STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

FLORIDA DEPARTMENT OF INSURANCE ) AND TREASURER, )

)

Petitioner, )

)

vs. ) CASE NO. 94-2992

) NATIONAL AMERICAN LIFE INSURANCE ) COMPANY OF PENNSYLVANIA, )

)

Respondent. )

)

RECOMMENDED ORDER

Upon due notice, this cause came on for formal hearing on February 21, 1995 in Tallahassee, Florida, before Ella Jane P. Davis, a duly assigned hearing officer of the Division of Administrative Hearings.

APPEARANCES

For Petitioner: James B. Redner, Esquire

Department of Insurance and Treasurer Division of Legal Services

612 Larson Building

200 East Gaines Street Tallahassee, Florida 32399-0333

For Respondent: No appearance.

STATEMENT OF THE ISSUES

Whether grounds exist which warrant the suspension or revocation of the Respondent's certificate of authority to transact insurance in the State of Florida.

PRELIMINARY STATEMENT

On April 8, 1994, Petitioner Department of Insurance and Treasurer entered an Order to Show Cause against Respondent, National American Life Insurance Company of Pennsylvania (NALICO) alleging numerous violations of the Florida Insurance Code. The allegations centered upon NALICO'S unsound financial condition, the makeup of its investment portfolio, its ratio of net written premiums to surplus as to policyholders, a cease and desist order entered against it by the Texas Insurance Department, and the effect of such factors on NALICO's ability to transact insurance in Florida.

On May 2, 1994, NALICO, by and through its attorney Vincent J. Rio, III, filed its Petition for Formal Proceedings and Response to the Department's Order to Show Cause. The case was referred to the Division of Administrative Hearings.

After several agreed continuances, an order was entered on September 6, 1994 which continued the formal hearing to February 21-22, 1995. By order dated February 9, 1995, the parties were given until February 15, 1995 to file their joint prehearing stipulation.

Petitioner agency filed a unilateral prehearing statement on February 14, 1995.

On January 31, 1995, NALICO had been placed in rehabilitation by the Insurance Department of NALICO's domiciliary state, Pennsylvania. The Pennsylvania Insurance Department, as Rehabilitator, immediately assumed possession of NALICO's property, business and affairs. The Rehabilitator severed the attorney-client relationship between NALICO and Mr. Rio and directed Mr. Rio to withdraw as counsel herein.

On February 15, 1995, Mr. Rio filed his Notice of Withdrawal. The notice was not self-executing. Due to inadequacy of the notice's certificate of service and the proximity of the date of formal hearing, no order permitting withdrawal pursuant to Rule 60Q-2.007, F.A.C. was entered prior to the date of formal hearing.

When formal hearing was convened on February 21, 1995, no one appeared on behalf of NALICO. The undersigned hearing officer telephoned Mr. Rio and requested that he appear to resolve the representation issue.

Upon his arrival, Mr. Rio assured the undersigned that the Pennsylvania Rehabilitator, Linda Kaiser, by and through her Special Funds Counsel, Carl F. France, was fully familiar with the nature of the proceedings herein and of the scheduled formal hearing, and that Mr. France had instructed Mr. Rio to withdraw. Mr. Rio further assured the undersigned that NALICO's President, Robert Rath, was also aware of the proceeding and that both Mr. Rath and the Rehabilitator had made an informed decision not to obtain other legal counsel and not to be present at the formal hearing or to have someone appear on their behalf, either jointly or severally.

On the basis of these representations, the undersigned orally permitted Mr.

Rio to withdraw as NALICO's counsel. A later written order memorialized the oral order.

At no time after February 15, 1995, when Mr. Rio filed his notice of withdrawal, did NALICO's President, the Pennsylvania Rehabilitator or the Rehabilitator's counsel enter an appearance or request a continuance.

Accordingly, Petitioner agency, which bore the burden of proof and duty to go forward herein, was permitted to go forward with evidence on February 21, 1995.

Petitioner presented the oral testimony of Leslie C. Blank and John C. Woods and had three exhibits admitted into evidence.

