Claims And Issues

Hurricane Gustav Follows Hurricane Katrina Path Three Years Later.

    On August 29, the people of New Orleans observed the third anniversary of Hurricane Katrina's lethal landfall in their City.  On August 30, it was reported that New Orleans was evacuating before Hurricane Gustav lands upon them.  "These are nervous times in New Orleans."  Mary Foster, "My New Orleans 3 Years After Katrina:  Jittery, on Edge as Another Hurricane Approaches" (South Florida Sun-Sentinel.com, Saturday, August 30, 2008).

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Mortgage Insurance, Fannie Mae and Freddie Mac: And Lots of Money.

    Insurance Companies are players in the Mortgage arena.  Their roles in that venue are addressed by Renae Merle, "Mortgage Insurers' Losses Mount/Problems Feed Fears That Squeeze on Loans" (washingtonpost.com, Thursday, August 14, 2008).  Here are some of the roles which Insurance Companies play in the Mortgage field.

    Mortgage Insurance Companies lead the list of role players among Insurance Companies where Mortgages are concerned.  They are plugging fingers into crumbling dikes that once held the flood waters of foreclosure at bay.   Increasing their amount of capital is a major priority on the agenda of Mortgage Insurance Companies confronted by loan delinquencies that continue to set record numbers.  "Large" Mortgage Insurance Companies according to the linked newspaper report have reported as a result some $2,600,000,000.00 or $2.6 Billion in losses in 2008 -- a year which of course is ending only its eighth month.

    Some $1.7 Billion worth of those particular $2.6 Billion in reported losses, have been reported in only the last 3 months.

    The reported status of "some of the largest players" includes information about:

    Triad Guaranty Insurance Corp., which "is going out of business."

    Radian Guaranty which is headquartered in Philadelphia has lost 90% of share value in the last year.

    So has Triad Guaranty, the company reportedly "going out of business."

    So has PMI Mortgage insurance.

    Mortgage Guaranty of Milwaukee, Wisconsin reportedly lost $97,900,000.00 in 2Q 2008.

    Then there is the complicated relationship between Mortgage Insurance Companies and the faltering Fed twins, Fannie Mae and Freddie Mac.  This relationship and the role of the faltering Feds will be the subject of a future post.  At this time, it is enough to begin with the information that Fannie and Freddie "often buy loans with a less than 20 percent down payment and then offset the risk with an insurance policy."  Id.  Being quasi-governmental agencies linked to the Federal Government, Fannie and Freddie have some requirements in order for Mortgage Insurance Companies to insure Fannie and Freddie risks.  The requirements imposed to assure solvency have reportedly not been obeyed either by Freddie Mac or Fannie Mae, which have both reportedly ignored the issue of any Insurance Company's noncompliance with these mandated standards.

    That has not apparently stopped either of the failed Feds from making Claims, however.  Reportedly, in 1Q and 2Q 2008, Fannie Mae alone was paid $830,000,000.00 by its Insurance Carriers.

More to come in another post.  Please Read The Disclaimer about this post.

Automobile Insurance: Driving Down, Premiums Up.

     Why have Automobile Insurance Premiums gone up while driving has gone down?  Insurance Companies report that although it is a fact that drivers in this country drive fewer miles now than they did in the past, the reduction in driving has not affected the number of reported accidents at this time.  In addition, the Insurance Companies point to many factors that increase the cost of Claims, and thus cause an increase in Automobile Insurance Premiums:

            1.  Inflation;

            2.  Commodities price increases including in the prices of materials to repair vehicles;

            3.  Medical Expenses, and

            4.  Legal fees and costs.

    Automobile Insurance Companies also point out a fifth factor, possibly of greater significance than these four so far:

            5.  An anticipated rise in car crashes if the current driving reduction is due to the economy, which is the most accepted usual suspect as the cause for reducing vehicular collisions.  After the oil embargo in 1973 and 1974, vehicular collisions declined while the embargo lasted, then picked right back up after the embargo was over.   In anticipation of the same thing happening now -- and assuming that the current economic conditions "return to normal" -- rising Automobile Insurance Premiums are a hedge against history.

