Claims And Issues

UPDATE: Cancer, Chemotherapy, Cancellation and Punitive Damages in California Arbitration.

    A previous post in this space addressed an Arbitration Award in a California Arbitration.  The Arbitration of the Insurance issues apparently including Good Faith and Fair Dealing or not, was demanded by the Health Insurance Company, Health Net Inc.  The agreed Arbitrator is a retired California Judge.  The California Arbitration resulted in an Award of over $9.4 Million, $8.4 Million of which was a Punitive Damages assessment against Health Net.  See the post here, on February 25, 2008.

    On February 28, 2008, a follow up newspaper report published in the Los Angeles Times Online seems to call into question what remedies or options, if any, Health Net and its Attorneys may have to appeal or even question the Arbitration Award:  Lisa Girion, "Penalty Cuts Insurer Profit/Health Net Lowers Its Earnings After a Judge Awards $9.4 Million to a Cancer Patient Whose Policy Was Canceled" (Los Angeles Times Online, Thursday, Feb. 28, 2008).

    As the linked newspaper report's headline reflects, Health Net is filing documents with the Securities and Exchange Commission reflecting that the Arbitration Award has lowered its reportable net income for 4Q 2007, from $123.4 Million to $116.9 Million.

    The newspaper also reports that the California Arbitrator has awarded the Policyholder her Attorney's Fees, in an amount to be determined.

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Autism Costs, Insurance Considered.

        This post updates "And A Little Child With Autism, Shall Lead Them":
                See posts here on September 26, 2007 and December 30, 2007.   

    The costs of therapy for autism reportedly range between $40,000.00 and $80,000.00 in a year.  Jason Parsley, "Mother of Autistic Son Shares Her Story to Help Others" (South Florida Sun-Sentinel.com, Wed., Feb. 27, 2008).   A bill to provide Insurance Coverage for some or all of these costs is pending in the Florida Legislature.  It has the reported backing of Autism Speaks, described as an advocacy group, and of Mr. Donald Trump.

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Foreclosures, Credit Flameout: Federal Role Alternative to Bond Insurance Risk?

    Vague suggestions of the current Federal Government taking some kind of positive action as an alternative to State Bonds being put at risk and to increasing State interest payments, are being floated by Governors of various States including New Jersey, New York and the State of Washington.  Their unformed suggestions for positive Federal action of some kind are prompted by the concerns of diverse bond-issuing authorities in local governments including universities, hospitals, Municipalities, Counties, and even The Bay Area Toll Authority that is responsible for financing seven toll bridges in the City of San Francisco, California.  James Tyson & William Selway, "States May Seek Congress's Aid as Subprime Fallout Boosts Costs (Update 1)" (Bloomberg.com, Tuesday, February 26, 2008).

    In the Great Depression, a different Federal Government brought a specific proposal to reality -- and made it turn a profit.  The Home Owners' Loan Corporation was a public corporation with a public purpose.  It existed from June, 1933 until 1951.  During that time, its charter was to assist in preventing home foreclosures "by replacing mortgages that were in or near default with new ones that homeowners could afford.  It did so by buying old mortgages from banks -- many of which were delighted to trade them in for safe government bonds -- and then issuing new loans to homeowners."    In the end, it accomplished its purpose and turned a profit.   Alan S. Blinder, "From The New Deal, a Way Out of a Mess" p. 6, col. 1 "Sunday Business" Section (New York Times Natl' Ed., Sunday, February 24, 2008).

   The proposed, pending Foreclosure Prevention Act of 2008 has several features.  One proposed provision would reportedly "[g]ive local housing agencies more power to issue bonds to raise money for refinancing of sub-prime mortgages."  "Taking Aim at Foreclosures" (Los Angeles Times Online, Tuesday, February 26, 2008).

    Specifics exist.  Alternatives are available.  Positive action is required.  Soon.  Very soon.

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Foreclosures, Credit Inferno: More Alternatives to Bond Insurance at Risk.

    So-called "bailouts" of homeowners by local governments take different forms.  Some are not "bailouts" at all.  In the absence of positive action by the current Federal Government (remember Katrina?  and Rita?), other governments such as the City of Seattle and the States of Maryland, Massachusetts, North Carolina and Ohio already have various programs underway in the face of the present credit inferno.

    Some of these programs use taxpayer dollars and others are authorized to issue Bonds for revenue without the involvement of taxpayer dollars.  Some programs offer conditional financial assistance to homeowners who are about to lose their homes.  Other programs pay for mortgage counselors to provide suggestions and advice for refinancing.