At the conclusion of its case-in-chief, Petitioner moved ore tenus to amend its Order to Show cause to conform to the evidence. The motion was unopposed because Respondent did not appear, and the motion was granted on a limited basis. 1/

Petitioner then moved ore tenus for the undersigned not to enter a recommended order but to relinquish jurisdiction for immediate entry of a final order by the agency. That motion was denied. Petitioner requested time to

supplement its motion with legal research. Petitioner was granted 24 hours to renew the motion in writing and provide supporting citations. No written motion or supporting citations were filed.

A transcript was filed in due course. All timely-filed proposed findings of fact have been ruled upon in the appendix to this Recommended Order, pursuant to Section 120.59(2), F.S.

FINDINGS OF FACT

1. NALICO is a Pennsylvania domiciled insurance company possessing a certificate of authority from the Florida Department of Insurance and Treasurer to write life and health insurance in Florida.

   
   

2. NALICO is subject to the jurisdiction and regulation of the Florida Department of Insurance and Treasurer, pursuant to Chapter 624, F.S. This case was initiated by that agency's order to show cause (Florida's order to show cause).

   
   

3. On February 22, 1994, the Texas Insurance Department issued a cease and desist order against NALICO prohibiting it from writing any new and/or renewal business in Texas. NALICO admitted in its response to Florida's order to show cause that Texas had taken that administrative action. This finding relates to Count I of Florida's order to show cause.

   
   

4. On January 31, 1995, NALICO was placed into rehabilitation, pursuant to an Order entered by the Commonwealth Court of Pennsylvania. The Commonwealth Court of Pennsylvania found that NALICO "consents to rehabilitation and is in such condition that further transaction of business would be hazardous to its policyholders, creditors and the public." This finding relates to Count I of Florida's order to show cause, as amended. 2/

   
   

5. NALICO, as a licensed life and health insurance company in Florida, is required to file three quarterly statements and one annual statement with the Florida Department of Insurance and Treasurer each year.

   
   

6. The third quarterly statement pertains to the period from June 30 through September 30 and must be filed with the Florida Department of Insurance and Treasurer no later than November 15 of each year.

   
   

7. NALICO filed its quarterly statement for the quarter ending September 30, 1994 with the Florida Department of Insurance and Treasurer on November 22, 1994.

   
   

8. Counts II and III of the Florida order to show cause were based upon data supplied by NALICO in its 1993 annual statement.

   
   

9. NALICO's September 30, 1994 quarterly statement reflects the most recent financial data available to the Department as of the date of the formal hearing, February 21, 1994. The agency relied on this statement at formal hearing.

   
   

10. Count II of Florida's order to show cause was directed to inadequacies of NALICO's investment portfolio as shown by the 1993 annual report. The evidence of Mr. Conrad Woods, a Certified Financial Planner was unrefuted that between the filing of the Florida order to show cause and the date of formal hearing, NALICO's own submissions to Petitioner agency revealed that NALICO was

    making investments in assets that were either totally unacceptable or unacceptable by virtue of an excess investment, thus tying-up NALICO's funds and making them unavailable to Florida claimants. Petitioner agency's disallowance of specific NALICO investments at each reporting period is the factor that reduced NALICO'S reported surplus or working capital so that it constituted a negative surplus. As of the date of formal hearing, NALICO was 5.2 million under its 3.4 million requirement. See infra. 3/

    
    

11. Leslie Blank, an Examiner II with the Florida Department of Insurance and Treasurer, reviewed NALICO's 1994 third quarterly statement for Florida Insurance Code compliance. She extracted data from NALICO's 1994 third quarterly statement to be inserted into a spreadsheet format developed by her agency. This spreadsheet operates as an abridged version of the quarterly statement and is used to determine whether the company is in compliance with various provisions of Florida's Code.

    
    

12. NALICO's ratio of net premiums written to surplus as to policyholders, on an annualized projected basis, exceeded the statutory limitation of 4 to 1 prescribed in Section 624.4095, F.S. NALICO's ratio of net premiums written to surplus as to policyholders, on an annualized projected basis, was 7.57, which means that for every dollar of surplus, there was $7.57 of premium written against it. Such ratio violates Section 624.4095 F.S.

