Insolvencies In-Depth Series (Part 3): One Long, Long Mission
Mission Insurance Cos. was one of 72 property/casualty insurers that failed during the period from 1984 to 1987 with an ultimate tab of $2.4 billion as of 1990. A congressional report, titled "Failed Promises: Insurance Company Insolvencies," prepared by the House Oversight and Investigations Subcommittee and released Feb. 7, 1990, followed more than a year of hearings and investigations into several insurer insolvencies, including Mission Insurance, Transit Casualty Co. and Integrity Insurance Co.
The report concluded that the state regulatory system at the time was "seriously deficient" in its ability to prevent such insurer collapses. Although the report did not advocate federal regulation or specific changes in state regulation of insurance, the report called for the further study of several problem areas in regulatory oversight and monitoring. One can only wonder what Congress would have to say about the 21-year-long insolvency proceedings that followed Mission's demise.
This article is not intended to be an indictment of those involved in the administration of the Mission estate because they had performed their work in a flawed receivership system. This case study is largely based upon the limited sources of information readily available, and the authors' own recollections. Instead, the article's purpose is to demonstrate the need for reform and, more importantly, provide recommendations for action.
THE STORY BEFORE RECEIVERSHIP
The insolvency of the Mission Insurance Cos., all subsidiaries of Mission Insurance Group Inc., was considered at the time to be one of the largest insolvencies to date. By virtue of its size, the nature of the corporate structure, the relationships between subsidiaries and its intricate reinsurance arrangements, this was the most complex insolvency undertaken in California, or any other state for that matter, up to that point.
Mission Insurance Group was a holding company for numerous subsidiaries consisting of licensed insurance companies, managing general agencies and other entities providing ancillary services. Its principal subsidiary, Mission American Insurance Co., in turn owned the Mission Insurance Co., Mission National Insurance Co. and Enterprise Insurance Cos., collectively known as the "Mission companies," all based in California.
Mission Insurance Group also owned various noninsurance subsidiaries, the principals of which were Pacific Reinsurance Management Corp., Mission Re Management Corp., and Sayre and Toso Inc., a managing general agency that underwrote a substantial amount of business for the Mission companies.
Prior to the 1980s, Mission had enjoyed a good reputation as a regional writer of workers' compensation business, as well as general liability, excess and surplus lines, and commercial multiple peril lines. It expanded in the soft market cycle of the early 1980s by writing large volumes of commercial property/casualty business, both on a reinsurance and direct basis.
Rapid expansion was achieved largely through the use of managing general agents, who wrote the business in Mission's name and then looked around the world to reinsure larger portions of the risk. Of course, Mission instituted limitations as to what the managing general agents could write, but these went largely ignored, according to historical accounts.
At one time, the Mission companies had more than 540 reinsurers--many of which were based overseas. At its peak, the Mission companies and the various affiliates conducted business from 39 offices in 24 states, with more than 2,000 employees. In 1981, premium income was $342,919,000 with an operating gain of $40,929,000. By 1985, premium income was $264,388,000 with an operating loss of $377,574,000.
With Mission reporting huge losses in both 1984 and 1985, Ohio Reinsurance Corp. and other retrocessionaires involved in the reinsurance pools managed by Pacific Reinsurance filed suit in federal court against Pacific Reinsurance and Mission Insurance, alleging fraud, misrepresentation, concealment, breach of fiduciary duty and gross negligence and seeking rescission of the reinsurance agreements. Mission Insurance fronted for the majority of the business written by Pacific Reinsurance.
A second legal action followed, filed by Federal Reinsurance Corp. against Pacific Reinsurance with similar allegations. These actions received widespread publicity, and thereafter other reinsurers reneged on their obligations to honor reinsurance contracts. The resulting negative cash flow impact on the Mission companies was viewed by many to be the single most critical factor leading to eventual liquidation.
By March 11, 1985, the Mission Insurance board of directors adopted a "rescue plan" for the ailing insurance subsidiaries that consisted of an infusion of $75 million of capital by Carl H. Lindner's American Financial Corp., which then had a 49.9 percent ownership interest in Mission Insurance Group.
