Findings Of Fact Liberty National Fire Insurance Company (hereinafter referred to as "Liberty National") is a licensed foreign insurer in the State of Florida and subject to the jurisdiction and regulation of the Florida Department of Insurance (hereinafter referred to as "Department"), pursuant to Chapter 624, Florida Statutes. Liberty National is headquartered in Birmingham, Alabama, and writes business in 45 states, in direct personal lines business, direct commercial lines business, and almost an equal amount of assumed reinsurance. Prior to Hurricane Andrew, as of August 1, 1992, Liberty National had approximately 40,000 personal line policies in the State of Florida. This figure includes all personal lines; the homeowners, preferred homeowners, special homeowners, industrial fire, business resale, and mobile homes. In 1987 Liberty National started writing mobile home programs with the Raymond Patterson Agency as their managing general agent. On May 19, 1993, the Department of Insurance promulgated emergency Rule 4 ER93-18. Subsection (3) imposed a 90 day moratorium on cancellations and nonrenewals of personal lines residential property insurance on the basis of hurricane claims. Subsection (4) provided: "This rule shall not apply if the insurer can affirmatively demonstrate to the Department that the proposed cancellation or nonrenewal is necessary for the insurer to avoid an unreasonable risk of insolvency." In direct response to the devastation in the wake of Hurricane Andrew and the resulting nonrenewals and cancellations of homeowner coverage by insurers, at Special Session B (1993) of the Florida Legislature, Section 1 of Chapter 93-401, Laws of Florida (HB 89-B) was passed which provided for a "moratorium on cancellation and nonrenewal of residential property coverage." This "moratorium law" was signed by the Governor on June 8, 1993, and by its terms was effective from May 19, 1993, until November 14, 1993. Subsection (1) of the moratorium law sets forth the "Findings and Purpose" of the Legislature in passing the bill: FINDINGS AND PURPOSE. -- The Legislature finds that property insurers, as a condition of doing business in this state, have a responsibility to contribute to an orderly market for property insurance and that there is a compelling state interest in maintaining an orderly market for property insurance. . . . The Legislature further finds that the massive cancellations and nonrenewals announced, proposed, or contemplated by certain insurers constitute a significant danger to the public health, safety, and welfare, especially in the context of a new hurricane season, and destabilize the insurance market. In furtherance of the overwhelming public necessity for an orderly market for property insurance, it is the intent of the Legislature to impose, for a limited time, a moratorium on cancellation or nonrenewal of personal lines residential property insurance policies. Subsection (3) describes the nature of the moratorium imposed by the Legislature: (3) MORATORIUM IMPOSED. -- Effective May 19, 1993, no insurer authorized to transact insurance in this state shall, until the expiration of this section pursuant to subsection (6), cancel or nonrenew any personal lines property insurance policy in this state, or issue any notice of cancellation or nonrenewal, on the basis of risk of hurricane claims. All cancellations or nonrenewals must be substantiated by underwriting rules filed with and accepted for use by the Department of Insurance, unless inconsistent with the provisions of this section. The Department of Insurance is hereby granted all necessary power to carry out the provisions of this section. On June 4, 1993, Respondent, Department of Insurance (DOI) filed 4ER93- 20 (published in the Florida Administrative Weekly, Vol. 19, No. 24, pp. 3398- 3400), indicating that the laws implemented included the moratorium law, Subsections 626.9541(1)(a)(d)(x) and Section 627.4133 of the Florida Insurance Code. The Emergency rule 4ER93-20 is entitled "Procedures For Applying for Moratorium Exemption and Required Insurer Corrective Action on Previous Notices of Cancellation or Nonrenewal" and indicates as follows: The purpose of this rule is to enumerate the procedures required for an insurer to be granted an exemption to that rule [the Department moratorium Rule 4ER93-18]; and to specify corrective action required of any insurer which has sent out a notice of cancellation or nonrenewal which is prohibited under the moratorium. On June 15, 1993, Liberty National submitted a request for an exemption from the Moratorium. In the request for partial exemption, Liberty National requested the nonrenewal of approximately 6,000 of 17,000 mobile home policies on one program only, which were written through Raymond Patterson Agency of Fort Lauderdale. The basis for Liberty National's request for exemption, was that subsequent to Hurricane Andrew they incurred problems with their ceded reinsurance program. Liberty National alleges that the problem with the reinsurance was that Liberty National was only able to secure foreign reinsurance and no domestic reinsurance. Liberty National is continuously trying to obtain domestic reinsurance. Effective July 1993 Liberty National's reinsurance provides caps for each county based on a Tier System dividing the counties in Florida into Tier 1, Tier 2, and Tier 3 counties. The cap for Tier 1 counties is $7,500,000; Tier 2 is $15,000,000; and Tier 3 is $25,000,000. A chart was submitted to the department as part of Liberty National's exemption application with the total exposure that Liberty National has in each county. Liberty National had also contracted with a firm, Applied Insurance Research, which does windstorm analysis for various companies, to develop loss scenarios, and this information was submitted to the Department as part of the application. On August 12, 1993, Liberty National submitted additional information to the Department, pursuant to their exemption request. In the material Liberty National reported surplus as of December 31, 1992, in the amount of $66,798,297, and a contribution by Tourchmark of $50,000,000 additional capital on July 16, 1993. On August 19, 1993, the Department held a public hearing on Liberty National's request for partial exemption at which Liberty National introduced two exhibits that contained supplemental information regarding Liberty National's application for partial exemption. On September 2, 1993, the Department issued a letter denying Liberty National's request for exemption.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Department of Insurance issue a Final Order in this case denying the exemption sought by the Petitioner. DONE AND ENTERED this 14th day of February 1994 in Tallahassee, Leon County, Florida. MICHAEL M. PARRISH 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 14th day of February 1994. COPIES FURNISHED: Mark A. Cohen, Esquire Mark A. Cohen & Associates, P.A. 1221 Brickell Avenue, Suite 1780 Miami, Florida 33131 Nancy Aliff, Esquire Department of Insurance Division of Legal Services 612 Larson Building Tallahassee, Florida 32399 Honorable Tom Gallagher State Treasurer and Insurance Commissioner The Capitol, Plaza Level Tallahassee, Florida 32399-0300 Bill O'Neil General Counsel Department of Insurance The Capitol, PL-11 Tallahassee, Florida 32399-0300
The Issue Whether Respondent committed the acts alleged in Petitioner’s ten-count Second Amended Administrative Complaint, and, if so, what penalty, if any, should be imposed upon Robert Gordon DeWald’s (Respondent) insurance agent licenses.
Findings Of Fact Respondent is currently licensed in Florida as a resident Life Including Variable Annuity (2-14), Life Including Variable Annuity & Health (2-15), Life (2016), and Life & Health (2-18) insurance agent. At all times pertinent to the dates and occurrences referred to herein, Respondent was licensed in this state as an insurance agent and has been a licensed insurance agent in Florida for over 21 years. Prior to being licensed in Florida, Respondent was a licensed insurance agent in the state of New York. Petitioner has jurisdiction over Respondent’s insurance agent licenses and appointments, pursuant to Chapter 626, Florida Statutes (2008).1 National Foundation of America The National Foundation of America (NFOA) is a registered Tennessee corporation that was formed on January 27, 2006, and headquartered in Franklin, Tennessee. NFOA Corporate Resolution, dated April 19, 2006, provides for the corporate authority to “liquidate stocks, bonds, and annuities . . . in connection with charitable contributions or transactions. ” This same resolution also provides for the corporate ability to “enter into and execute planned giving or charitable contribution transactions with donors, including executing any and all documentation related to the acceptance or acquisition of a donation, . . . given in exchange for a charitable gift annuity. ” On September 18, 2006, the State of Washington Office of Insurance Commissioner issued an Order to Cease and Desist: In the Matter of: National Foundation of America, Richard K. Olive, and Susan L. Olive, Order No. D06-245. The Order, among other things, was based on NFOA doing business in the state and not having been granted a certificate of authority as an insurer in the state of Washington and not having been granted tax exempt status under Section 501(c)(3) of the IRC. On April 13, 2007, the Florida Office of Insurance Regulation (OIR) issued an Immediate Final Order (IFO) In the Matter of: National Foundation of America, Richard K. Olive, Susan L. Olive, Breanna McIntyre, and Robert G. DeWald, Case No. 89911-07, finding that the activities of NFOA, et al., constituted an immediate danger to the public health, safety or welfare of Florida consumers. OIR further found that, in