    These local government alternatives are reported by William Yardley, "Foreclosure Aid Rising Locally, As Is Dissent" p. A1, col. 3 (New York Times Nat'l Ed., Tuesday, February 26, 2008).  See also Lisa Prevost, "Confronting The Home-Loan Pain" p. 19, col. 1 "Sunday Business" Section (New York Times Nat'l Ed., Sunday, February 24, 2008).   None of the alternatives reported in the linked newspaper articles extend to banks, Bond Insurance Companies, or other financial institutions mixed up in the credit meltdown.

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Continued Creative Alternatives to Bond Insurance At Risk.

    Bond Insurance Companies are losing high credit ratings reportedly because they foolishly signed on to insure or guarantee subprime mortgage loans and other credit creatures they obviously did not understand very well.  Taking the teeth from foreclosures will increase market confidence.  The credit ratings of Bond Insurance Companies should increase along with the increase in market confidence.

    Yet another available alternative to placing or keeping Bond Insurance at risk involves Judges.  And Senators and Members of Congress.  Lending institutions have failed to modify loan provisions enough to stem the record cascade of home foreclosures, that is an indisputable fact.  The subject alternative is therefore to amend the Bankruptcy Law so that Bankruptcy Judges can modify loan provisions enough to stem the record cascade of home foreclosures -- including halting or lowering the adjustable rates of mortgages taken by lenders from borrowers who could not pay those rates.

    Lenders reportedly are opposed.  They threaten to raise interest rates on new mortgages.  This threat may be as empty as a borrower's wallet.  The problem is that very, very few people are interested in signing up for new mortgages in the current market.   Jonathan Peterson, "Aid on Home Loans Sought" (Los Angeles Times Online, Tuesday, February 26, 2008).

    Fanning the flames of the credit inferno is not an option.  Turning off the fuel that fuels the credit inferno, by using the best tool or tools at hand to stem the fire, is ultimately the ONLY alternative to Bond Insurance at risk.

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Credit Inferno Engulfs Bond Insurance Ratings, Changes in the Making.

    Credit concerns may not have begun with Bond Insurance Companies.  But credit concerns have surely spread to them.  The concerns are a result of the Bond Insurance Companies dabbling far afield from Municipal Bonds, for which the Bond Insurance Companies came into existence.  These Companies have strayed into subprime mortgages and Collateralized Debt Obligations and other complex financing arrangements that nobody -- including the Bond Insurance Companies -- understand very well.

    With the number of mortgage defaults  and other unpaid debts increasing precipitously, investors and credit rating agencies have looked at the collateral that Bond Insurance Companies have taken in exchange for good money, and they "have begun to question whether guarantors have enough reserves to pay claims on their insurance contracts, particularly those backing mortgage-related securities."  Vikas Bajaj, "Bond Insurer Plans to Split to Protect Its Ratings" p. B1, col. 6 in Business Day Section (New York Times Nat'l Ed., Saturday, February 23, 2006).

    Actually, investors and perhaps credit raters too, are now certain that insurance contracts and any kind of guarantee of "mortgage-related securities" are bad investments and credit risks.  That is the reason why Ambac, and other Bond Insurance Companies, are trying to split themselves in two, one corporation to insurance Municipal Bonds -- and perhaps salvage a high credit rating, and the other corporation to corral the toxic mortgage-related securities in the credit pits.

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Credit Woes Worsen, Debt Deepens, Capital Outgo ... Goes Out.

    Apropos of the dawning realization that the current credit woes go way beyond Bond and other Insurance Companies and subprime mortgages, it is reported that the average first mortgage debt now exceeds the average price of a home.

    It is also reported that there was one other time in the recent history of the United States that such a large part of its population owed more on their homes than their homes are worth.

    That was in the Great Depression.  Edmund L. Andrews & Louis Uchitelle, "Rescues Weighed as Homeowners Wallow in Debt/Efforts in Washington/Mortgage Exceeds Value of Home for 10.3% of Nation's Owners" p. A1, col. 6 (New York Times Nat'l Ed., Friday, February 22, 2008). 

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"Review Insurance Policies Now" Says Orlando Newspaper.

   Good advice with related links in this newspaper article published in the Orlando Sentinel, February 22, 2008, by Greg Groeller, "Review Insurance Policies Now".  Every Policyholder and their Agents and Brokers holding every kind of Insurance Policy can benefit from following the good advice published by this linked newspaper article.