Mission representatives assured the commissioner and his staff that the plan would allow Mission Insurance Co. to run off its business in orderly fashion with no harm to policyholders. The Department of Insurance gave its continued approval for the plan.
ASSESSMENT AND EVALUATION
At the same time, a regular triennial financial examination of Mission and its subsidiaries was conducted under the direction of the California Department of Insurance in coordination with other state regulators.
In mid-May 1985, the California department concluded that the cash-flow projection produced by Mission Insurance Group to support its position that Mission Insurance Co. could proceed in an orderly runoff was too optimistic and that further capital would be required to support the runoff. The exam found, among other things, that Mission's reserves were understated by $64.3 million. Mission was now deemed to be in hazardous financial condition.
American Financial Corp. committed to an additional investment of $40 million, but by October 1985, things were looking grim. The reluctance of Mission's reinsurers to pay reinsurance balances alleged due now resulted in reinsurance recoverables being the fastest growing asset on the company's balance sheet.
While the cause of this nonpayment is open to debate, and was the subject of litigation, in part it was the unexpected level of losses being reported to reinsurers. To some extent, the nonpayment was also caused by the public complaints about the behavior of Mission's reinsurers and the subsequent drawing down of letters of credit held by Mission, which created a very adversarial relationship between Mission and its reinsurers and retrocessionaries, particularly those outside the United States. This "uncommercial behavior" would impact other U.S. receiverships.
Nevertheless, and perhaps more importantly, these circumstances put the insurance department at odds with the reinsurers. This conflict would remain when the insurance commissioner put on the receiver's hat.
In October 1985, it became obvious that the refusal of Mission's reinsurers to pay reinsurance balances due presented a serious problem for Mission Insurance Co. On Oct. 31, 1985, the California Department of Insurance moved to obtain a court order of conservatorship. The receivership court found nearly $900 million in unpaid claims and a reserve deficiency of $169 million.
In the months that preceded a move to liquidate in February 1987, Commissioner Roxani Gillespie assumed office in July 1986. A report issued five years after Mission was placed in conservatorship by the California Department of Insurance revealed that Gillespie undertook an investigation through retained consultants to determine if rehabilitation was feasible.
At the same time, an effort was made to obtain an agreement with recalcitrant reinsurers to honor their commitments. Any workable scheme ultimately required reinsurers to honor their commitments, which was found to be impossible.
There is no discussion in the public record of any attempt to advise and seek input from policyholders and creditors, or to develop a plan of rehabilitation that Mission's creditors, reinsurers and the regulatory authorities could agree to and implement to avoid liquidation.
The commissioner also moved to assemble a group of experts, consisting of attorneys, accountants and actuaries, to provide counsel, advice and technical expertise during the review process and subsequently assist in executing the actual liquidation under her direction.
The commissioner took immediate action to assemble this team of consultants, including Karl Rubinstein, an attorney with Rubinstein and Perry, and Williams S. Price, who were designated as special deputy insurance commissioners. As a former insurance executive, Price's role throughout the liquidation was to function as CEO of the Mission companies.
It is unclear whether these individuals had the receivership experience necessary to deal with what was then viewed as the largest and most complex insurer insolvency in the industry's history. The point here, though, is that these individuals were selected by the commissioner without competitive bidding, based on whatever criteria the commissioner deemed relevant, and that the appointment was approved by the court without a substantial hearing. Stakeholders with a vital interest in who held these important positions--creditors and guaranty funds--had no role in the selection process. Despite the fact that California had an experienced receivership office, it was not substantially involved in the receivership until 1998.
A stark example of one of the fundamental flaws in the U.S. insolvency system is evidenced in this case. While the state of California maintains a Web site as the liquidator of the Mission Insurance Cos., it is incomplete. It contains no information from the entry of liquidation order in February 1987 to March 2003. The authors are also aware of only one status report being issued by the receiver dated November 1990. This lack of information prevents an evaluation of the performance of those who conducted the receivership. And, of course, it would have precluded oversight by stakeholders of the liquidation as it was being conducted.