concert, NFOA, et al., were “soliciting, misleading, coercing and enticing elderly Florida consumers to transfer and convey legitimate income tax deferred annuities for the benefit of themselves and their heirs to NFOA in exchange for charitable term-certain annuities”; and that NFOA, et al., had violated provisions of the Florida Insurance Code, including Sections 624.401 and 626.901, Florida Statutes. NFOA has never held a license or Certificate of Authority to transact insurance or annuity contracts in Florida, nor has NFOA ever been registered, pursuant to Section 627.481, Florida Statutes, for purposes of donor annuity agreements. NFOA was never a registered corporation with the Florida Department of State, Division of Corporations. On May 11, 2007, NFOA appealed OIR’s IFO to the First District Court of Appeal of Florida (1st DCA). The 1st DCA dismissed NFOA’s appeal on July 24, 2007. Therefore, NFOA operated an as unauthorized insurer in Florida. On May 17, 2007, the IRS sent a letter to the Texas Department of Insurance stating that NFOA was not classified as an organization exempt from Federal Income Tax as an organization described in Section 501(c)(3) of the IRC. On May 23, 2007, the DCI filed a Verified Petition for Appointment of Receiver for Purposes of Liquidation of National Foundation of America; Immediate and Permanent Injunctive Relief; Request for Expedited Hearing, in the matter of Newman v. National Foundation of America, Richard K. Olive, Susan L. Olive, Breanna McIntyre, Kenny M. Marks, and Hunter Daniel, Chancery Court of the State of Tennessee (Chancery Court), Twentieth Judicial District, Davidson County, Case No. 07-1163-IV. The Verified Petition states, at paragraph 30: NFOA’s contracts reflect an express written term that is recognized by the IRS as a charitable non-profit organization under Section 501(c)(3) of the Internal Revenue Code (Prosser, attachment 4), and the NFOA represents in multiple statements and materials that the contract will entitle the customers to potential generous tax deductions related to that status. The IRS states that it has granted NFOA no such designation. The deceptive underpinning related to NFOA’s supposed tax favored treatment of its contracts permeates its entire business model and sales pitch. This misrepresentation has materially and irreparably harmed and has the potential to harm financially all its customers and the intended beneficiaries of the contracts. These harms are as varied in nature and degree as the circumstances of all those individual’s tax conditions, the assets turned into NFOA, and the extent to which they have entrusted their money and keyed their tax status and consequences to reliance on such an organization. On August 2, 2007, the Commissioner for the Tennessee DCI, having determined that NFOA was insolvent with a financial deficiency of at least $4,300,000, filed a Verified Petition to Convert Rehabilitation by Entry of Final Order of Liquidation, Finding of Insolvency, and Injunction, in the matter of Newman v. National Foundation of America, et al. On September 11, 2007, pursuant to a Final Order of Liquidation and Injunction entered in the matter of Newman v. National Foundation of America et al., the Chancery Court placed NFOA into receivership after finding that the continued rehabilitation of NFOA would be hazardous, financially and otherwise, and would present increased risk of loss to the company’s creditors, policy holders, and the general public. On February 6, 2008, the IRS sent a letter to the court appointed Tennessee DCI Receiver (Receiver) for NFOA stating that NFOA does not qualify for exemption from Federal income tax as an organization described in Section 501(c)(3) of the IRC. The IRS, in determining that NFOA did not qualify for tax exempt status, stated that the sale of NFOA annuity plans has a “distinctive commercial hue”, and concluded that NFOA was primarily involved in the sale of annuity plans that “constitute a trade or business without a charitable program commensurate in scope with the business of selling these plans.” The IRS letter also provides that consumers may not take deductions on their income tax returns for contributions made to NFOA. Insurance Agent’s Duties An insurance agent has a fiduciary duty to his clients to ensure that an insurer is authorized or otherwise approved as an insurer in Florida by OIR prior to the insurance agent selling the insurer’s product to his clients. There are several methods by which an insurance agent could verify whether or not an insurer was authorized or otherwise approved (hereinafter: “authorized”) as an insurer in Florida by OIR. It is insufficient for an insurance agent to depend on the assurances of his insurance business peers as to whether an insurer needs to be authorized in Florida. Due to the importance of income tax considerations in a consumer’s decision making process as to whether or not to purchase an insurance product, an insurance agent has a fiduciary duty to his clients to verify the validity of any representations that an insurer’s product has an IRS 501(c)(3) tax exempt status, prior to the insurance agent selling the product to his clients. There are several methods by which an insurance agent could verify whether or not an insurer has an IRS 501(c)(3) tax exempt status. Respondent admitted, in his testimony, that he had depended on the assurances of others and assumed that NFOA did not need to be authorized as an insurer in Florida. Respondent testified it was his understanding that only insurance companies sell annuities; that NFOA was not an insurer; and therefore, NFOA did not need to be licensed as a Florida insurer. Respondent did not inquire of the Florida OIR whether or not NFOA was authorized to do business in the State of Florida. However, Respondent admitted that the NOFA product he sold “mirrored” an annuity product. Respondent testified that he had verified (by phone, in writing, and the Internet) with the IRS that NFOA had applied for 501(c)(3) tax exempt status. However, Respondent was aware that the tax exempt status had not been granted to NFOA. Respondent knew income tax considerations were materially important to his clients. However, none of the NFOA materials or any Florida consumer contracts signed by Respondent and his clients contain any disclaimer language informing consumers that the 501(c)(3) tax exempt status had been applied for but had yet to be granted by the IRS. Respondent testified that he made use of the Internet to obtain information. However, Respondent failed to use the Internet to find out that the State of Washington Office of Insurance Commissioner entered an Order of Cease and Desist on September 18, 2006, against NFOA based on NFOA not having a certificate of authority as an insurer and because NFOA did not have a 501(c)(3) tax exemption. As is noted below, the filing date of the Washington Order to Cease and Desist, preceded in time all but two of Respondent’s NFOA sales to Florida consumers. Respondent received commissions totaling $171,328.18 for selling NFOA annuities to Florida consumers. Respondent failed to disgorge any of these commissions to the Receiver for NFOA in the state of Tennessee. Re: Count I: Consumer – Yvette Potvin On November 30, 2006, Respondent solicited and induced Yvette Potvin of Casselberry, Florida, then age 81, to transfer or otherwise surrender ownership of her existing annuity contract with Allianz Life Insurance Company in return for an NFOA annuity. The NFOA agreement that the consumer entered into, and which was signed by Respondent, is dated subsequent to the State of Washington Order to Cease and Desist that was filed against NFOA. Respondent knew or reasonably should have known that NFOA was not an authorized insurer in Florida. Respondent, by use of the NFOA installment plan agreement, knowingly misrepresented to Ms. Potvin that NFOA was a charitable non-profit organization under Section 501(c)(3) of the IRC, even though Respondent knew that NFOA had not been approved for tax exempt status by the IRS. Based upon Respondent’s transaction of insurance, Ms. Potvin transferred to NFOA and is anticipated to lose approximately $10,410.42. This amount includes a surrender penalty incurred for transferring her original Allianz annuity to NFOA, and after receiving partial refunds by the Receiver. Based upon Respondent’s transaction of insurance with Ms. Potvin, Respondent was paid a commission of $3,682.89 by NFOA. Re: Count II: Consumer – Edna Bishop On January 18, 2007, Respondent solicited and induced Edna Bishop of Orlando, Florida, then aged 89, to transfer or otherwise surrender ownership of her existing annuity contract with American Equity Investment Life Insurance Company in return for an NFOA annuity. The NFOA agreement that the consumer entered into, and which was signed by Respondent, is dated subsequent to the State of Washington Order to Cease and Desist that was filed against NFOA. Ultimately, this transaction did not close. Respondent knew or reasonably should have known that NFOA was not an authorized insurer in Florida. Respondent, by use of the NFOA installment plan agreement, knowingly misrepresented to Ms. Bishop that NFOA was a charitable non-profit organization under Section 501(c)(3) of the IRC, even though Respondent knew or should have known that NFOA was not a tax exempt corporation. Based upon Respondent’s transaction of insurance with Ms. Bishop, Respondent was paid a commission of $8,185.35 by NFOA, even though the transaction was not completed. Re: Count III: Consumer – Genevieve McCann On December 14, 2006, Respondent solicited and induced Genevieve McCann of Fern Park, Florida, then aged 85, to transfer or otherwise surrender ownership of her existing annuity contract with American Equity Investment Life Insurance Company in return for an NFOA