Judges: MICHAEL R. N. MCDONNELL
Agency: Department of Financial Services
Latest Update: May 15, 1978
Summary: Proposed stock acquisition of insurance provider denied where proposed buyer did not meet criteria imposed for those purchasing five percent or more voting stock.
77-0973.PDFSTATE OF FLORIDA
DIVISION OF ADMINISTRATIVE HEARINGS
IN RE: )
) APPLICATION OF LOUISIANA )
AND SOUTHERN LIFE INSURANCE ) CASE NO. 77-973 COMPANY TO ACQUIRE )
ADDITIONAL STOCK OF ) NATIONAL LIFE OF FLORIDA ) CORPORATION. )
)
RECOMMENDED ORDER
Pursuant to notice, an administrative hearing was held before Michael R.N. McDonnell, Hearing Officer for the Division of Administrative Hearings, on October 24, 25, and 26, 1977, in Suite 205, Building B, 6501 Arlington Expressway, Jacksonville, Florida.
Mark Hulsey, Jr., Esquire, Steven Bussey, Esquire, and John B. McDonald, Esquire of Smith, Hulsey, Schwalbe & Nichols, and B. K. Roberts, Esquire, of Roberts, Miller, Baggett & LaFace, appeared as counsel for Petitioner.
Judson Freeman, Esquire, Ray W. Richard, Esquire, and William Brenton, Esquire, of Freeman, Richardson, Watson, Slade, McCarthy & Kelly, appeared as counsel for Respondent.
Petitioners, Louisiana and Southern Life Insurance Company, The Charter Company and New Charter Holding Company, Inc. (hereafter collectively L & S) seek to acquire in excess of five percent (5 percent) of the outstanding voting securities of Respondent, National Life of Florida Corporation (hereafter National Life). Since a public hearing has been called on the protest of National Life, L & S must meet the requirements of Section 628.461(6), Florida Statutes, as a condition precedent to approval of the acquisition by the Department of Insurance.
The statute provides that approval shall be given upon a finding that the five criteria contained therein are met. The statute places the burden of proof upon the acquiring entity, in this case L & S. The first criterion reads:
Upon completion of the acquisition, the domestic stock insurer would be able to satisfy the requirements for the inssuance of a license to write the line or lines of insurance for which it is presently licensed.
The parties agree that this first criterion is not at issue in this case and that, in fact, upon completion of the proposed acquisition National Life would be able to satisfy the requirements for the issuance of a license to write the lines of insurance for which it is presently licensed. That leaves four remaining criteria which L & S contends it has adequately proven. National Life, on the other hand, contends that L & S has failed to meet its burden of proof and that the evidence as a whole shows that the criteria are not met.
RESERVED EVIDENTIARY RULINGS
During the hearing in this cause, counsel for L & S objected to the admission in evidence of the expert opinion of Richard L. Pike and to the admission in evidence of the expert opinion of Robert M. Crowe. Ruling was reserved and the evidence was admitted conditionally.
As to Pike's testimony, objection was made on two grounds: (1) that the testimony was immaterial to the issues in the cause and (2) that the testimony was based upon hearsay not in evidence. The question posed seeks to elicit the witness' opinion as to whether the proposed acquisition would have an effect upon the stockholders of National Life. Counsel for National Life contends the question is not relevant to any issues because the statutory criteria seek only to ascertain the effect of the acquisition upon the insurer, its policy holders and stockholders and does not seek the effect of the acquisition upon stockholders of the controlling company.
In this case, National Life is the controlling company. It does not issue life insurance policies but rather is the sole stockholder of the domestic stock insuring company, Voyager Life. The criterion reads:
The financial condition of the acquiring person will not jeopardize the financial stability of the insurer or prejudice the interests of its policyholders and will not prejudice the interests of any remaining shareholders who are unaffiliated with the acquiring person.
National Life contends that the phrase "remaining shareholders who are unaffiliated with the acquiring person" includes the shareholders of the controlling company, National Life. Significantly, the other four criteria deal only with the effect of various aspects of the acquisition on the policy holders and shareholders of the domestic stock insurer. There is no logical reason why, if the Legislature were concerned with the effect of the financial condition of the acquiring entity upon the policy holders of the controlling company, it would not also be concerned with the effect, the competency, experience and integrity of the persons composing the acquiring entity would have upon the shareholders of the controlling company. Yet the Legislature is evidently unconcerned with effects on controlling company shareholders since the fourth criterion contained in paragraph (d) deals only with the best interests of the policy holders and shareholders of the insurer. (It treats also with the interests of the public, but that is not germane to the discussion.)