The dissention between Mission and its reinsurers not only continued but worsened as the liquidation process continued, at least in part due to the, at best, "unconventional" positions taken by the receiver. It is believed by some that these activities not only extended the life of the estate, but also caused considerable cost to the estate and its creditors without any benefit.
By way of example, in the late '80s and early '90s, Mission's liquidator sought to have its reinsurers held liable for acceleration and estimation for future claims incurred but not reported. The California Supreme Court eventually ruled in 1991 that the receiver did not have authority under the receivership law or contract law to pursue such claims from its reinsurers. About the same time, the liquidator sought to sue the reinsurers for breach of contract, bad faith and special damages. This action was also denied by the court.
In 1989, the Mission liquidator denied the ability of reinsurers to offset sums due Mission for claims with sums due from Mission for premiums or other payable balances. Again, the California Supreme Court in 1992 stated that mutual debits and credits may be offset under state insurance law. In its ruling, the court advised the liquidator that "its economic arguments should be directed to the state legislature."
There is no question that this insolvency revealed a "crack" in the insolvency regime with regard to the claims fixing and approval process for claims emanating from occurrence liability insurance products and reinsurance of those products.
Exacerbated by an ever-growing litigious environment in the United States, it was soon realized that the estate would have to remain open for decades until unliquidated and contingent claims could be finalized.
Of the 180,000 claims filed against Mission, about 71,000 claims were filed as "contingent and undetermined" and stated no dollar amount. But, more importantly, the substantial reinsurance recoveries on these claims, which would increase the estate's general assets available for all creditors, would not be realized.
While the receiver had no desire to let them off the hook for those payments, the statute did not provide direction. What was to be done? The receiver came up with a plan that would allow for estimation of the estate's ultimate obligation to each claimant. These estimates would then be used to accelerate reinsurance collection.
The receivership court approved the receiver's plan in 1995, but the reinsurers and others appealed the plan. The appellate court ruled that the receiver did not have authority under California law for the plan because it contradicted the express language of the statute and the receiver did not have the ability to unilaterally amend reinsurance contracts to accelerate collection. With this defeat, it appears that the receivership went largely inactive until finally, in 2002, the court asked the receiver to submit a proposal and plan to close the Mission estate. The receiver's plan set December 31, 2003, as the last date for liquidation of contingent and undetermined claims to share in the assets of the estate.
In 2006, the final distribution to policyholders and claimants of Mission Insurance Cos. occurred. Surprisingly, policyholders and claimants of Mission Insurance and Mission National received 100 percent of their approved claims.
Even general creditors of Mission National and Mission Insurance, mostly reinsured companies, received 100 percent and 30 percent of their claims, respectively.
After this final distribution, the receiver reports holding assets of approximately $80 million. What will be done with these remaining funds is not disclosed.
While limited information is available to analyze, it appears that this favorable outcome was caused by success in reinsurance collections and a significant decline in actual claims; however, holding on to creditors' money for a couple of decades certainly helped as well.
This conclusion causes some to wonder if, in fact, the Mission companies were actually insolvent. Of course, we will never know. The present system never concerns itself with collecting data to create patterns that will be useful for the next "Mission."
In contrast to Mission, HIH Insurance Group collapsed in 2001 in Australia. Within a few years, the liquidator proposed a creditor's "scheme of arrangement" under Australian law so that HIH could be wound up expeditiously and in a cost-effective manner. The first distribution occurred in 2006, even though this device had been rarely used in Australia. Under a creditor's scheme of arrangement, creditor's rights are substituted for those conferred by the winding-up procedures set forth in the scheme. Such a process is also permitted in the United Kingdom, Bermuda, Singapore and elsewhere, but not in the United States.
The final article in this series will provide further insight into schemes of arrangement.
JAMES W. SCHACHTis a managing director in the Regulatory, Restructuring and Runoff Practice at Navigant Consulting.
LYNNE PRESCOTT HEPLER
is a director in the Regulatory, Restructuring and Runoff Practice at Navigant Consulting.
March 1, 2007
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