annuity. The NFOA agreement that the consumer entered into, and which was signed by Respondent, is dated subsequent to the State of Washington Order to Cease and Desist that was filed against NFOA. Respondent knew or reasonably should have known that NFOA was not an authorized insurer in Florida. Respondent, by use of the NFOA installment plan agreement, knowingly misrepresented to Ms. McCann that NFOA was a charitable non-profit organization under Section 501(c)(3) of the IRC, even though Respondent knew or should have known that NFOA was not a tax exempt corporation. Based upon Respondent’s transaction of insurance, Ms. McCann is anticipated to lose approximately $6,100.23. The loss consists of $20,933.04, the amount transferred to NFOA, less $1,742.85 (installment payments made by NFOA to Ms. McCann); $12,473.62 (the first payment sent by Receiver); and $2,686.63 (the second payment sent by Receiver). Ms. McCann lost $2,070.29 through surrender charges incurred for transferring her original American Equity annuity to NFOA. If the surrender penalty is excluded from the calculation, Ms. McCann’s loss is $4,029.94. Based upon Respondent’s transaction of insurance with Ms. McCann, Respondent was paid a commission of $1,879.52 by NFOA. Re: Count IV: Consumer – Lenora Bricker On or about November 30, 2006, Respondent solicited and induced Lenora Bricker of Winter Haven, Florida, then aged 87, to transfer or otherwise surrender ownership of her existing annuity contract with American Equity Investment Life Insurance Company in return for an NFOA annuity. The NFOA agreement that the consumer entered into, and which was signed by Respondent, is dated subsequent to the State of Washington Order to Cease and Desist that was filed against NFOA. Ultimately, this transaction did not close. Respondent knew or reasonably should have known that NFOA was not an authorized insurer in Florida. Respondent, by use of the NFOA installment plan agreement, knowingly misrepresented to Ms. Bricker that NFOA was a charitable non-profit organization under Section 501(c)(3) of the IRC, even though Respondent knew or should have known that NFOA was not a tax exempt corporation. Based upon Respondent’s transaction of insurance with Ms. Bricker, Respondent was paid a commission of $1,085.17 by NFOA, even though the transaction was not completed. Re: Count V: Consumer – Louise Blevins On or about November 30, 2006, Respondent solicited and induced Louise Blevins of Longwood, Florida, then aged 81, to transfer or otherwise surrender ownership of her existing annuity contract with American Equity Investment Life Insurance Company in return for an NFOA annuity. The NFOA agreement that the consumer entered into, and which was signed by Respondent, is dated subsequent to the State of Washington Order to Cease and Desist that was filed against NFOA. Ultimately, this transaction did not close. Respondent knew or reasonably should have known that NFOA was not an authorized insurer in Florida. Respondent, by use of the NFOA installment plan agreement, knowingly misrepresented to Ms. Blevins that NFOA was a charitable non-profit organization under Section 501(c)(3) of the IRC, even though Respondent knew or should have known that NFOA was not a tax exempt corporation. Based upon Respondent’s transaction of insurance with Ms. Bricker, Respondent was paid a commission of $5,469.09 by NFOA, even though the transaction did not close. Re: Count VI: Consumer – Audrey Piel On December 14, 2006, Respondent solicited and induced Audrey Piel of Maitland, Florida, then aged 81, to transfer or otherwise surrender ownership of her existing annuity contract with American Equity Investment Life Insurance Company in return for an NFOA annuity. The NFOA agreement that the consumer entered into, and which was signed by Respondent, is dated subsequent to the State of Washington Order to Cease and Desist that was filed against NFOA. Respondent knew or reasonably should have known that NFOA was not an authorized insurer in Florida. Respondent, by use of the NFOA installment plan agreement, knowingly misrepresented to Ms. Piel that NFOA was a charitable non-profit organization under Section 501(c)(3) of the IRC, even though Respondent knew or should have known that NFOA was not a tax exempt corporation. Based upon Respondent’s transaction of insurance, Ms. Piel is anticipated to lose approximately $5,594.24. The loss consists of $21,089.17, the amount transferred to NFOA; less $996.35 (installment payments made by NFOA to Ms. Piel); $13.645.33 (the first payment sent by Receiver); and $2,938.99, (the second payment sent by Receiver). Ms. Piel lost $2,085.74 through surrender charges incurred for transferring her original American Equity annuity to NFOA. If the surrender penalty is excluded from the calculation, Ms. Piel’s loss is $3,508.50. Based upon Respondent’s transaction of insurance with Ms. Piel, Respondent was paid a commission of $1,839.54 by NFOA. Re: Count VII: Consumer – John Bartlett On February 13, 2007, Respondent solicited and induced John Bartlett of Orlando, Florida, then age 75, to transfer or otherwise surrender ownership of his existing annuity contract with American Equity Investment Life Insurance Company in return for an NFOA annuity. The NFOA agreement that the consumer entered into, and which was signed by Respondent, is dated subsequent to the State of Washington Order to Cease and Desist that was filed against NFOA. Ultimately, this transaction did not close. Respondent knew or reasonably should have known that NFOA was not an authorized insurer in Florida. Respondent, by use of the NFOA installment plan agreement, knowingly misrepresented to Mr. Bartlett that NFOA was a charitable non-profit organization under Section 501(c)(3) of the IRC, even though Respondent knew or should have known that NFOA was not a tax exempt corporation. Based upon Respondent’s transaction of insurance with Mr. Bartlett, Respondent was paid a commission of approximately $16,385.56 by NFOA, even though the transaction was not completed. Re: Count VIII: Consumer – Lilla Dama On January 18, Respondent solicited and induced Lilla Dama of Orlando, Florida, then aged 86, to transfer or otherwise surrender ownership of her existing annuity contract with American Equity Investment Life Insurance Company in return for an NFOA annuity. The NFOA agreement that the consumer entered into, and which was signed by Respondent, is dated subsequent to the State of Washington Order to Cease and Desist that was filed against NFOA. Ultimately, this transaction did not close. Respondent knew or reasonably should have known that NFOA was not an authorized insurer in Florida. Respondent, by use of the NFOA installment plan agreement, knowingly misrepresented to Ms. Dama that NFOA was a charitable non-profit organization under Section 501(c)(3) of the IRC, even though Respondent knew or should have known that NFOA was not a tax exempt corporation. Based upon Respondent’s transaction of insurance with Ms. Dama, Respondent was paid a commission of approximately $2,757.52 by NFOA, even though the transaction was not completed. Re: Count IX: Consumer – Agnes Burns On February 28, 2007, and April 2, 2007, Respondent solicited and induced Agnes Burns of Orlando, Florida, then aged 87, to transfer or otherwise surrender ownership of her existing annuity contract with American Equity Investment Life Insurance Company and New York Life Insurance and Annuity Company, respectively, in return for an NFOA annuity. The NFOA agreement that the consumer entered into, and which was signed by Respondent, is dated subsequent to the State of Washington Order to Cease and Desist that was filed against NFOA. Respondent knew or reasonably should have known that NFOA was not an authorized insurer in Florida. Respondent, by use of the NFOA installment plan agreement, knowingly misrepresented to Ms. Burns that NFOA was a charitable non-profit organization under Section 501(c)(3) of the IRC, even though Respondent knew or should have known that NFOA was not a tax exempt corporation. Based upon Respondent’s transaction of insurance, Ms. Burns is anticipated to lose approximately $77,509.17. The loss consists of $335,070.29, the amount transferred to NFOA; less $18,363.66 (installment payments sent by NFOA to Ms. Burns); $205,859.31 (the first payment sent by Receiver); and $44,338.93 (the second payment sent by Receiver). A surrender penalty of $11,000.78 was incurred by Ms Burns for transferring her original annuities to NFOA. If the surrender penalty is excluded from the calculation, Ms. Burns’ loss is $66,508.39. Based upon Respondent’s transaction of insurance with Ms. Burns, Respondent was paid a commission of $30,080.00 by NFOA. Re: Count X: Consumers – Ms. Buchanan; Ms. Golus, and Mr. Owens Respondent solicited and induced Elizabeth Buchanan, aged 42, of Bradenton, Florida; Nancy Golus, aged 59, of Palmetto, Florida; and Herbert Owens, aged 86, of St. Petersburg, Florida, to transfer or otherwise surrender ownership of their existing annuity contracts in return for an NFOA annuities. As to the the NFOA agreement that Mr. Owens entered into, and which was signed by Respondent, the date of the agreement is subsequent to the State of Washington Order to Cease and Desist that was filed against NFOA. The NFOA agreements that Ms. Buchanan and Ms. Golus entered into were dated prior to the State of Washington’s Order to Cease and Desist. Respondent knew or reasonably should have known that NFOA was not an authorized insurer in Florida. Based upon Respondent’s transactions of insurance, Ms. Buchanan is anticipated to lose approximately $89,031.12. The loss consists of $162,445.60, the amount transferred to NFOA; less $20,000.00 (installment payments sent by NFOA to Ms. Buchanan); $92,589.64 (the first payment sent by Receiver); and $19,942.38 (the second payment sent by Receiver). Ms. Buchanan suffered $59,117.54 in losses from surrender charges incurred. Even after partial refunds by the DCI Receiver and the surrender penalty are excluded from the calculation, Ms. Buchanan’s loss is still $29,913.58. Ms. Golus is anticipated to lose approximately $146,027.18, the amount transferred to NFOA. Ms. Golus received $94,917.67 (the first payment by Receiver) and $20,443.81 (the second payment by Receiver). However, Ms. Golus suffered $53,152.47 in surrender charges incurred. Even after partial refunds by the Receiver and the surrender penalty are excluded from the calculation, Ms. Golus’ loss is $30,665.67. Mr. Owens is anticipated to lose approximately $10,976.33. The loss consists of $54,743.52, the amount transferred to NFOA; less $5,108.40 (installment payments sent by NFOA to Mr. Owens); $32,262.83 (the first payment by Receiver); and, $6,948.92 (the second payment sent by Receiver). Mr. Owens incurred $552.96 in surrender charges. Even after partial refunds by the Receiver and the surrender penalty are excluded from the calculation, Mr. Owens’ loss is still $10,423.37. In each and every count, Petitioner proved by clear and convincing evidence that: Respondent directly or indirectly represented or aided an unauthorized insurer to do business in Florida. Respondent knew or reasonably should have known that the annuity contracts he contracted with clients were with an unauthorized insurer. Respondent knowingly placed before the public a statement, assertion, or representation with respect to the business of insurance that was untrue, deceptive or misleading. Respondent knowingly caused to be made, published, disseminated, circulated, delivered, or placed before the public a false material statement. Respondent demonstrated a lack of fitness and trustworthiness to engage in the business of insurance. Respondent engaged in unfair and deceptive practices or showed himself to be a source of injury or loss to the public.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that the Chief Financial Officer enter a final order finding that: Respondent violated Subsections 626.901(1), 626.901(2), 626.9541(1)(b)4., 626.9541(1)(e)1.e., 626.611(7), 626.621(2), and 626.621(6), Florida Statutes, as charged in Counts I-X of the Second Amended Administrative Complaint; Revoking each and every one of Respondent’s licenses and appointments issued or granted under or pursuant to the Florida Insurance Code; and Providing that if Respondent, subsequent to revocation, makes application to Petitioner for any licensure, a new license will not be granted if Respondent fails to prove that he has otherwise satisfied the financial losses of his NFOA clients, or if Respondent otherwise fails to establish that he is eligible for licensure. DONE AND ENTERED this 10th day of December, 2009, in Tallahassee, Leon County, Florida. S DANIEL M. KILBRIDE Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 10th day of December, 2009.
The Issue Whether Petitioners' proposed rates are justified pursuant to the requirements of Section 627.062, Florida Statutes, or whether the Department of Financial Services, Office of Insurance Regulation (OIR) was correct in denying the requested rate increases.
Findings Of Fact The Hartford companies are property and casualty insurers transacting insurance in the State of Florida pursuant to valid certificates of authority and the Florida Insurance Code. Two types of personal lines insurance filings submitted by Hartford to the OIR are at issue in this proceeding: two filings for homeowners insurance (Case Nos. 07-5185 and 07-5186) and two filings for dwelling fire insurance (Case Nos. 07-5187 and 07- 5188). Hartford's substantial interests are affected by the notices disapproving the filings in this case. Homeowners insurance includes coverage for a variety of perils in and around a home, is usually purchased by a homeowner, and covers both the structure and the contents of a home. Dwelling/fire insurance is usually purchased by the owners of properties that are leased or rented to others, and provides coverage for the structure only. Both types of insurance cover damage caused by hurricanes. The New Legislation and its Requirements In a special session held in January 2007, the Florida Legislature enacted changes to the Florida Hurricane Catastrophe Fund (CAT Fund), as reflected in Chapter 2007-1, Laws of Florida. The special session was precipitated by a perceived crisis regarding the cost and availability of homeowners insurance after the 2004 and 2005 hurricane seasons. As a result of the substantial number of claims incurred after multiple severe hurricanes each of these years, changes in the insurance marketplace resulted in some insurance companies withdrawing from the Florida market, others non-renewing policies, one company becoming insolvent, and the cost for reinsurance available to all insurers rising dramatically. One of the primary features of the legislation was an expansion of the CAT Fund. The CAT Fund was established in 1993 after Hurricane Andrew to provide reinsurance to insurers for property insurance written in Florida at a price significantly less than the private market. The CAT Fund is a non-profit entity and is tax exempt. Prior to the enactment of Chapter 2007-1, the CAT Fund had an industry-wide capacity of approximately $16 million. The purpose of the changes enacted by the Legislature was to reduce the cost of reinsurance and thereby reduce the cost of property insurance in the state. As a result of Chapter 2007-1, the industry-wide capacity of the CAT Fund was increased to $28 billion, and insurers were given an opportunity to purchase an additional layer of reinsurance, referred to as the TICL layer (temporary increase in coverage limit), from the CAT Fund. Section 3 of Chapter 2007-1 required insurers to submit a filing to the OIR for policies written after June 1, 2007, that took into account a "presumed factor" calculated by OIR and that purported to reflect savings created by the law. The new law delegated to the OIR the duty to specify by Order the date such filings, referred to as "presumed factor filings" had to be made. On February 19, 2007, the OIR issued Order No. 89321-07. The Order required insurers to make a filing by March 15, 2007, which either adopted presumed factors published by the OIR or used the presumed factors and reflected a rate decrease taking the presumed factors into account. The presumed factors were the amounts the OIR calculated as the average savings created by Chapter 2007-1, and insurers were required to reduce their rates by an amount equal to the impact of the presumed factors. The OIR published the presumed factors on March 1, 2007. In its March 15, 2007, filings, Hartford adopted the presumed factors published by OIR. As a result, Hartford reduced its rates, effective June 1, 2007, on the products at issue in these filings by the following percentages: Case No. 07-5185 homeowners product: 17.7% Case No. 07-5186 homeowners product: 21.9% Case No. 07-5187 dwelling/fire product: 8.7% Case No. 07-5188 dwelling/fire product: 6.2% The Order also required that insurers submit a "True-Up Filing" pursuant to Section 627.026(2)(a)1., Florida Statutes. The filing was to be a complete rate filing that included the company's actual reinsurance costs and programs. Hartford's filings at issue in these proceedings are its True-Up Filings. The True-Up Filings Hartford submitted its True-Up filings June 15, 2007. The rate filings were certified as required by Section 627.062(9), Florida Statutes. The filings were amended August 8, 2007. Hartford's True Up Filings, as amended, request the following increases in rates over those reflected in the March 15, 2007, presumed factor filings: Case No. 07-5185 homeowners product: 22.0% Case No. 07-5186 homeowners product: 31.6% Case No. 07-5187 dwelling and fire product: 69.0% Case No. 07-5188 dwelling and fire product: 35.9% The net effects of Hartford's proposed rate filings result in the following increases over the rates in place before the Presumed Factor Filings: Case No. 07-5185 homeowners product: .4% Case No. 07-5186 homeowners product: 2.8% Case No. 07-5187 dwelling/fire product: 54.3% Case No. 07-5188 dwelling/fire product: 27.5% Case Nos. 07-5185 and 07-5186 (homeowners) affect approximately 92,000 insurance policies. Case Nos. 07-5187 and 07-5188 (dwelling/fire) affect approximately 2,550 policies. A public hearing was conducted on the filings August 16, 2007. Representatives from Hartford were not notified prior to the public hearing what concerns the OIR might have with the filings. Following the hearing, on August 20, 2007, Petitioners provided by letter and supporting documentation additional information related to the filings in an effort to address questions raised at the public hearing. The OIR did not issue clarification letters to Hartford concerning any of the information provided or any deficiencies in the filings before issuing its Notices of Intent to Disapprove the True-Up Filings. All four filings were reviewed on behalf of the OIR by Allan Schwartz. Mr. Schwartz reviewed only the True-Up Filings and did not review any previous filings submitted by Hartford with respect to the four product lines. On September 10, 2007, the OIR issued Notices of Intent to Disapprove each of the filings at issue in this case. The reasons give for disapproving the two homeowners filings are identical and are as follows: Having reviewed the information submitted, the Office finds that this filing does not provide sufficient documentation or justification to demonstrate that the proposed rate(s) comply with the standards of the appropriate statute(s) and rules(s) including demonstrating that the proposed rates are not excessive, inadequate, or unfairly