Accordingly, the objection is well founded and is sustained on the ground that the opinion sought to be elicited is not material to the issues in the proceeding. The proffered evidence will not be considered by the Hearing Examiner.
The testimony of Robert M. Crowe, is objected to because the opinion sought to be elicited was based upon material not in evidence, namely Value Line Reports on the Charter Company. National Life urges that the Value Line Reports are properly considered by the expert witness in the formulation of his opinion, notwithstanding the fact they have not been introduced in evidence. (National Life attempted to introduce the reports in evidence but the objection of L & S was sustained.) National Life reasons that Value Line is a recognized trade
journal containing market data and that an expert may give an opinion based upon extra-evidentiary sources customarily and usually relied upon by experts in the field. Indeed, the Value Line Reports are in large measure composed of raw financial data which standing alone might qualify as an allowable basis for an expert opinion. However, the Value Line Reports as proffered also contain a somewhat imprecise discussion of possibilities, probabilities, speculations and opinions which would, under their use in the context in which they are offered, be fundamentally unfair to L & S. For this reason, the objection to the proffered opinion is sustained and the testimony will not be considered be the Hearing Officer.
FINDINGS OF FACT
On February 17, 1977, L & S, pursuant to the provisions of Section 628.461, Florida Statutes, filed an application with the Florida Department of Insurance seeking approval of its proposed acquisition of an undesignated number of shares of the capital stock of National Life, which is the controlling company of Voyager Life Insurance Company (hereafter Voyager), a domestic insurer. The application was subsequently withdrawn and on April 19, 1977, a second application was filed by L & S seeking approval for the purchase of up to an additional 240,900 shares, or approximately ten percent (10 percent) of the issued and outstanding shares of National Life. The latter application recited that L & S then held approximately 20.2 percent of the total issued and outstanding shares of National Life.
On August 30, 1977, the application was amended to reflect the joinder of the Charter Company (hereafter Charter) and New Charter Holding Company, Inc. (hereafter New Charter). It was represented that Charter wholly owned New Charter and that New Charter held a majority of the issued and outstanding shares of L & S. National Life then filed its objections to the proposed acquisition.
Voyager is a domestic stock insurance company offering insurance coverage primarily in the lines of credit life, credit accident and health and ordinary life, as well as fixed and variable annuity contracts. National Life is a Florida corporation which includes Voyager as the largest of its several wholly owned subsidiaries.
L & S is a Louisiana stock insurer qualified to do business in Florida, engaged primarily in the underwriting of ordinary life coverage, and is a wholly owned subsidiary of New Charter. New Charter is a South Carolina corporation and a holding company, and is a wholly owned subsidiary of Charter. Charter, a Florida corporation, is a diversified holding company with the most important part of its business in petroleum refining and related activities, and with further interests in the areas of communications, real estate and insurance.
At the time of the hearing, L & S was the holder of approximately 20.2 percent of the outstanding common stock of National Life, which it had acquired from Charter affiliates and in open market purchases over the past two years. L & S has no contracts, arrangements or understandings with any other party with respect to any securities of Voyager or National Life. Neither L & S nor any of its officers or directors have any present plans or proposals to liquidate either Voyager or National Life, to sell their assets, to merge or consolidate either of them with any other person or to make any other major changes in their business, corporate structure or management.
As early as March 1, 1977, L & S had formulated an intent to seek control of National Life and, at the hearing in this cause, confirmed that intent. L & S attempted to exercise control at the 1977 annual meeting of National Life shareholders by conditioning the registration of shares which it owned on two conditions: (1) that two individuals of L & S' choice be elected to National Life's Board of Directors and (2) that National Life withdraw all opposition to the instant application. As a result of National Life's refusal to accede to the demands made by L & S at the 1977 annual meeting, L & S did not register its shares and the meeting was subsequently adjourned for lack of a quorum.
L & S' application for permission to acquire an additional ten percent of National Life's stock is in furtherance of their intent to seek to control National Life.
In March 1977, as collateral for a twenty million dollar loan, Charter pledged all voting securities of New Charter to subsidiaries of the conglomerate American Financial Corporation (hereafter AFC). A default by Charter under the promissory note could result in a transfer of control of L & S and beneficial ownership of National Life shares (held by L & S) to AFC.
From 1974 through 1976, Voyager out performed L & S in each product line common to the two companies.
The top management of Voyager and National Life have extensive experience in full time insurance operations, while the top management of L & S and New Charter and those persons whose backgrounds were required to be furnished in the application, have limited insurance experience and education.
The AM Best Company (Best's Insurance Reports, Life/Health) gives Voyager a "B" or "good" rating, while omitting any rating for L & S for the stated reasons that the operation of L & S has been very irregular without any definite trend during the last five years and because L & S has accumulated sufficient debits to fall outside the boundaries of a minimum rating.