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Another Homeowner's Insurance Company "Leaves" Florida.

    It is reported that the largest "private" Property Insurance Company in the State of Florida, State Farm, has told the Florida Office of Insurance Regulation that it will not issue new Homeowner's Insurance Policies.

    State Farm will apparently remain on the risk to the thousands of Floridians from whom it collects Automobile Insurance Premiums, in addition to soliciting new Automobile Insurance business in Florida.

    These decisions are certain to catch the notice of the members of the Florida Legislature, who will meet in early March for the 2008 Florida Legislative Session.  It is unknown what actions if any will result.  Julie Patel, "State Farm to Stop Selling Homeowner Policies in Florida" (South Florida Sun-Sentinel.com, Sunday, February 24, 2008).

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Cancer, Chemotherapy and Cancellation = Punitive Damages in California.

    In an Arbitration in California last week, an Award was entered against a Health Insurance Company for  over $9 Million.  $8.4 Million of the award is an assessment for Punitive Damages.

  The Health Insurance Company, Health Net Inc., canceled a Policyholder while she was receiving expensive chemotherapy treatments.  Health Net Inc. reportedly insisted on resolving the dispute only by Arbitration.

    The Arbitrator was a retired California Judge.  At the Arbitration, there was apparently a lot of evidence to the effect that the expense of chemotherapy was the motivation for cancellation.

  Documents generated by Health Net itself were made available to the Arbitrator.  The documents showed that Health Net paid bonuses to employees who met "a cancellation quota and for the amount of money saved."

    This practice did not sit well with the Arbitrator, who wrote:  "'It's difficult to imagine a policy more reprehensible than tying bonuses to encourage the rescission of health insurance that keeps the public well and alive.'" Quoted in "Health Net Ordered to Pay $9 Million After Canceling Cancer Patient's Policy/The Punitive Damage Award is the First of its Kind and has Prompted the Giant Medical Insurer to Scrap Practices That Have Recently Come Under Fire" by Lisa Girion (Los Angeles Times Online, Saturday, February 23, 2008).

    In the same newspaper article it is reported that other Health Insurers are about to change their own practices in this regard.

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Louisiana Supreme Court Has Final Word on Louisiana Flood Exclusions ....

                       ...  Not the 9 Supremes in Washington, D.C.

    On February 26, 2008, the Louisiana Supreme Court is scheduled to hear Oral Arguments in cases involving so-called Flood Exclusions and Anti-Concurrent Cause Exclusions in Homeowner's and other Property Insurance Policies.  The cases involve Catastrophe Claims from Hurricane Katrina, it is reported in this Associated Press story published by the Washington Post Online on Tuesday, Feb. 19, 2008.   

    In the meantime, the nine people who currently sit as the Supreme Court of the United States let stand a Fifth Circuit ruling by 3 other Federal appeals court judges that Louisiana law would bar any claims involving water damage.

    Louisiana State Insurance Law, at least, will be decided by Louisiana Judges in the Courts of Louisiana, not by people unconnected with Louisiana and who happen to currently be Federal appeals court Judges.

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Bond Insurers Back to the Future to Save ... What, Exactly?

    MBIA is one of the several Bond Insurance Companies presently in credit ranking turmoil as a result of its own sojourn in the subprime debacle.   MBIA has  hit upon  a solution  to its problems.  It has reportedly rehired the Chair and CEO that  ventured into subprime territory.   More than that,  MBIA is  reportedly considering paying  the CEO it is ousting, who was on duty when MBIA ran aground, $11,000,000.00 or $11 Million in cash, stocks, and "retirement benefits".   Vikas Bajaj & Julie Creswell, "Bond Insurer in Turmoil Turns to Familiar Leader" p. C2, col. 1 "Business Day Section" (New York Times Nat'l Ed., Wed., Feb. 20, 2008).

    At the same time, bonds are not being bought if the Bond Insurance Companies are all there is to back them.  Awareness of that stark reality is growing among those who otherwise might be in the market of buyers and sellers of Bonds including local governments authorized to issue Bonds.   See "Market Place" by Floyd Norris, "Auctions Yield Chaos For Bonds" p. C1, Col. 1 "Business Day Section" (New York Times Nat'l Ed., Wed., Feb. 20, 2008).  See also Jeremy R. Cooke, "Florida Schools, California Convert Auction Bonds Amid Failures" (Bloomberg.com, Friday, Feb. 22, 2008).