    All of these events are reported by Mary Williams Walsh, "Driving is Down, But Auto Insurance Rates Are Rising" (New York Times Online, Saturday, August 23, 2008).

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"Fay, You Are No Hurricane": But Claims are Coming in.

    There are a significant number of Claims and more to come from the passage of Tropical Storm Fay over Florida, as reported by Julie Patel, "13,847 Claims Filed After Fay" (South Florida Sun-Sentinel.com, Wed., August 27, 2008), Claims are coming in even though Fay is no longer stationary over Florida.  To date, there are reportedly:

            11,678 Homeowner's Insurance Claims;

              1,404 Automobile insurance Claims; and

                756 Flood Insurance Claims.

Hurricanes can cause Catastrophic damage.  Fay has proven beyond any doubt that Tropical Storms can cause Catastrophe Claims, too.

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Rate Hike Rejection in Florida.

    State Farm's previously reported rate hike request of 47.1% across Florida has been rejected.  The Florida Office of Insurance Regulation issued its order of denial, as expected by many.

    Reportedly, State Farm now has three available options.  Which one, or more, it will choose is open to speculation, it appears:

            1.    Appeal the order to an Administrative Law Judge in the Florida Division of Adminstrative Hearings;

            2.    Drop up to 50,000 existing Policyholders and their Policies in Florida; or

            3.    File a new Rate Hike Request.

These developments are reported by Jennifer Liberto, "Florida Rejects State Farm Hike" (St. Petersburg Times Online, Monday, August 25, 2008).

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An Online Social Network for People in Health Insurance Net.

    A virtual health clinic is reportedly in the beta stage, i.e., under development in an experiment being launched by WellNet Healthcare in August, 2008.  Kendra Marr, "A Social Network for Your Doctor, Pharmacist and Insurer"  (washingtonpost.com, Saturday, August 16, 2008).

    The virtual health clinic would reportedly be an online social network limited to people involved with WellNet's Health Insurance paradigm.  Medical specialists and primary care providers will have access to a participating patient's medical records online.  They will be able to communicate with each other by Instant Messaging.  Patients will be able to schedule checkups online, write a journal about their health and about the health care they receive, and rate their physicians.  Pharmacies may be linked to the doctors used by the patients.

    On the other hand, prying eyes will also be able to see and do all of these things, too, if and when they crack the code.

    Many implications are addressed in the linked newspaper article.  Reportedly, WellNet "will give companies the program for free if they transfer their pharmacy benefits to WellNet.  When it opens this service to others early next year, it will start charging a licensing fee."  Id.

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Subprimes Sneeze, Credit Card Consumers Chilled, Insurance Catches Cold.

    Insurance Industry illnesses from the credit fiasco come in a couple of ways.  One is that more Claims are made on more types of Insurance Policies -- Mortgage, Credit, for examples -- than these Insurance "products" may have been designed to withstand.  Another is that there is less capital -- i.e., less money -- available to invest in the Insurance Industry, thus Insurance Companies face the same issue that many other finance institutions face in the U.S. at this time.  They too must find more capital in other ways.

    August, 2008 is the one-year 'anniversary' of the "Subprime Crisis" or "Credit Crisis," according to both the popular press and the financial media.  A good exploration of both is made available by Creidt Suisse on their web site, including an understandable "Subprime Definition":  Michele Bodmer & Joy Boli, "Understanding the Subprime Crisis" (May 13, 2008 Credit-Suisse.com).