From 1975 to June 30, 1977, Voyager's general expenses as a percentage of its total income have fallen from approximately eight percent to five percent, while during the same period, L & S' general expenses as a percentage of its total income have risen from approximately thirteen percent to twenty-one percent.
From 1974, to June, 1977, Voyager's unassigned surplus dropped from negative $9,370,000.00 to a negative $6,924,000.00, while during the same period, L & S' unassigned surplus climbed from a negative $14,070,000.00 to a negative $19,584,000.00.
From 1974 through 1976, Voyager had a net statutory gain of approximately $3,000,990.00 while during the same period L & S had a net statutory loss of approximately $2,942,000.00. For the first nine months of 1977, National Life had a statutory gain of approximately $1,900,000.00 while during the same period L & S had a statutory loss of approximately $270,000.00.
From 1974 through 1976, National Life paid its shareholders
$620,000.00 in dividends while during the same period L & S paid no dividends to its shareholders.
L & S has had to have support in its surplus or surplus notes and L & S has obtained approximately $15,000,000.00 of surplus relief through reinsurance contracts.
It is a mark of potentially unstable business for a life insurance company to have twenty percent to twenty-four percent of its admitted assets tied up in policy loans. Under its present management, L & S' policy loans as a percentage of its total admitted assets have climbed from approximately eighteen percent at year end 1975, to twenty-four percent as of June 30, 1977.
CONCLUSIONS OF LAW
The threshold question involved in this case concerns the acquisition of "control" of National Life. L & S contends that it is a passive investor and has disclaimed any intent to control National Life if its application is granted. Hence, argues L & S, the criteria for approval must be analyzed as though no control were passing to L & S.
National Life, on the other hand, asserts that the requirements of the statute cannot be avoided by a promise not to exercise control. The statute, says National Life, neither provides for nor contemplates approval of a proposed acquisition without an affirmative finding as to each of the determinations called for by the statute.
In passing Section 628.461, Florida Statutes, the Legislature made no distinction comparable to that urged by L & S. The statute is entitled "Acquisition of Controlling Stock" and goes on to prohibit a tender offer or exchange offer for five percent or more of the outstanding voting securities without approval of the Department of Insurance.
L & S urges that since it disclaims any intent to exercise control over National Life and would not do so without prior approval of the Department of Insurance, that it is relieved of the burden of proving the criteria insofar as they relate to the acquisition of control. L & S says that legislative intent is fulfilled in their case because they agree to allow the Department of Insurance to exercise continuing supervision of their relationship with National Life and take remedial action should L & S transgress and attempt to control the affairs of National Life.
Such a position is untenable. It is the Legislature that has determined that the acquisition of five percent or more of the outstanding voting securities constitutes the acquisition of controlling stock for the purpose of the statute. The Legislature has made no exceptions and certainly has not provided a statutory scheme whereby the exercise of control may be disclaimed by the acquiring entity and subsequently policed by the Department of Insurance. It would be beyond the scope of delegated legislative authority to supply such a regulatory scheme when the Legislature has chosen not to do so.
The only remaining question is whether L & S has met its burden of proof in establishing the five criteria for approval of the acquisition. They shall be considered seriatim.
Upon completion of the acquisition, the domestic stock insurer would be able to satisfy the requirements for the issuance of a license to write the line or lines of insurance for which it is presently licensed.
As stated previously, the parties agree that this criterion is met. Accordingly, it is concluded that upon completion of the proposed acquisition, National Life would he able to satisfy the requirements for the issuance of a license to write the lines of insurance for which it is presently licensed.
The financial condition of the acquiring person will not jeopardize the financial stability of the insurer or prejudice the interests of its policy holders and will not prejudice the interest of any remaining shareholders who are unaffiliated with the acquiring person.
The only evidence offered by L & S to establish the second criterion was the testimony of Mr. George K. Burnstein. It was his opinion that, with the commitment not to exercise control, regardless of the financial condition of the acquiring company, there can be no jeopardy to the financial stability of the insurer nor any prejudice to the interest of its policy holders nor any prejudice to the interest of any remaining shareholders who are unaffiliated with the acquiring person. The witness emphasized the importance of the qualification contained in L & S' application that no control would be exercised.
However, as previously observed, the statute is not drafted to accommodate disclaimers of the exercise of control. Rather, the statutes presume the acquisition of a controlling interest occurs upon the acquisition of five percent or more of the outstanding voting securities. Accordingly, it is concluded that L & S has failed to meet its burden of proof as to the second criterion.