discriminatory. The deficiencies include but are not limited to: The premium trends are too low and are not reflective of the historical pattern of premium trends. The loss trends are too high and are not reflective of the historical pattern of loss trends. The loss trends are based on an unexplained and undocumented method using "modeled" frequency and severity as opposed to actual frequency and severity. The loss trends are excessive and inconsistent compared to other sources of loss trends such as Fast Track data. The catastrophe hurricane losses, ALAE and ULAE amounts are excessive and not supported. The catastrophe non-hurricane losses, ALAE and ULAE amounts are excessive and not supported. The particular time period from 1992 to 2006 used to calculate these values has not been justified. There has been no explanation of why the extraordinarily high reported losses for 1992 and 1993 should be expected to occur in the future. The underwriting profit and contingency factors are excessive and not supported. Various components underlying the calculation of the underwriting profit and contingency factors, including but not limited to the return on surplus, premium to surplus ratio, investment income and tax rate are not supported or justified. The underwriting expenses and other expenses are excessive and not supported. The non-FHCF reinsurance costs are excessive and not supported. The FHCF reinsurance costs are excessive and not supported. The fact that no new business is being written has not been taken into account. No explanation has been provided as too [sic] Hartford believes it is reasonable to return such a low percentage of premium in the form of loss payments to policyholders. For example, for the building policy forms, only about 40% of the premium requested by Hartford is expected to be returned to policyholders in the form of loss payments. As a result of the deficiencies set forth above, the Office finds that the proposed rate(s) are not justified, and must be deemed excessive and therefore, the Office intends to disapprove the above-referenced filing. The Notices of Intent to Disapprove the two dwelling/fire filings each list nine deficiencies. Seven of the nine (numbers 1-6 and 8) are the same as deficiencies listed for the homeowners filings. The remaining deficiencies named for Case No. 07-5187 are as follows: 7. The credibility standard and credibility value are not supported. 9. No explanation has been provided as too (sic) why Hartford believes it needs such a large rate increase currently, when the cumulative rate change implemented by Hartford for this program from 2001 to 2006 was an increase of only about 10%. The deficiencies listed for Case No. 07-5188 are the same as those listed for Case No. 07-5187, with the exception that with respect to deficiency number 9, the rate change implemented for the program in Case No. 07-5188 from 2001 to 2006 was a decrease of about -3%. Documentation Required for the Filings Florida's regulatory framework, consistent with most states, requires that insurance rates not be inadequate, excessive, or unfairly discriminatory. In making a determination concerning whether a proposed rate complies with this standard, the OIR is charged with considering certain enumerated factors in accordance with generally accepted and reasonable actuarial techniques. Chapter 2007-1 also amended Section 627.062, Florida Statutes, to add a certification requirement. The amendment requires the chief executive officer or chief financial officer and chief actuary of a property insurer to certify under oath that they have reviewed the rate filing; that to their knowledge, the rate filing does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which the statements were made, not misleading; that based on their knowledge, the information in the filing fairly presents the basis of the rate filing for the period presented; and that the rate filing reflects all premium savings reasonably expected to result from legislative enactments and are in accordance with generally accepted and reasonable actuarial techniques. § 627.062(9)(a), Fla. Stat. (2007). Actuarial Standards of Practice 9 and 41 govern documentation by an actuary. Relevant sections of Standard of Practice 9 provide: Extent of documentation - . . . Appropriate records, worksheets, and other documentation of the actuary's work should be maintained by the actuary and retained for a reasonable length of time. Documentation should be sufficient for another actuary practicing in the same field to evaluate the work. The documentation should describe clearly the sources of data, material assumptions, and methods. Any material changes in sources of data, assumptions, or methods from the last analysis should be documented. The actuary should explain the reason(s) for and describe the impact of the changes. Prevention of misuse - . . . The actuary should take reasonable steps to ensure that an actuarial work product is presented fairly, that the presentation as a whole is clear in its actuarial aspects, and that the actuary is identified as the source of the actuarial aspects, and that the actuary is available to answer questions.. . . . * * * 5.5 Availability of documentation- Documentation should be available to the actuary's client or employer, and it should be made available to other persons when the client or employer so requests, assuming appropriate compensation, and provided such availability is not otherwise improper. . . . In determining the appropriate level of documentation for the proposed rate filings, Petitioner relied on its communications with OIR, as well as its understanding of what has been required in the past. This reliance is reasonable and is consistent with both the statutory and rule provisions governing the filings. Use of the RMS Catastrophic Loss Projection Model In order to estimate future losses in a rate filing, an insurer must estimate catastrophic and non-catastrophic losses. Hartford's projected catastrophic losses in the filings are based upon information provided from the Risk Management Solutions (RMS) catastrophic loss projection model, version 5.1a. Hartford's actuaries rely on this model, consistent with the standards governing actuarial practice, and their reliance is reasonable. Catastrophe loss projection models may be used in the preparation of insurance filings, if they have been considered by and accepted by the Florida Commission on Hurricane Loss Projection Methodology (the Hurricane Commission). The Hurricane Commission determined that the RMS model, version 5.1a was acceptable for projecting hurricane loss costs for personal residential rate filings on May 17, 2006. In addition to approval by the Hurricane Commission, use of the model is appropriate "only if the office and the consumer advocate appointed pursuant to s. 627.0613 have access to all of the assumptions and factors that were used in developing the actuarial methods, principles, standards, models, or output ranges, and are not precluded from disclosing such information in a rate proceeding." §627.0628(3)(c), Fla. Stat. Both the Consumer Advocate and a staff person from the OIR are members of the Hurricane Commission. In that context, both have the ability to make on-site visits to the modeling companies, and to ask any questions they choose regarding the models. Both OIR's representative and the Consumer Advocate participated in the meetings and had the same opportunity as other commissioners to ask any question they wished about RMS 5.1a. The Hurricane Commission members, including the Consumer Advocate, clearly have access to the information identified in Section 627.0628(3)(c). However, there are restrictions on the Hurricane Commission members' ability to share the information received regarding trade secrets disclosed by the modeling companies. For that reason, the Commission's deliberations are not, standing alone, sufficient to determine that the Office of Insurance Regulation has access. In this case, credible evidence was submitted to show that RMS officials met with staff from the Office in July and October 2006 to discuss the model. RMS offered to provide any of its trade secret information to the OIR, subject to a non- disclosure agreement to protect its dissemination to competitors. RMS also opened an office in Tallahassee and invited OIR staff to examine any parts of the model they wished. In addition, both RMS and Hartford have answered extensive questionnaires prepared by OIR regarding the RMS model, and Hartford has offered to assist OIR in gathering any additional information it requires. Most of the questions posed by OIR involve the same areas reviewed by the Commission. RMS' representative also testified at hearing that RMS would not object to disclosure of the assumptions during the hearing itself if necessary. Finally, OIR Exhibit 1 is the Florida Hurricane Catastrophe Fund 2007 Ratemaking Formula Report. The Executive Summary from the report explains how rates were recommended for the Florida Hurricane Catastrophic Fund (CAT Fund) for the 2007- 2008 contract year. The report stated that the RMS model, as well as three other models accepted by the Hurricane Commission, were used for determining expected aggregate losses to the CAT Fund reinsurance layer. Three models, including the RMS model, were also used for analysis of detailed allocation to type of business, territory, construction and deductible, as well as special coverage questions. The models were compared in detail and given equal weight. The report notes that these three models were also used in 1999-2006 ratemaking. The report is prepared by Paragon Strategic Solutions, Inc., an independent consultant selected by the State Board of Administration, in accordance with Section 215.555(5), Florida Statutes. While OIR did not prepare the report, they show no