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Allstate and the State: Subpoenas, Catclaim Models, Reinsurance ... and Premiums.

     The Florida Office of Insurance Regulation (Insurance Department) has filed an administrative Complaint against Allstate.  The object is to force Allstate to provide documents previously demanded by subpoenas served on Allstate by the State.  The subpoenas demand documents from Allstate that describe alternative CatClaim Models favored by Allstate in computing its Premium Rate Increase Requests in Florida, Allstate's reinsurance treaties and agreements, and other matters that do or may factor into requesting higher Premiums in Florida.

    This administrative proceeding will be heard by an administrative law Judge from the Department of Administrative Hearings.  One available sanction if the State prevails on its Complaint is to yank Allstate's license to engage in the business of Insurance in Florida.

    In a separate and independent proceeding in the interim, the appeal is continuing that Allstate filed after the D.O.I.'s attempt to issue an order directly to Allstate that would halt Allstate's issuance of new Insurance Policies in Florida.  Florida's First District Court of Appeal has stayed that order while that appeal is pending, meaning that Allstate may continue its business of selling new Insurance Policies while the appellate proceeding goes forward.

    These developments are reported recently by Anika Myers Palm, "State Seeks to Block Allstate/It's the Latest Step to Obtain Documents From the Company Related to Hurricane-Risk Models" p. C1, col. 5 (Orlando Sentinel Central Florida Business Section, Wed., Feb. 20, 2008); and by Tom Zucco, "State Goes After Allstate on Code Violations/A Broader Pursuit Alleges [sic] Also Seeks to Block the Insurer From Writing New Policies" (St. Petersburg Times Online, Wed., Feb. 20, 2008).

Please Read The Disclaimer.
 

Eighth and Ninth Alternatives to Bond Insurance Placed At Risk.

                          And Especially if Bond Insurance is Placed at Risk.

    The options just keep presenting themselves.  Many investor groups, angered by steep drops in the prices of shares held by investors, are  going to hold  officers and directors  accountable for their  bad decisions,  it is reported  by Tomoeh Murakami Tse, "Economic Downturn Emboldens Shareholder Activists" (Washington Post Online, Tuesday, Feb. 19, 2008).  That general approach may lead to many other alternatives to accepting Bond Insurance being placed at risk, but for the moment consider it the Eighth Alternative to Bond Insurance At Risk, if you will.

    Another option is also reported in the linked article.  Angry as well "over multimillion-dollar payouts to financial executives during some of the worst corporation performance ever," many groups of shareholders are also increasing their efforts to lower payouts by corporations in trouble to the officers and directors who were on duty when the corporations ran into trouble.  Call that the Ninth Alternative to Bond Insurance Placed At Risk.

    Note:  Credit rating agencies are not immune to these developments, it is reported in the same article.  One of the credit raters, Moody's, and what is described in the newspaper article as "the parent company of Standard & Poor's" (is that not the same thing as McGraw-Hill?), which is another financial ratings agency, are both facing proposals from shareholders concerning corporate governance and the behavior of officers and directors including "that boards of directors be directly involved in managing potential conflicts of interest with clients."

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The "reasonable and customary" Charge For Out-of-Network Providers ...

                        ...  A Guide for Policyholders and Health Insurance:

                       Is "reasonable and customary" a Way for Health

                      Insurance Companies to Keep Policyholders In Network?
   

   Three-quarters of Health Insurance Policies provided through the American workplace allow Policyholders to obtain medical treatment from healthcare providers who are 'not on the plan'.  Those plans provide the available Health Insurance for approximately 40 Million people.  Healthcare providers who are not on the plan are "out of network".  Tests, procedures and hospitalizations that are not on the plan are similarly "out of network".

   Many people think that their Health Insurance Companies will pay up to 80% of the costs charged by "out of network" providers.  That is not generally true.  Most if not all Health Insurance Policies provide that out of network charges depend on whether the charges are "reasonable and customary" in the area.

   Ordinarily, only the Health Insurance Company decides what is a "reasonable and customary" charge for out-of-network medical care.

   Then, the Health Insurance Company will pay up to 80% of that charge, the "reasonable and customary" charge, for out-of-network medical care.

   Those are some of the Insurance Issues addressed in various State investigations underway at the present time.  The issues are discussed in this recent comprehensive news report:  Reed Abelson, "Health Plans Put Onus on Insured" p. C1, col. 6, "Business Day" Section (New York Times Nat'l Ed., Tuesday, Feb. 19, 2008).  Interestingly (at least to those of us in Florida), the report quotes one State Insurance official, a Florida Deputy Insurance Commissioner.

