill of over $100 million. The assessments were needed for 30 of the 162 insurers that are in receivership. Meanwhile, loans from Texas Commerce Bank provided the cash draws to operate the insurance guaranty fund between the time that estimates of needs are made and assessment receipts are received. In addition to assessments for claims against the liquidated companies, there are costs for auditing, legal fees, consulting fees, and all other expenses of the Liquidation Division of the SBI. Disbursements of the Liquidation Division for the last fiscal year reached $146 million, including $70 million for claims paid. This money, of course, comes out of the pockets of every Texas taxpayer. \(A similar phenomenon is happening across the country; according to the National Conference of Insurance Guarantee Funds, payments to policyholders from state guarantee funds have soared over the past seven years, If anything, the future of the Texas insurance industry looks even bleaker than the recent past. As Kay Doughty, the former state insurance consumer counsel who now advises Gib Lewis on insurance issues, said: “Hang on to your hats; the cost of insolvencies is still going up.” Just last month, United States Fidelity and Guaranty Company announced that, after over 70 years of writing insurance in Texas, it would shut down its Texas offices and suspend most of its operations in the state. In fact, the costs could accelerate in the near future, as holding companies turn their captive insurers into cash for themselves and financial disasters for the state by converting liquid assets into dividends. Merger Mania HERE ARE VAST advantages to owning aninsurance company. Unlike most corporations, the assets of insurance companies are not tied up in merchandise or heavy manufacturing equipment. Their stock is promises promises backed by money. While the unscrupulous companies over-invest their liquid assets, often in risky loans, or real-estate investments, the principled ones are highly liquid, and liquidity makes them attractive prey for corporate raiders. When the holding company of a corporate conglomerate takes over an insurance company, it can drain the liquid resources from the insurance reserves. It can quash the insurer’s affiliates and subsidiaries to finance its own operations or other takeovers. During the height of the merger mania of the 1980s, the practice of capturing wellmanaged insurance companies grew until many century-old businesses became pawns of powerful corporate raiders. Furthermore, the holding companies can eliminate competition in insurance for their captives by having their own source for insurance as well as their own customers themselves. Even when a takeover is unsuccessful, the cost to the insurance company can be tremendous and protection against takeovers is a part of the necessary cost which made premiums soar in the 1980s. A strong and solvent company may be captured and then dismantled by its owner. Examples abound: A West Coast conglomerate, National General bought up 99 percent of Great American and awarded itself a $172 million dividend an amount three times the value of the parent company before the acquisition; IT&T owns 25 insurance companies, including the Hartford Group; Gulf and Western owns 18; Teledyne, 15; Control Data, 14; Beatrice Foods, four; American Express owns the Firemen’s Fund companies; and General Motors and General Electric own insurance companies. Nearly every large corporation owns an insurer. As renowned insurance plaintiffs lawyer Gerry Spence wrote in his 1989 book, With Justice for None, “American corpora tions seem to lust for them.” HE INSURANCE industry and its corporate owners will doubtless claim that the impending shakeout of Texas insurance companies will hurt the state by depriving consumers of competition. Yet more insurance companies do not result in better service or protection for the public, but less, according to Halsey D. Josephson, writing in The Case Against New Life Insurance Companies: When the McCarran-Ferguson Act \(which 8 APRIL 5, 1991 ‘0464fr”,”*r_r wto-mt …s.