Any plans or proposals which the acquiring person has made to liquidate the insurer, to sell its assets or to merge or consolidate it with any person, or to make any other major change in its business or corporate structure or management; or to liquidate any controlling company, to sell its assets or to merge or consolidate it with any person, or to make any major change in its business or corporate structure or management which would have an effect upon the insurer, are fair and free of prejudice to the policy holders and shareholders of the domestic stock insurer.
It has been established that neither L & S nor any of its officers or directors have any present plans or proposals to liquidate either Voyager or National Life, to sell their assets, to merge or consolidate either of them with any other person or to make any other major changes in their business, corporate structure or management. Accordingly, it is concluded that the third criterion is established by the record.
The competence, experience, and integrity of those persons who would control the operation of the domestic stock insurer indicate that the acquisition is in the best interest of the policy holders and
shareholders of such insurer and in the public interest; and
The natural persons whose backgrounds are required to be furnished pursuant this section have such backgrounds as to indicate that it
is in the best interest of the policy holders and shareholders of the domestic stock insurer and in the public interest to permit such persons to exercise control over such domestic stock insurer.
For the purposes of these two remaining criteria, it is concluded, as a matter of law, that the word "control" and the phrase "exercise control" are synonymous with the acquisition of controlling stock and the acquisition of five percent or more of outstanding voting securities.
It has been established that the top management of Voyager and National Life have extensive experience in full time insurance operations, a fact which is illustrated by the financial success of those companies. Conversely, the top management of L & S and New Charter and those persons whose backgrounds were required to be furnished in the instant application have comparatively limited experience and education in insurance operations. Accordingly, it is concluded that it is not in the best interest of the policy holders and shareholders of Voyager nor is it in the public interest to permit the acquisition or to permit such persons to exercise control over Voyager.
L & S has failed to meet its burden of proof as to the fourth and fifth criteria and the evidence taken as a whole shows that the criteria have not been established on the record.
RECOMMENDATION
Because L & S has failed to meet its burden of proof of affirmatively establishing each of the five criteria in accordance with Section 628.461(6), Florida Statutes, the proposed acquisition should be disapproved.
DONE and ENTERED this 15 day of February, 1978, in Tallahassee, Florida.
MICHAEL R. N. McDONNELL
Hearing Officer
Division of Administrative Hearings Room 530, Carlton Building Tallahassee, Florida 32304
(904) 488-9675
Filed with the Clerk of the Division of Administrative Hearings this 15 day of February, 1978.
APPENDIX
In accordance with the requirements of the decision in Stuckey's of Eastman, Georgia v. Department of transportation, 340 So.2d 119 (Fla. 1st DCA
1976), the rulings on proposed findings of fact submitted by the parties, along with the grounds for rejection are set forth below.
PETITIONERS' PROPOSED FINDINGS OF FACT
Adopted in substance.
Adopted in substance.
Adopted in substance.
Adopted in substance.
Adopted in substance.
Adopted in substance.
Adopted in substance.
Adopted in substance.
Adopted in substance.
Adopted in substance.
Rejected. Not relevant.
Adopted in substance
Adopted in substance
Rejected. Not relevant.
Rejected. Not supported by the evidence.
RESPONDENT'S PROPOSED FINDINGS OF FACT
Adopted in substance.
Adopted in substance.
Adopted in substance.
Adopted in substance.
Adopted in substance.
Adopted in substance.
Adopted in substance.
Adopted in substance.
Rejected. Not material.
Rejected. Not relevant.
Rejected. Not relevant.
Adopted in substance.
Adopted in substance.
Adopted in substance.
Adopted.
Adopted.
Adopted.
Adopted.
Adopted.
Adopted.
Adopted in substance.
Adopted in substance.
These findings made this 15th day of February, 1978.
MICHAEL R.N. McDONNELL
Hearing Officer
COPIES FURNISHED:
Mark Hulsey, Jr., Esquire
500 Barnett Bank Building Jacksonville, Florida 32202
B. K. Roberts, Esquire Roberts, Miller, Baggett
& LaFace
101 East College Avenue Post Office Box 1752 Tallahassee, Florida 32302
Judson Freeman, Esquire Freeman, Richardson, Watson,
Slade, McCarthy & Kelly, P.A.
1200 Barnett Bank Building Jacksonville, Florida 32202
Docket for Case No: 77-000973
Orders for Case No: 77-000973
| Issue Date |
Document |
Summary |
|
May 12, 1978 |
Agency Final Order
|
|
|
Feb. 15, 1978 |
Recommended Order
|
Proposed stock acquisition of insurance provider denied where proposed buyer did not meet criteria imposed for those purchasing five percent or more voting stock.
|