hesitation in accepting and relying on the report and the modeled information it contains in these proceedings. Indeed, one of OIR's criticisms is Hartford's failure to use the report with respect to CAT Fund loss recovery estimates. Based upon the evidence presented at hearing, it is found that the OIR and Consumer Advocate were provided access to the factors and assumptions used in the RMS model, as contemplated by Section 627.0628. The Alleged Deficiencies in the Homeowners Filings1/ A rate is an estimate of the expected value of future costs. It provides for all costs associated with the transfer of risk. A rate is reasonable and not excessive, inadequate or unfairly discriminatory if it is an actuarially sound estimate of the expected value of all future costs associated with an individual risk transfer. In preparing a filing, an actuary identifies the time period that its proposed rates are expected to be in effect. Because ratemaking is prospective, it involves determining the financial value of future contingent events. For the rate filings in question, actuaries for Hartford developed their rate indications by first considering trended premium, which reflects changes in premium revenue based on a variety of factors, including construction costs and the value of the buildings insured. Trended premium is the best estimate of the premium revenue that will be collected if the current rates remain in effect for the time period the filing is expected to be in place. Expenses associated with writing and servicing the business, the reinsurance costs to support the business and an allowance for profit are subtracted from the trended premium. The remainder is what would be available to pay losses. This approach to ratemaking, which is used by Hartford, is a standard actuarial approach to present the information for a rate indication. As part of the process, expected claims and the cost to service and settle those claims is also projected. These calculations show the amount of money that would be available to pay claims if no changes are made in the rates and how much increased premium is necessary to cover claims. The additional amount of premium reflects not only claims payments but also taxes, licenses and fees that are tied to the amount of premium. The first deficiency identified by OIR is that "the premium trends are too low and are not reflective of the historical pattern of premium trends." In determining the premium trend in each filing, Hartford used data from the previous five years and fit an exponential trend to the historical pattern, which is a standard actuarial technique. Hartford also looked at the factors affecting the more recent years, which were higher. For example, the peak in premium trend in 2006 was a result of the cost increases driven by the 2004 and 2005 hurricanes, and the peak in demand for labor and construction supplies not matched by supply. Costs were coming down going into 2007, and Hartford believed that 2006 was out of pattern from what they could anticipate seeing in the future. The premium trends reflected in Hartford's filings are reasonable, reflective of historical patterns, and based on standard actuarial techniques. The second identified deficiency with respect to the homeowner filings was that the loss trends are too high and are not reflective of the historical pattern of loss trends. A loss trend reflects the amount an insurance company expects the cost of claims to change. It consists of a frequency trend, which is the number of claims the insurance company expects to receive, and a severity trend, which is the average cost per claim. The loss trend compares historical data used in the filing with the future time period when the new rates are expected to be in effect. Hartford's loss trends were estimated using a generalized linear model, projecting frequency and severity separately. The model was based on 20 quarters of historical information. The more credible testimony presented indicates that the loss trends were actuarially appropriate. The third identified deficiency is that the loss trends are based on an unexplained and undocumented method using "modeled" frequency and severity as opposed to actual frequency and severity. As noted above, the generalized linear model uses actual, historical data. Sufficient documentation was provided in the filing, coupled with Hartford's August 20, 2007, letter. The method used to determine loss trends is reasonable and is consistent with standard actuarial practice. The fourth identified deficiency is that loss trends are excessive and inconsistent compared to other sources of loss trends, such as Fast Track data. Saying that the loss trends are excessive is a reiteration of the claim that they are too high, already addressed with respect to deficiency number two. Fast Track data is data provided by the Insurance Services Office. It uses unaudited information and is prepared on a "quick turnaround" basis. Fast Track data is based on paid claims rather than incurred claims data, and upon a broad number of companies with different claims settlement practices. Because it relies on paid claims, there is a time lag in the information provided. Hartford did not rely on Fast Track data, but instead relied upon its own data for calculating loss trends. Given the volume of business involved, Hartford had enough data to rely on for projecting future losses. Moreover, Respondents point to no statutory or rule requirement to use Fast Track data. The filings are not deficient on this basis. The fifth identified deficiency in the Notice of Intent to Disapprove is that catastrophe hurricane losses, ALAE and ULAE amounts are excessive and not supported. ALAE stands for "allocated loss adjustment expenses," and represents the costs the company incurs to settle a claim and that can be attributed to that particular claim, such as legal bills, court costs, experts and engineering reports. By contrast, ULAE stands for "unallocated loss adjustment expense" and represents the remainder of claims settlement costs that cannot be linked to a specific claim, such as office space, salaries and general overhead. Part of the OIR's objection with respect to this deficiency relates to the use of the RMS model. As stated above at paragraphs 25-33, the use of the RMS model is reasonable. With respect to ALAE, Hartford analyzed both nationwide data (4.4%) and Florida data (4.8%) and selected an ALAE load between the two (4.6%). This choice benefits Florida policyholders. It is reasonable to select between the national and Florida historical figures, given the amount of actual hurricane data available during the period used. With respect to ULAE, the factors used were based upon directions received from Ken Ritzenthaler, an actuary with OIR, in a previous filing. The prior discussions with Mr. Ritzenthaler are referenced in the exhibits to the filing. The more credible evidence demonstrates that the ALAE and ULAE expenses with respect to catastrophic hurricane losses are sufficiently documented in Hartford's filings and are based on reasonable actuarial judgment. The sixth identified deficiency is that the catastrophe non-hurricane losses, ALAE and ULAE amounts are excessive and not supported. According to OIR, the particular time period from 1992 to 2006 used to calculate these values has not been justified, and there has been no explanation of why the extraordinarily high reported losses for 1992 and 1993 should be expected to occur in the future. OIR's complaint with respect to non-hurricane losses is based upon the number of years of data included. While the RMS model was used for hurricane losses, there is no model for non- hurricane losses, so Hartford used its historical data. This becomes important because in both 1992 and 1993, there were unusual storms that caused significant losses. Hartford's data begins with 1992 and goes through 2006, which means approximately fifteen years worth of data is used. Hartford's explanation for choosing that time period is that hurricane models were first used in 1992, and it was at that time that non-hurricane losses had to be separated from hurricane losses. Thus, it was the first year that Hartford had the data in the right form and sufficient detail to use in a rate filing. Petitioners have submitted rate filings in the past that begin non-hurricane, ALAE and ULAE losses with 1992, increasing the number of years included in the data with each filing. Prior filings using this data have been approved by OIR. It is preferable to use thirty years of experience for this calculation. However, there was no testimony that such a time-frame is actuarially or statutorily required, and OIR's suggestion that these two high-loss years should be ignored is not based upon any identified actuarial standard. Hartford attempted to mitigate the effect of the severe losses in 1992 and 1993 by capping the losses for those years, as opposed to relying on the actual losses.2/ The methodology used by Hartford was reasonable and appropriate. No other basis was identified by the OIR to support this stated deficiency. The seventh identified deficiency is that the underwriting profit and contingency factors are excessive and not supported. The underwriting profit factor is the amount of income, expressed as a percentage of premium, that an insurance company needs from premium in excess of losses, settlement costs and other expenses in order to generate a fair rate of return on its capital necessary to support its Florida exposures for the applicable line of business. Hartford's proposed underwriting profit factor for its largest homeowners filing is 15.3%. Section 627.062(2)(b), Florida Statutes, contemplates the allowance of a reasonable rate of return, commensurate with the risk to which the insurance company exposes its capital and surplus. Section 