    
    

13. Based upon the data provided by NALICO in its September 30, 1994 quarterly statement, NALICO's statutorily required surplus should have been

    $3,417,549. See, Section 624.408 F.S. Ms. Blank determined that NALICO's surplus as to policyholders actually was a negative $1,869,181. Therefore, NALICO's surplus was deficient in the amount of $5,286,730 as of the date of the formal hearing. 4/

    
    

    CONCLUSIONS OF LAW

    
    

14. The Division of Administrative Hearings has jurisdiction over the subject matter and the parties to this proceeding, pursuant to Chapters 624, 625, 626 and Section 120.57(1), F.S.

    
    

15. The Florida Department's order to show cause, as orally amended, seeks a suspension of NALICO's Florida certificate of authority, pursuant to Section 624.418, F.S., which reads, in pertinent part:

    
    

    624.418 Suspension, revocation of certificate

    of authority for violations and special grounds.--

    1. The department shall suspend or revoke

       an insurer's certificate of authority if it finds that the insurer:

       (a) Is in unsound financial condition.

       (d) No longer meets the requirements for the authority originally granted.

    2. The department may, in its discretion, suspend or revoke the certificate of authority of an insurer if it finds that the insurer:

       1. Has violated any lawful order or rule of the department or any provision of this code.

          1. Has a ratio of net premiums written to surplus as to policyholders that exceeds 4 to 1, and the department has reason to believe that the financial condition of the insurer endangers the

             interests of the policyholders. The ratio of net premiums written to surplus as to policyholders shall be on an annualized actual or projected basis. The ratio shall be based on the insurer's current calendar year activities and experience to date or the insurer's previous calendar year activities and experience, or both, and shall be calculated to represent a 12-month period. However, the pro- visions of this paragraph do not apply to any insurance or insurer exempted from s. 624.4095.

          2. Is under suspension or revocation in another state.

    3. The insolvency or impairment of an insurer constitutes an immediate serious danger to the public health, safety, or welfare; and the depart- ment may, at its discretion, without prior notice and the opportunity for hearing immediately suspend the certificate of authority of an insurer upon a determination that:

    1. The insurer is impaired or insolvent; or

    2. Receivership, conservatorship, rehabilitation or other delinquency proceedings have been initiated against the insurer by the public insurance super- visory official of any state.

    
    

16. The data extracted from NALICO's September 30, 1994 quarterly statement showed Respondent to be statutorily impaired, insolvent, or otherwise of unsound financial condition as the result of its surplus deficiency. NALICO's condition constitutes a serious threat to its policyholders and the insurance-buying public due to the company's diminished ability or complete inability to meet its obligations. Moreover, due to its surplus deficiency,

    NALICO no longer meets the statutory requirements prescribed in Section 624.408, F.S., or the requirements for its certificate of authority as set forth in Chapter 626, F.S. Accordingly, Respondent is subject to suspension or revocation of its certificate of authority, pursuant to Sections 624.418(1)(a) and (d); (2)(f); and (3)(a), F.S.

    
    

17. Respondent's problems in Texas and Pennsylvania subject it to suspension or revocation, pursuant to Section 624.418(3)(b), F.S.

    
    

18. Petitioner agency does not seek revocation, which is one of the appropriate penalties under the statute. It seeks suspension. This is an appropriate result.

    
    

19. The Department's posthearing submittal does not indicate what period of time would be appropriate for a suspension or upon what conditions the suspension could be terminated. However, based upon testimony and argument at formal hearing, it is clear that ending the suspension should be related to proof by NALICO that it is rehabilitated or recovered, if rehabilitation and/or recovery are possible.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Department of Insurance and Treasurer enter a Final

Order suspending NALICO's certificate of authority to transact insurance in Florida and specifying, within the agency's expertise, upon what terms NALICO may prove up financial responsibility for recertification.

DONE AND ENTERED this 28th day of April, 1995, in Tallahassee, Florida.

ELLA JANE P. DAVIS

Hearing Officer

Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-1550

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 28th day of April, 1995.