    A previous report issued by Credit Suisse pointed to changes in the Bankruptcy Law in the United States in a previous Congress that made it much easier for credit card companies and other creditors to pursue consumers who had a hard time paying their debts, by making Bankruptcy Court protections much, much harder to get.  The credit card companies in particular reportedly pushed the statutory changes as a way of enforcing their rapidly increasing high rates of interest and other charges they imposed on debt-ridden consumers.  Credit Suisse reported that these changes had a direct and profound effect on increasing the number of foreclosure filings once homeowners began to default in droves.  See Patrick Healy & Michael Luo, "A Senate Stalwart Who Bounced Back" p. 1, col. 3 (Sunday New York Times Nat'l Ed., August 24, 2008).

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"Fay, You Are No Hurricane": More Effects Than Claims Alone.

    Tropical Storm Fay has more effects than leaving behind many Claims.  Reportedly, Property Insurance Companies have a "no-bind" practice or procedure in response to any National Weather Service Watch or Warning that is issued in Florida for a Tropical Storm or Hurricane. This means that in the case of Tropical Storm Fay, for example, house closings are on hold until Insurance Coverage can be finalized once Fay leaves Florida once for all.  Jeff Harrington, "Tropical Storm Fay Gets in Way of Home Closings" (St. Petersburg Times Online, Tuesday, August 19, 2008).

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"Fay, You Are No Hurricane": Check All Risks, Commissioner Says.

    Tropical Storm Fay is not (yet?) a Hurricane.  Fay has definitely caused property damage and loss of life, too, however.  The Florida Insurance Commissioner reportedly said that, as a result, "the damage will be covered by the all-perils portion of a property owner's policy".  Julie Patel, "Fay's Damage Will be Covered by Insurance Policies' All-Perils Section" (South Florida Sun-Sentinel.com, Friday, August 22, 2008).  This may be unintentionally misleading.

    The Florida Insurance Commissioner and the reporter(s) writing this story no doubt meant to say that Policyholders should look to the "All Risk" or "Other Perils" provisons of their Property Insurance Policies in connection with their Property Damage claims resulting from Fay.  The Insurance Companies and if need be, the Florida Courts, will undoubtedly have something to say about whether Fay's damage will be covered in the case of particular claims.

    In the meantime, it is encouraging to many Florida Policyholders to realize that, as the Insurance Commissioner and the news reports point out, since Fay's damage to date was not caused by a Hurricane, then the Hurricane Deductible cannot apply.  Instead, a much lower deductible applicable to All Risks or Other Perils Coverages would seem to be the applicable deductible for claims presented on account of damage from Fay so far.

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Condo Costs: Need to Know.

    Condominium Associations may not need to tell buyers what their Insurance Premiums will come to, or perhaps even what buyers can expect to pay in special assessments this year or next.  This newspaper report recommends that you do your homework to find out, including ask the seller.  Financial information is just too important to take "no need to know" for an answer.  Joe Kollin, "Before Buying, Check Out Place Thoroughly" CONDOS/HOMEOWNER ASSOCIATIONS (South Florida Sun-Sentinel.com, Wed., August 20, 2008).

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"Fay, You Are No Hurricane" -- So, No Effect on Premiums?

    Hurricanes caused hidden damage in Florida in 2004 and 2005.  They caused Premiums to rise because they caused the Florida Hurricane Catastrophe Fund and Citizens Property Insurance, for example, to require higher assessments.  See Tom Zucco, "Fay Unlikely to Cause Havoc With Insurance" (St. Petersburg Times Online, Monday, August 18, 2008).

    Fay is a Tropical Storm and not a Hurricane as this post is written.  Presumably, Fay will not cause charges to be imposed which can cause Insurance Premiums to rise accordingly.  Presumably.

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Florida Office of Insurance Regulation Putins Allstate Insurance.

    For nearly a year, Allstate Insurance Company and its subsidiaries resisted investigations by the Florida Insurance Commissioner into its Reinsurance arrangements, its unauthorized Catastrophe Models that consistently predicted greater damage -- and thus the 'need' for greater Premiums -- than was predicted by the Catastrophe Models that have long been used in the industry and in Florida, and Allstate's relationships with raters and trade associations.  As readers of this web log know, many posts here have followed the developments during that time, until Allstate exhausted its appeals and Courts overruled its objections to the Insurance Commissioner's investigations.  Now, what the Florida Insurance Commissioner calls "'drastic actions'" have been agreed to by Allstate.  Tom Zucco, "Deal Cuts Allstate's Rates" (St. Petersburg Times Online, Friday, August 15, 2008).