627.062(2)(b)4., Florida Statutes, authorizes the adoption of rules to specify the manner in which insurers shall calculate investment income attributable to classes of insurance written in Florida, and the manner in which investment income shall be used in the calculation of insurance rates. The subsection specifically indicates that the manner in which investment income shall be used in the calculation of insurance rates shall contemplate allowances for an underwriting profit factor. Florida Administrative Code Rule 69O-170.003 is entitled "Calculation of Investment Income," and the stated purpose of this rule is as follows: (1) The purpose of this rule is to specify the manner in which insurers shall calculate investment income attributable to insurance policies in Florida and the manner in which such investment income is used in the calculation of insurance rates by the development of an underwriting profit and contingency factor compatible with a reasonable rate of return. (Emphasis supplied). Mr. Schwartz relied on the contents of this rule in determining that the underwriting profit factor in Hartford's filings was too high, in that Florida Administrative Code Rule 69O-170.003(6)(a) and (7) specifies that: (6)(a) . . . An underwriting profit and contingency factor greater than the quantity 5% is prima facie evidence of an excessive expected rate of return and unacceptable, unless supporting evidence is presented demonstrating that an underwriting profit and contingency factor included in the filing that is greater than this quantity is necessary for the insurer to earn a reasonable rate of return. In such case, the criteria presented as determined by criteria in subsection (7) shall be used by the Office of Insurance Regulation in evaluating this supporting evidence. * * * An underwriting profit and contingency factor calculated in accordance with this rule is considered to be compatible with a reasonable expected rate of return on net worth. If a determination must be made as to whether an expected rate of return is reasonable, the following criteria shall be used in that determination. An expected rate of return for Florida business is to be considered reasonable if, when sustained by the insurer for its business during the period for which the rates under scrutiny are in effect, it neither threatens the insurer's solvency nor makes the insurer more attractive to policyholders or investors from a corporate financial perspective than the same insurer would be had this rule not been implemented, all other variables being equal; or Alternatively, the expected rate of return for Florida business is to be considered reasonable if it is commensurate with the rate of return anticipated for other industries having corresponding risk and it is sufficient to assure confidence in the financial integrity of the insurer so as to maintain its credit and, if a stock insurer, to attract capital, or if a mutual or reciprocal insurer, to accumulate surplus reasonably necessary to support growth in Florida premium volume reasonably expected during the time the rates under scrutiny are in effect. Mr. Schwartz also testified that the last published underwriting profit and contingency factor published by OIR was 3.7%, well below what is identified in Hartford's filings. Hartford counters that reliance on the rule is a misapplication of the rule (with no explanation why), is inconsistent with OIR's treatment of the profit factors in their previous filings, and ignores the language of Section 627.062(2)(b)11., Florida Statutes. No evidence was presented to show whether the expected rate of return threatens Hartford's solvency or makes them more attractive to policyholders or investors from a corporate financial perspective than they would have been if Rule 69O- 170.003 was not implemented. Likewise, it was not demonstrated that the expected rate of return for Florida business is commensurate with the rate of return for other industries having corresponding risk and is necessary to assure confidence in the financial integrity of the insurer in order to maintain its credit and to attract capital. While the position taken by OIR with respect to Hartford's filings may be inconsistent with the position taken in past filings, that cannot be determined on this record. The prior filings, and the communications Hartford had with OIR with regard to those filings, are not included in the exhibits in this case. There is no way to determine whether Petitioners chose to present evidence in the context of prior filings consistent with the criteria in Rule 69O-170.003, or whether OIR approved the underwriting profit and contingency factor despite Rule 69O- 170.003. Having an underwriting profit factor that is considered excessive will result in a higher rate indication. Therefore, it is found that the seventh identified deficiency in the Notices of Intent to Disapprove for the homeowners filings and the second identified deficiency in the Notices of Intent to Disapprove for the dwelling/fire filings is sustained. The eighth identified deficiency is that various components underlying the calculation of the underwriting profit and contingency factors, including but not limited to the return on surplus, premium to surplus ratio, investment income and tax rate are not supported or justified. Return on surplus is the total net income that would result from the underwriting income and the investment income contributions relative to the amount of capital that is exposed. Surplus is necessary in addition to income expected from premium, to insure that claims will be paid should losses in a particular year exceed premium and income earned on premium. Hartford's expected return on surplus in these filings is 15%. The return on surplus is clearly tied to the underwriting profit factor, although the percentages are not necessarily the same. It follows, however, that if the underwriting income and contingency factor is excessive, then the return on surplus may also be too high. Hartford has not demonstrated that the return on surplus can stand, independent of a finding that the underwriting profit and contingency factor is excessive. Premium-to-surplus ratio is a measure of the number of dollars of premium Hartford writes relative to the amount of surplus that is supporting that exposure. Hartford's premium-to- surplus ratio in the AARP homeowners filing is 1.08, which means that if Hartford wrote $108 of premium, it would allocate $100 of surplus to support that premium.3/ The premium-to-surplus ratio is reasonable, given the amount of risk associated with homeowners insurance in Florida. The OIR's position regarding investment income and tax rates are related. The criticism is that the filing used a low- risk investment rate based on a LIBOR (London Interbank Offering Rate), which is a standard in the investment community for risk- free or low-risk yield calculations. The filing also used a full 35% income tax rate applied to the yield. Evidence was presented to show that, if the actual portfolio numbers and corresponding lower tax rate were used in the filings, the rate after taxes would be the same. The problem, however, is that Section 627.062(2)(b)4., Florida Statutes, requires the OIR to consider investment income reasonably expected by the insurer, "consistent with the insurer's investment practices," which assumes actual practices. While the evidence at hearing regarding Hartford's investments using its actual portfolio yield may result in a similar bottom line, the assumptions used in the filing are not based on Petitioner's actual investment practices. As a result, the tax rate identified in the filing is also not the actual tax rate that has been paid by Hartford. The greater weight of the evidence indicates the data used is not consistent with the requirements of Section 627.062(2)(b)4., Florida Statutes. Therefore, the eighth deficiency is sustained to the extent that the filing does not adequately support the return on surplus, investment income and tax rate. The ninth identified deficiency is that the underwriting expenses and other expenses are excessive and not supported. Hartford used the most recent three years of actual expense data, analyzed them and made expense selections based on actuarial judgment. The use of the three-year time frame was both reasonable and consistent with common ratemaking practices. Likewise, the commission rates reflected in the agency filings are also reasonable. The tenth identified deficiency is that the non-FHCF (or private) reinsurance costs are excessive and not supported. The criticism regarding private reinsurance purchases is three- fold: 1) that Hartford paid too much for their reinsurance coverage; 2) that Hartford purchases their reinsurance coverage on a nationwide basis as opposed to purchasing coverage for Florida only; and 3) that the percentage of the reinsurance coverage allocated to Florida is too high. Hartford buys private reinsurance in order to write business in areas that are exposed to catastrophes. It buys reinsurance from approximately 40 different reinsurers in a competitive, arm's-length process and does not buy reinsurance from corporate affiliates. Hartford used the "net cost" of insurance in its filings, an approach that is appropriate and consistent with standard actuarial practices. Hartford also used the RMS model to estimate the expected reinsurance recoveries, which are subtracted from the premium costs. Hartford buys private catastrophic reinsurance on a nationwide basis to protect against losses from hurricanes, earthquakes and terrorism, and allocates a portion of those costs to Florida. Testimony was presented, and is accepted as credible, that attempting to purchase reinsurance from private vendors for Florida alone would not be cost-effective. The cost of reinsurance, excluding a