ENDNOTES

1/ The motion to amend was granted to add within Count I Pennsylvania's placement of NALICO into rehabilitation on January 31, 1995 and to address, in Count III, the change in NALICO's ratio of net premiums written to surplus as to policyholders between the date of the Florida order to show cause and the date of formal hearing.

The specific statutory sections originally pled in the order to show cause and its specific language addresses the issue of the ratio of net premiums as it might develop over the period before formal hearing. The evidence used at formal hearing (the 1994 third quarter statement) originated with NALICO and the agency's intent to use it was fully disclosed by the Petitioner agency in its unilateral prehearing statement filed prior to formal hearing.

Accordingly, there was neither surprise nor prejudice to NALICO in granting the motion to amend. Authority for the amendment to Count I is found in Board of Medicine v. Mata, 561 So.2d 364 (Fla. 1st DCA 1990). See the following Endnotes for greater detail.

2/ Id. n. 1.

3/ Count II of Florida's order to show cause was based on NALICO's 1993 annual statement and named irregularities within that statement in regard to NALICO's investment portfolio under Sections 625.012(12); 625.322; 625.304(4)(a); 625.151(3)(a); 625.325; 625.151(3)(a)2.; 625.333(2); 624.418(1)(a), (b), and

(d); 625.340; and 624.4211, F.S. These involved NALICO's mislisting assets; excess investments in lower quality, less safe investments; investments in unacceptable categories, and pledged collateral loans, which loans were arguably not secure. The evidence presented at formal hearing related to the 1994 third quarterly statement.

4/ Count III of the original order to show cause alleged that the ratio of net premiums written by NALICO for accident and health insurance to surplus as to policyholders was 5.51 to 1 which exceeds the limitation of 4 to 1 set forth in Section 624.4095 F.S. That allegation was based upon NALICO's 1993 annual statement. The following statutory violations arising out of this deficiency also alleged in the original order to show cause: Sections 624.4095; 624.418(1)(b) and (d); 624.418(2)(a); and 624.4211 F.S.

Petitioner put on no evidence of the 5.51 to 1 ratio based on the 1993 annual statement but successfully and clearly demonstrated the 7.57 to 1 ratio based upon NALICO's September 30, 1994 (1994 third quarter) statement.

Petitioner was permitted to amend Count III to cover this intervening information which had been submitted initially by NALICO, thoroughly negotiated between the parties, and which also had been a subject of Petitioner's unilateral prehearing statement.

APPENDIX TO RECOMMENDED ORDER

Petitioner's PFOF

All proposed findings of facts are accepted in substance, except that proposed conclusions of law and legal argument have not been utilized and subordinate, unnecessary and/or cumulative material also has not been utilized.

Respondent's PFOF None filed.

COPIES FURNISHED:

James B. Redner, Esquire

Department of Insurance and Treasurer Division of Legal Services

612 Larson Building

200 East Gaines Street Tallahassee, FL 32399-0333

Karl F. France, Esquire Special Funds Counsel

Pennsylvania Insurance Department Capitol Associates Building

901 North 7th Street Harrisburg, PA 17102

Honorable Linda S. Kaiser Rehabilitator

Commonwealth of Pennsylvania Insurance Department

1300 Strawberry Square

Harrisburg, PA 17120

Mr. Bill Nelson State Treasurer and

Insurance Commissioner

Department of Insurance and Treasurer The Capitol, Plaza Level

Tallahassee, FL 32399-0300

Dan Sumner, Esquire Acting General Counsel

Department of Insurance and Treasurer The Capitol, PL-11

Tallahassee, FL 32399-0300

COURTESY COPY:

Vincent J. Rio, III, Esquire TAYLOR, DAY AND RIO

315 South Calhoun St., Ste. 344 Tallahassee, FL 32301

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit to the agency written exceptions to this Recommended Order. All agencies allow each party at least ten days in which to submit written exceptions. Some agencies allow a larger period within which to submit written exceptions. You should contact the agency that will issue the Final Order in this case concerning agency rules on the deadline for filing exceptions to this Recommended Order. Any exceptions to this Recommended Order should be filed with the agency that will issue the Final Order in this case.

Docket for Case No: 94-002992

Orders for Case No: 94-002992