    The capitulation to which Allstate has been forced to consent is as overwhelming in its own way, as the recent invasion of Georgia by the Russian Army.  Allstate's "agreeement" was released on Friday, August 15, 2008, the traditional day of the week to release bad news to the public and press.  The agreement includes these terms:

Allstate will pay a $5,000,0000.00 fine to the Florida Insurance Regulatory Trust Fund under its agreement with the Florida Office of Insurance Regulation, which is the Florida Insurance Commissioner's Office;

Allstate will write 100,000 new Insurance Policies in Florida over the next three years, breaking down into 50,000 new "basic" Homeowner's Insurance Policies and 50,000 new Condominium, Renters and other residential Property Insurance Policies;

Allstate will lower Premiums on its existing "Florida policies" by 5.6 %, it is reported in the linked article, although what kind of Insurance Policies they are is not reported;

Allstate will not seek a Premium Rate Increase for at least a year, although again, the linked article does not identify for what kind of Insurance Policies;

Allstate will continue to 'cooperate' with the Florida O.I.R. investigations; and

Allstate waives its rights to challenge this agreement in Court.

    Allstate is reportedly the Number 2 Automobile Insurance Company in Florida, writing an average of some $564,000.00 in new Premiums a month in that line of business.  It is also reportedly the Number 4 Property Insurance Company in Florida.

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Premiums Rise for Long-Term Insurance.

    John Hancock is reportedly joining Genworth in seeking Premium Rate Increases for some existing Long-Term Insurance Policies.  Kimberly Lankford, Kiplinger's Personal Finance, published as "Long-Term-Care Insurance Rates Are Set to Increase" at washingtonpost.com, Sunday, August 17, 2008.  Where the companies have filed their Rate Increase Requests is not reported in the linked newspaper article.

    For John Hancock, apparently this raise in rates for Long-Term Insurance is a first.  Recommendations and suggestions are provided in the linked newspaper report, including if you currently hold a Long-Term Insurance Policy you may wish to hold on to it regardless of Premium Rate Increases, because new Policyholders face higher Premiums anyway; switching Long-Term Insurance Companies at this time is not a very attractive option.

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Collateralized Debt Obligations, Credit Default Swaps, And Credit Insurance, Continuation ....

.... Part 3:  What Is The Prognosis?

     Merrill Lynch's recipe for settlements of CDO indemnity obligations may be "a template for Wall Street, Bank of America Corp. analysts said."  John Glover, "Merrill CDO Deal May Be Model, Bank of America Says (Update 1)" (Bloomberg.com, Friday, August 1, 2008).  

    Another description from a different analyst is that Merrill may have set a "benchmark".  John Glover, "Merrill Gives Up Gains, Is 'On Hook' For CDO Losses (Update 2)"  (Bloomberg.com, Wed., July 30, 2008).

    Yet a third description of this conduct is that Merrill Lynch has ushered in "a sea change in the way banks are approaching their holdings of troubled investments."  Jenny Anderson, "An Investment Firm That Prospered From Past Crises Turns to Mortgages" Business Day Section, p. C1, col. 3 (New York Times Nat'l Ed., Wed., July 30, 2008).

    Here is what Merrill arranged.  It held Collateralized Debt Obligations.  It sold them to Lone Star Funds.  The sale price was in the neighborhood of 22 cents for 100 cents or 22 cents on the dollar.  Merrill loaned Lone Star 75% of the 22 cents-for-100 cents purchase price.  Glover, "Merrill Gives Up Gains, is 'On Hook' for CDO Losses (Update 2)", supra.