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If Overinsured Means Overtreated, Underinsured Means ... Not Treated?

"Do these findings mean that patients without insurance are being diagnosed too late, or that insured patients are being excessively diagnosed?"

Dr. H. Gilbert Welch of Dartmouth, quoted in Kevin Sack, "Study Finds Cancer Diagnosis Linked to Insurance" p. A10, col. 6 (New York Times Nat'l Ed., Monday, Feb. 18, 2008).

    Researchers employed by the American Cancer Society have completed a study and the results are available concerning how variables like lack of insurance and race, interact with cancer diagnoses.  The researchers conclude that among Americans who have been diagnosed with cancer, Black Americans and Americans without Health Insurance, run a risk of their diagnosis being made at a later stage of cancer compared to other Americans who also have cancer but have better Health Insurance.

    Another interpretation is provided by Dr. Welch, quoted above, who is quoted in the same newspaper report that summarizes the findings of the American Cancer Society researchers.  Dr. Welch's views seem to echo the inquiry by Shannon Brownlee in a thorough and enlightening new book, "Overtreated".

       Here is a useful summary of the research study.  The study itself, which is much longer than the summary linked here, can be purchased from The Lancet.com:  Halpern, Ward, Pavluck, Schrag, Bian & Chen, "Association of Insurance Status and Ethnicity With Cancer Stage at Diagnosis for 12 Cancer Sites:  A Retrospective Analysis," The Lancet Oncology, Early Online Publication, February 18, 2008.

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Health Insurance, Service, Premiums ... and Florida?

   The New York Attorney General has reportedly started investigations into allegations that Health Insurance Companies are steering Policyholders toward only medicalcare providers who are "in network" because the Health Insurance Companies allegedly pay even less than they might owe under the Policy toward the costs of "out of network" providers.  This development was posted here on Friday, Feb. 15, 2008.  On the geographical expansion of this issue, see this Sunday Editorial by a Florida newspaper:

Florida Attorney General Bill McCollum's office said it would look into the New York case to see if it has jurisdiction to act here in the matter.  Cuomo is earning a reputation as an aggressive defender of consumer rights.  McCollum should follow his lead.

St. Petersburg Times Editorial, "Insurer Pays a Little so Patient Pays a Lot" (St. Petersburg Times Online, Sunday, Feb. 17, 2008).

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State Insurance Takeover: Seventh Alternative to Bond Insurance at Risk.

    Government takeover is a seventh alternative to putting Bond Insurance at risk:

    If [Bond Insurance Company] MBIA and [New York State Insurance Superintendent] Mr. Dinallo remain at odds over whether the company needs to do anything, the dispute could end in court, legal experts say.  Mr. Dinallo has significant power as superintendent to take control of insurers if he believes there are not enough assets to pay claims by policyholders, but the company and its policyholders can fend him off if they can prove his decisions are "arbitrary and capricious" ....

Vikas Bajaj, "A Split-Up of Insurers of Bonds Considered" (New York Times Online, Saturday, February 16, 2008).

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Reorganization: A Sixth Alternative to Putting Bond Insurance At Risk.

    Reorganization is a sixth alternative to putting Bond Insurance at risk.  Current talk about reorganizing Bond Insurance Companies centers on splitting the very safe, but very endangered, Municipal Bond Insurance business into a separate corporation.  The resulting corporation would be a true Bond Insurance Company, shielded from the adverse results experienced by whatever business organization is established to deal with mortgage-related securities.  See Vikas Bajaj, "A Split-Up of Insurers of Bonds Considered" (New York Times Online, Saturday, February 16, 2008).

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Health Insurance Companies, Service Quality, Higher Medical Costs ... Higher Premiums?

   Investigations on both Coasts are taking place into issues affecting people who are sick and people who are healthy.  The investigated issues include Premiums charged by Health Insurance Companies, and the medicalcare costs those Companies make their Policyholders pay when their Policyholders have the audacity to seek the medical care of providers who are "out of network".  Some say that the out of network share assumed by the Health Insurance Companies is not as much as it should be, which puts pressure on the sick to stay "in network" and not receive the medical care they may want -- or perhaps the medical care they need.  See Lisa Girion, "Heat is on Health Insurers/Elected Leaders in New York and Los Angeles Initiate Campaigns to Curb and Punish Abuses" (Los Angeles Times Online, Thursday, Feb. 14, 2008);  Reed Abelson, "Inquiry Set on Health Billing" p.C1 "Business Day" Section, col. 6 (New York Times Nat'l Ed., Thursday, Feb. 14, 2008).