layer of reinsurance that covers only the Northeast region of the country and is not reflected in calculating costs for Florida, is approximately $113 million. Hartford retains the first $250 million in catastrophe risk for any single event, which means losses from an event must exceed that amount before the company recovers from any reinsurer. In 2006, Hartford raised its retention of losses from $175 million to $250 million in an effort to reduce the cost of reinsurance. Hartford purchases reinsurance in "layers," which cover losses based on the amount of total losses Hartford incurs in various events. Hartford allocates approximately 65% of the private reinsurance costs (excluding the Northeast layer) to Florida in the AARP homeowners filing. Only 6-7% of Hartford's homeowners policies are written in Florida. The amount Hartford paid for reinsurance from private vendors is reasonable, given the market climate in which the insurance was purchased. Hartford has demonstrated that the process by which the reinsurance was purchased resulted in a price that was clearly the result of an arms-length transaction with the aim of securing the best price possible. Likewise, the determination to purchase reinsurance on a nationwide basis as opposed to a state-by-state program allows Hartford to purchase reinsurance at a better rate, and is more cost-effective. Purchasing reinsurance in this manner, and then allocating an appropriate percentage to Florida, is a reasonable approach. With respect to the allocation of a percentage of reinsurance cost to Florida, OIR argues that, given that Florida represents only 6-7% of Hartford's homeowner insurance business, allocation of 65% of the reinsurance costs to Florida is per se unreasonable. However, the more logical approach is to examine what percentage of the overall catastrophic loss is attributable to Florida, and allocate reinsurance costs accordingly. After carefully examining both the testimony of all of the witnesses and the exhibits presented in this case, the undersigned cannot conclude that the allocation of 65% of the private reinsurance costs is reasonable, and will not result in an excessive rate.4/ The eleventh identified deficiency is that the FHCF (or CAT Fund) reinsurance costs are excessive and not supported. Hartford purchases both the traditional layer of CAT Fund coverage, which is addressed in a separate filing and not reflected in these filings, and the TICL layer made available pursuant to Chapter 2007-1, Laws of Florida. Hartford removed the costs of its previously purchased private reinsurance that overlapped with the TICL layer and those costs are not reflected in these filings and have not been passed on to Florida policyholders. In estimating the amount of premium Hartford would pay for the TICL coverage, it relied on information provided by Paragon, a consulting firm that calculates the rates for the CAT Fund. As noted in finding of fact number 31, the RMS model, along with three other models accepted by the Hurricane Commission, were used by Paragon for determining expected aggregate losses to the CAT Fund reinsurance layer, clearly a crucial factor in determining the rate for the CAT fund. Hartford did not use the loss recoveries calculated by Paragon, but instead estimated the total amount of premium it would pay for the TICL coverage and subtracted the expected loss recoveries based on the RMS model alone. The expected loss recoveries under the RMS model standing alone were 60% of the loss recovery estimate calculated by Paragon when using all four models. Hartford claimed that its use of the RMS model was necessary for consistency. However, it pointed to no actuarial standard that would support its position with respect to this particular issue. Moreover, given that the premium used as calculated by Paragon used all four models, it is actually inconsistent to use one number which was determined based on all four models (the Paragon-based premium estimate) for one half of this particular calculation and then subtract another number using only one model for the other half (the loss recoveries rate) in order to determine the net premium. To do so fails to take into account the unique nature of the CAT fund, in terms of its low expenses and tax-exempt status. Accordingly, it is found that the CAT-Fund reinsurance costs for the TICL layer are excessive. The twelfth identified deficiency is that Hartford did not consider in the filing that no new business is being written. OIR's explanation of this asserted deficiency is that the costs associated with writing new business are generally higher than that associated with writing renewals. Therefore, according to OIR, failure to make adjustments to their historical experience to reflect the current mix of business, means that the costs included in the filing would be excessive. Hartford began restricting the writing of new business for these filings in 2002. Ultimately, no new business for the AARP program was written after November 2006 and no new business was written for the agency program after June 2006. Credible evidence was presented to demonstrate that a very low percentage of new business has been written over the period of time used for demonstrating Hartford's historical losses. As a result, the effect of no longer writing new business is already reflected in the data used to determine expenses. No additional adjustment in the filing was necessary in this regard. The thirteenth identified deficiency is that no explanation has been provided as to why Hartford believes it is reasonable to return such a low percentage of premium in the form of loss payments to policyholders. For example, for the building policy forms, OIR states that only about 40% of the premium requested by Hartford is expected to be returned to policyholders in the form of loss payments. OIR pointed to no actuarial standard that would require a specific explanation regarding how much of the premium should be returned to policyholders. Nor was any statutory or rule reference supplied to support the contention that such an explanation was required. Finally, the more credible evidence presented indicates that the correct percentage is 44%. In any event, this criticism is not a basis for finding a deficiency in the filing. Alleged Deficiencies in the Dwelling/Fire Filings The seventh deficiency identified in the dwelling/fire filings, not reflected in the homeowner filings, is that the credibility standard and credibility values are not supported. Credibility is the concept of identifying how much weight to put on a particular set of information relative to other potential information. Credibility value is determined by applying the "square root rule" to the credibility value, a commonly used actuarial approach to credibility. Hartford used the credibility standard of 40,000 earned house years in these filings. This credibility standard has been the standard within the industry for personal property filings for over forty years and has been used in prior filings submitted to OIR. Mr. Schwartz testified that his criticism with respect to the credibility standard and credibility values is that Hartford did not explain why they used that particular standard. However, Florida Administrative Code Rule 69O-170.0135 discusses those items that must be included in the Actuarial Memorandum for a filing. With respect to credibility standards and values, Rule 69O-170.0135(2)(e)5., provides that the basis need only be explained when the standard has changed from the previous filing. Given that no change has been made in these filings with respect to the credibility standard, this criticism is not a valid basis for issuing a Notice of Intent to Disapprove. The ninth deficiency in the Notice relating to the dwelling/fire filing in Case No. 07-5187 provides: "No explanation has been provided as too (sic) why Hartford believes it needs such a large rate increase currently, when the cumulative rate change implemented by Hartford for this program from 2001 to 2006 was an increase of only about 10%." With respect to Case No. 07-5188, the deficiency is essentially the same, except the cumulative rate change identified for the same period of time is a decrease of about -3%. Testimony established that the dwelling/fire rate increases were larger than those identified for the homeowners filings because Hartford did not seek rate increases for these lines for several years. The decision not to seek increases was not based on the adequacy of current rates. Rather, the decision was based on an internal determination that, based on the relatively small number of policies involved in these two filings, the amount of increased premium reflected in a rate increase was not sufficient to incur the costs associated with preparing the filings. Mr. Schwartz pointed to no authority, either in statute, rule, or Actuarial Standard, that requires the explanation he desired. He acknowledged that he understood the basis of how Hartford reached the rate increase they are requesting. The failure to provide the explanation Mr. Schwartz was seeking is not a valid basis for a Notice of Intent to Disapprove.
Recommendation Upon consideration of the facts found and conclusions of law reached, it is RECOMMENDED: That a final order be entered that disapproves the rate filings in Case Nos. 07-5185 and 07-5186 based upon the deficiencies numbered 7,8,10 and 11 in the Notices of Intent to Disapprove, and that disapproves the rate filings in Case Nos. 07-5187 and 07-5188 based on the deficiencies numbered 2,3,5 and in the Notices of Intent to Disapprove. DONE AND ENTERED this 28th day of March 2008, in Tallahassee, Leon County, Florida. S LISA SHEARER NELSON Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 SUNCOM 278-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 28th day of March, 2008.