    To fully understand the potential significance of this transaction, it is reported that some accounting information will help.  "Investment banks [like Merrill Lynch] can book a gain if an insurer is willing to pay more to terminate its liability on a default swap contract than the amount at which the bank has it on its books, Bank of America said."  Glover, "Merrill CDO Deal May Be Model, Bank of America Says (Update 1)," supra.  [Emphasis added.]  Unknown, unnamed "analysts" say:  "'Monetization of these gains, we feel, would follow.'"  Id.

     I think this means that right now, no-one can honestly say what these paper accounting "gains" are worth.  They do know enough to know, apparently, that an insurer shedding liability on "a default swap contract" is a postiive gain.  Insurance regulators will otherwise "probably" take over the Insurance Companies "and pay the holders of municipal bonds they guaranteed before the banks," according to "the analysts".  Id.

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Expert Witnesses, Reasonableness of Conduct and Other Business/Law/Financial Issues.

     Do you pay your Expert Witnesses $1,000 an hour?  Summaries in the newspapers of recent studies reflect that Expert Witnesses often charge that much.  Here is a handy link here.  This report uses many of the studies as resources.

    It is interesting that in 1 out of 3 lawsuits, Expert Witnesses testify at Trial in Federal Court about the "reasonableness of a party's actions" and other "business/law/financial" issues, as reported by studies of Federal Civil Trials and surveys of Federal Trial Judges across the nation.  More such issues are likely to be presented as the financial crisis deepens.

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Past Fears, Uncertain Future Drive Florida State Hurricane Warnings.

    Predictions of the future can be very uncertain.  Sometimes perceived future dangers, for example, are based more on past fears than present facts, perhaps.  It is reported that the Florida "state meteorologist" (did you know that Florida has one of those?) predicts an active Hurricane Season in the rest of 2008.  HIs predictions, together with consequences of not preparing for Hurricanes in the past, and some people's current state of preparedness, are all broadly explored by Curtis Krueger, "Don't Panic, Just be Wary" (St. Petersburg Times Online, Saturday, August 9, 2008).

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Unidentified Claim Practices Settlement by Life Insurer -- Update.

     This Updates a Previous Post.

    The unidentified claim practices settlement by a Life Insurance Company will remain unidentified if it is left up to the parent Life Insurance Company, apparently.  The parent Company in question is Healthmarkets, Inc.  It is also in the business of selling Health Insurance Policies through numerous subsidiaries.  Here is Healthmarkets' own July 21, 2008 "Press Release" on "Healthmarkets' Subsidiaries Reach Settlement With State Regulators".  It could not be more vague if it was deliberately written to be vague -- which clearly seems to be the case with this press release.

    Three days after Healthmarkets' Press Release regarding its settlement with many State regulators, Reuters reported that the ratings of Healthmarkets, Inc. and many of its subsidiaries were downgraded.  Reuters Report, "A.M. Best Downgrades Ratings of HealthMarkets, Inc. And Its Subsidiaries" (Thursday, July 24, 2008).

    It turns out that the settlement is massive by any measure.  HealthMarkets and its affected subsidiaries agreed that they would pay $20 Million in fines and penalties now, and that they would pay another $10 Million in the future if they did not live up to the progress requirements they agreed to.

    It is also an innovative settlement arrangement.  The ground-breaking feature of it is that State Insurance Regulators worked together under the auspices of the National Association of Insurance Commissioners to address many complaints against HealthMarkets, Inc. and its subsidiaries across the entire nation.  When the settlement was signed in July, 29 jurisidictions signed off on the settlement at that time.  Designated 'enforcers' of the settlement are Washington State, Alaska, California, Florida, Oklahoma, and Texas.  The settlement agreeement provides an August 18, 2008 deadline for other State Insurance Regulators to sign on.

    As part of the settlement agreement, HealthMarkets, Inc. and its participating subsidiary companies must report two times a year through December 31, 2009 that they have imporved in some 13 areas covered by their agreement, including:

    Agent training and supervision;

    Claims handling; and

    Complaints and grievances, among others.