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Another Alternative, But Vague So Far: "Recapitalization".

    "Recapitalization" is a vague word.  It is being used to describe another alternative to putting Bond Insurance at risk.  It apparently involves providing downgraded Bond Insurance Companies with unspecified amounts of money in exchange for unspecified conditions which may include separating Muncipal Bond Insurance operations from their "riskier activities".  At least according to this Reuters Report Published in the New York Times Online, Friday, February 15, 2008.

    Officials for two of the downgraded Bond Insurance Companies, MBIA and Ambac, are again quoted in the press as defending the financial vigor of their companies and at least MBIA attacking its critics in the face of downsized credit ratings.

    The Bond Insurance Companies that have achieved downsized credit ratings -- in some cases, from the best or AAA to shall we say very low, or junk status -- received their involuntarily downsized credit ratings after they retreated from their area of core competency.  What these Companies did, and did very well for many years, was issue Bond Insurance Policies for Municipal Bonds.  They retreated from that sound and safe business, wandering into the land of subprime securitization, i.e., the land where the fast buck seemed to dwell but unfortunately the land of the now-worthless collateral such as collateralized debt obligations or CDOs.  These events have been the subject of press reports and of many posts here.

          Millions for Defense, Not One Darn Penny For Good Results
                      (Because The Results Are Not Good, You Know).

    Speaking of Ambac, it is also reported that Ambac paid a reward of $800,000.00 to its departing chief risk officer -- after Ambac's assumption of CDO and other subprime risk collapsed its credit rating and threatens its core business of Insuring Municipal Bonds.   This risk exposure caused what is reported to be the first losses in the history of the Company in Ambac's last two reported Quarters, which are the last two Quarters of FY 2007.  For that outcome, Ambac's chief risk officer -- who just reportedly resigned for some unreported reason -- not only was  paid an  $800,000.00 cash bonus, but  he also received a reported  $425,000.00 in restricted stock plus options to buy further shares at a good price.  See "Ambac's Chief Risk Officer Leaves" p. C6, col. 3 (Reuters Report Published in the New York Times Nat'l Ed., Thursday, Feb. 14, 2008).

Hurricanes, Climate Change and Warming Seas.

    The magazine "Nature" provides this news summary of a recent U.K. report on Hurricanes, Climate Change and Warming Seas.  The news summary is by Quirin Schiermeier, "Stormy Weather/Experts Still Divided on the Link Between Climate Change and Hurricanes" (www.nature.com, Wed., Jan. 30, 2008).  This summary of the U.K. researchers' scientific report, also published recently in Nature, provides the researchers' conclusion that Hurricanes have become more frequent and that there is now an increasingly greater number of Cat 4 and Cat 5 Hurricanes.

     If those things prove to be true, then Floridians and other citizens of the United States who live near or on the Gulf Coast or the Atlantic Coast in particular, will have more to worry about in the coming years than the upward spiral in Insurance Premiums.

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Rating Companies Under Fire.

    Credit rating companies also are under the gun.  Such credit rating companies as Fitch Ratings, Standard & Poors (S & P), and Moody's once ranked Bond Insurance Companies highly, then lowered the Bond Insurers' credit ratings precipitously.  In fact, the credit raters lowered the Bond Insurers' credit ratings like a rock falling off a cliff when the subprime mortgage crisis made worthless much of the collateral  -- such as the the now-infamous CDO's or collateralized debt obligations -- foolishly taken back as security by people at the Bond Insurers in exchange for the use of money the Bond Insurers gave to some others.  This has raised suspicions on the part of many State government investigators who are not impressed by some of the 'reforms' that the credit rating companies have publicly related.  See Karen Freifeld, "Cuomo Belittles Credit Raters' Reforms/N.Y. Attorney General to Continue Probe of S&P, Moody's" (Bloomberg News Report published online at washingtonpost.com, Fri., Feb., 8, 2008).