For a comprehensive report on the settlement, participating State Insurance Regulators, and how the settlement agreement was reached, see this NAIC Press Release, "State Insurance Regulators Levy $20 Million Fine Against Healthmarkets" (July 24, 2008). 

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Federal Disasters Declared, Catastrophe Models Unspecified But Described As Consistent.

     During his two terms as president, Mr. Bush has issued 422 declarations of disaster.  That is described as more than President Bill Clinton and far more than President Ronald Reagan, also two-term presidents.  The largest number of Mr. Bush's disaster declarations in any given year came in 2004.  Austin Bogues, "Bush Declared 422 Major Disasters" (New York Times Online, Sunday, August 10, 2008).

    Mr. Bush's government committed $40 Billion in disaster relief from the Federal Government after Hurricane Katrina and Hurricane Rita in 2005.  Since they took office, they have committed an additional $47 Billion, for a total of $87 Billion in Federal Taxpayer Funds used for disaster relief, so far.  With or without the relief following Hurricanes Katrina and Rita, Mr. Bush has assigned more Federal money to disaster relief than his predecessor by some 2 and 1/2 times after adjusting for inflation, it is reported in the linked newspaper article.  The likely cause is, ironically, global warming.

    Before concluding this post, it is worth noting that a curious quote in the linked report is attributed to a person with the Environmental Defense Fund.  He is quoted as observing that "'weather events'" are "'consistent with what the models predict'".  However, the linked article does not provide a description of whose Computer Catastrophe Models they have in mind.

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Rate Rejection Redux.

 This Updates a Previous Post.

    Florida Farm Bureau's 2007 Premium Rate Increase was rejected in 2008.  FFB's 2007 Premium Rate Hike Request was for a 26.8 % increase.

    FFB also requested a Premium Rate Increase in 2008, upping the ante so to speak to 28.4%.  It was recently rejected by the Florida Office of Insurance Regulation.  FFB may now request an Administrative Hearing with a Florida Administrative Law Judge, or Hearing Officer.  Florida Farm Bureau has reportedly issued some 100,000 Homeowner's Insurance Policies in Florida.  Tom Zucco, "Farm Bureau Rate Hike is Rejected" (St. Petersburg Times Online, Tuesday, August 5, 2008).

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Unidentified Claim Practices Settlement by Life Insurer.

     In 2007, these three Life Insurance Companies reportedly took back over $115,000,000.00 or over $115 Million from Floridians who paid them Premiums:

     1.  MEGA LIfe and Health;

     2.  Mid-West National LIfe, and

     3.  Chesapeake Life.

Each is reportedly a subsidiary of HealthMarkets, Inc.  HealthMarkets recently settled many claims in many States for unidentified practices, reportedly resulting in a payment of $1,700,000.00 or $1.7 Million "for Florida".  Kris Hundley, "Florida to Get $1.7-Million From Insurance Settlement" (St. Petersburg Times Online, Friday, July 25, 2008).

If more information can be located from other sources, it will be posted here in the future.

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Collateralized Debt Obligations, Credit Default Swaps, And Credit Insurance, Continuation ....

.... Part 2:  Devalue, Destroy, or Divest.

    Ambac Financial Group Inc., a Bond Insurance Company that ventured into the dangerous land of Collateralized Debt Obligations and hoisted packages of subprime mortgages in exchange for real money, agreed with Citigroup Inc. that Ambac would get out from under a guarantee of CDOs.  Christine Richard & Jody Shenn, "Ambac to Pay $850 Million in Citigroup CDO Settlement (Update 7)" (Bloomberg.com, Friday, August 1, 2008).   Here is how the Ambac-Citigroup deal has been reported.  Recall that a very broad definition of Collateralized Debt Obligations is that they "package pools of securities," including subprime mortgages, "and slice them into pieces of varying risk."  Id.