    Even more recently,  some of the same  ratings agencies -- namely, Fitch Ratings and Moody's Investor Services -- reportedly have issued warnings that Florida's new Property Tax Reduction ballot measure will make Bonds issued by Municipalities and other local governments riskier than they would otherwise be.  Jennifer Liberto, "Property Tax Relief Makes Bonds Costly/Higher Rates Can Cost Millions in Interest" (St. Petersburg Times Online Corrected Report Feb. 9, 2008).   The Florida measure passed in a recent referendum in which the proponents advertised mainly that property taxes would be reduced, with little discussion of the local government services that rely on property tax revenue to exist.

    No revenue, no service.  No tax revenue to back Bonds, unfavorable ratings for Bonds.  The rating reflects the agencies' opinion of whether and how much the Municipality or other local government entity issuing the bond can pay it back.  The lower the rating of such a Bond, the higher the rate of interest that the Government entity must offer investors in order to attract their money.

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Municipal and Other Bond Insurance Issues Affect Government Budgets.

    Many issues affect the issuance of municipal and other local government Bonds at the present time.  The rapidly descending financial ratings of some Bond Insurance Companies is only one of those issues.  Declining tax revenues is another, major issue.  See generally Joe Mysak, "Buffett Plan Saves Muni Market, Dooms Ambac, MBIA" (Bloomberg.com, Wed., February 13, 2008).

    In Florida, a great reduction of local government tax revenues was recently passed by a referendum that was understandably advertised as lowering property taxes.  Jennifer Liberto, "Property Tax Relief Makes Bonds Costly/Higher Rates Can Cost Millions in Interest" (St. Petersburg Times Online Corrected Feb. 9, 2008 Report).   Now, even the availability and purchase of Insurance by municipalities and other local governments may be in peril due to the effects of lowered tax revenue to support the prospects that if these local governments issue bonds now, that they will pay them back later, or ever.

    Questions about Fiduciary Duties of Bond Insurance Companies, or not, are arising at this time as well.  Some of those questions are posted on Insurance Claims And Bad Faith Law Blog, linked here.

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Banks, or Buffett and Berkshire? Balking Bond Insurers Prodded.

    The recent offer by Mr. Warren Buffett and Berkshire Hathaway to provide alternative financing to a bailout of the Bond Insurance Companies was requested by the same State Insurance Superintendent who is attempting to arrange a bailout with private funds provided by banks.  Apparently, the Bond Insurance Companies are balking at terms and conditions offered along with financial assistance that would prevent them from totally failing under prevailing market conditions.  See Vikas Bajaj, "Buffett Offers Aid on Bonds, But at a Price" p. A1, col. 1 (New York Times Nat'l Ed., Wednesday, February 13, 2008).

    An old saying applies here:  Do not look a gift horse in the mouth.  Here is another saying, Bond Insurance Company people:  Beggars can't be choosers.

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A Fourth Alternative to Bond Insurance at Risk.

    Mr. Warren Buffett has made an offer to three Bond Insurance Companies, Ambac, FGIC, and MBIA.  The offer does not appear to be "reinsurance," as has been widely reported.  Instead, the offer appears to be for a "novation" or a new contract.

     Under the new contract, Berkshire Hathaway Inc. would reportedly insure  33% of "the debt insurance market".  This means the market that consists of Bond Insurance for Municipal Bonds and other local government Bonds, only.  The offer specifically excludes the three "bond insurers' subprime-related obligations".

    By the reported terms of this offer, then, Berkshire Hathaway Inc. would take on the Municipal Bond Insurance Policies issued by the three insurers -- Ambac, FGIC and MBIA -- in its own name under its own Insurance Contracts, in exchange for 1.5 times the Premium that the Bond Insurance Companies charged.   On news of this offer, as they say, the Dow Jones and the S&P climbed; the "offer drove U.S. stocks higher on optimism the plan would help calm credit markets and prevent a slump in the value of municipal debt."

    This is another alternative to a bailout of the Bond Insurance Companies whose credit ratings are being involuntarily downsized.  It is "'one option to protect municipal issuers and investors,'" the New York State Insurance Superintendent -- who has been a force behind recent attempts to bail out Bond Insurance Companies, using private funds if they can be found --  was quoted in a statement issued in response to the news of Mr. Buffett's offer.  See Christine Richard, "Buffett Bids For MBIA, Ambac Municipal Bond Contracts (Update 8)" (Bloomberg.com, Tuesday, February 12, 2008).

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Another, Third Alternative to Bond Insurance at Risk.

    Reinsurance is another alternative to having Bond Insurance Policies and their Coverages currently at risk.  The current risk is not due to pending claims but instead to falling credit ratings of some Bond Insurance Companies.  The Bond Insurance Companies that issued the existing Policies also made other investments that have gone south.

     The "gone south" other investments have affected the Bond Insurers' financial ratings for the worse, not municipal or other local government bonds.  The local government bonds remain as safe as they ever were, and as profitable to insure.

    It should not be difficult to attract  Reinsurance now, to  provide present Coverage to Bond Insurance Companies for theoretically possible future losses on municipal and other local government  bonds (losses that based on past experience, the foundation of Underwriting, may never happen).  That would clearly seem to prevent the Bond Insurance Policies and their Coverages from being at risk.   That would also be an alternative to a "bailout" whether private or public funds are suggested.  See generally Tomoeh Murakami Tse, "Buffett Unveils Proposal to Bail Out Bond Insurers/Investor Would Insure Firms' Healthy Municipal Portfolios" (washingtonpost.com, Wed., February 13, 2008).

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Bond Insurance No Assurance.

   Counties, universities and hospitals issue bonds to raise revenue.  They and other bond-issuing entities reportedly have a default rate of one-tenth of one percent, or 0.1 percent. 

   Compard to the subprime collapse, that is astronomically good for investors.  No logic here though.

   Bond Insurance Companies sprang into existence because at the time, circa 1973, bonds were viewed as risky investments.  Cities, counties and other government entities authorized to issue bonds (instead of raising taxes) did not attract credit ratings high enough for the influx of capital they wanted.  Bond Insurance Companies, however, had high AAA credit ratings at the beginning, and they were able to transfer their AAA ratings to the bonds they insured.  In this case, the financial rating of Bond Insurance Companies was a measure of their capacity to pay claims -- which they apparently hardly ever had to do.

   Times  have changed dramatically.  However, the investors' perception of bonds as risky investments persists.  Bond Insurance Companies are being removed from the picture as their financial ratings are quickly lowered since they dabbled for years in guaranteeing or insuring the payback of mortgages secured by subprime securities that they sometimes could not spell like collateralized debt obligations (sp).

   Now, counties, universities and hospitals that issued bonds, for example, are having to pay greater amounts of money on bonds they have already issued and in many cases, are putting off issuing new bonds and thus postponing planned capital improvement projects.  Martin Z. Braun, "Bond Insurance Turns Toxic For Munis as Rates Soar (Update 1)" (Bloomberg.com, Monday, February 11, 2008).   For want of a nail, the shoe was lost ... and for want of a Bond Insurance Company's credit rating, the bond was lost -- and the municipal, hospital or other public improvement along with it.

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Florida to Fund Reinsurance Less, Promoting Private Re and Rise in Premiums.

   The Chief Financial Officer of Florida has a reported plan to "force insurers to purchase more insurance from the private market," rather than from the State of Florida.  (Previous reports reflected that the large insurers were not purchasing their Reinsurance from the State because their parent corporations purchased Reinsurance for them, on the so-called private market.)  The office of the CFO is said to point out that private Reinsurance Premiums have actually dropped. 

   A spokesperson for State Farm Florida, however, suggests that other Premiums will increase if Homeowner's and other Property Insurance Companies can only buy Reinsurance from Reinsurance Companies.  Jennifer Liberto, "Reinsurance Rehab on Table/CFO Sink Wants to Lower Florida's Exposure" (St. Petersburg Times Online, Fri., Feb. 8, 2008).

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Get a Financial Grip, Joe!

   Bloomberg estimates that investors in bonds backed by now-worthless securities which were foolishly guaranteed by Municipal Bond Insurance Companies stand to lose $200 Billion or $200,000,000,000.00.  People at the Bond Insurance Companies who decided to deal in subprime securities were experienced instead in issuing Insurance Policies for Municipal Bonds.  Municipal, county and other local government bonds have not changed.  Only the Bond Insurance Companies' credit ratings may change, because the one part of their business that they obviously did not know, which is the part involving subprime securities, has come up worthless.  See several previous posts here, and see this summary by Aaron Kirchfeld & Andreas Scholz, "Ackermann Says Bond Insurers Threaten Debt 'Tsunami' (Update4)" (Bloomberg.com, Thurs., Feb. 7, 2008).

   Josef Ackermann, the current CEO of Deutsche Bank Aktiengesellschaft, likened this potential loss of money to the "tsunami" that killed thousands of people in the Pacific.  That seems like an inappropriate comparison at any time.  Get a grip, Joe.

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