    Not long ago, Ambac guaranteed a Collateralized Debt Obligation of $1,400,000,000.00 or $1.4 Billion.  After the subprime collapse and the credit crunch began, Ambac wrote down the value of the CDO by $1,000,000,000.00 or $1 Billion.  (Could this have been accurately reported instead as written down the value of the CDO to $1 Billion?  See below.)

    Next, Ambac paid $850,000,000.00 or $850 Million to Citigroup to get out from under Ambac's guarantee of the CDO.  By an accounting charade, Ambac reported that it gained $150,000,000.00 or $150 Million on the transaction.  See Christine Richard, "Ambac Posts Record Net Income on Accounting; New Business Falls" (Bloomberg.com, Wed., August 6, 2008).

    This accounting sleight of hand works on Wall Street.  After Ambac reported its settlement agreement with Citigroup, the shares of Ambac rose 50% to $3.79 a share.  The share price of its rival Bond Insurance Company MBIA also rose, by 29% to $7.67 a share.  Associated Press Report, "Stocks & Bonds/A Rough Week With a Sedate Conclusion," Business Day Section, p. B7, col. 2 (New York Times Nat'l Ed., Saturday, August 2, 2008).

    This is suddenly the preferred way of shedding exposure by shedding previously given guarantees of Collateralized Debt Obligations.  "Somehow, $4.4 billion just evaporated at Merrill Lynch."  Louise Story, "A Sale of Troubled Mortgage Assets Raises More Questions Than It Settles," Business Day Section, p.C1, col. 1 (New York Times Nat'l Ed., Wed., July 30, 2008), published Online as "A Deal at Merrill Puts Spotlight on Others".  Once again, CDOs are described in this newspaper report as "toxic mortgage investments".  Not long ago, Merrill Lynch assigned a value of $11,100,000,000.00 or $11.1 Billion to the "toxic" CDOs on its books.  At this time, it is selling those CDOs for the lesser value of $6,700,000,000.00 or $6.7 Billion.  That is not all.

    Merrill Lynch is loaning the buyer, Lone Star Funds, most of the purchase price.  It wrote down the value, and put it back on the balance sheet as a loan.  This arrangement is reportedly all about the corporate balance sheet.

    As reported in the newspapers and other media, Merrill Lynch's arrangement removes the iffy valuation of CDO ownership from its books.  It is replacing ownership of a likely low value asset on its books, with a loan.   However, as noted in the linked newspaper article, the risk of the CDOs remains.  That said, however, something else may have been gained besides a balance sheet balancing better.

    If CDOs are the new Credit Insurance, then not owning nor guaranteeing the payment of CDOs may mean that the party that sold them, even if it devalued them, no longer runs the additional risk of issuing an Insurance Policy without the authority of any State to do so.  That exposure means potential penalties.  It is generally unknown how to accurately calculate that unwanted exposure.  Dumping the CDOs may dump that additional "toxic" exposure, too.

    Merrill Lynch is not only moving its CDOs to Lone Star Funds, however.  It also reportedly settled recently with a Reinsurance Company, XL Capital Assurance, "which had insured some of the firm's C.D.O.'s."  Merrill is writing down those CDOs' value in the 3Q 2008.  Merrill Lynch's settlement agreeement with XL Capital will cost Merrill a reported $500 Million, while other settlements with "other reinsurance companies" will add another $800 Million in Merrill's obligations.  Louise Story, "Write-Down Is Planned At Merrill" p. C1, col. 5, Business Day Section (New York Times Nat'l Ed., Tuesday, July 29, 2008).

    What is not necessarily understood in all these stories, and what the linked article does not mention, is that reinsurance is insurance purchased by an Insurance Company.  If a Reinsurance Policy was issued to "insure some of Merrill's C.D.O.'s," that means that the Reinsurance Company and Merrill both implicitly viewed the CDOs as insurance for which Reinsurance was a good idea in their judgment.

    CDOs, the New -- and unauthorized and, so far, unregulated -- Credit Insurance.  The next post in the Continuation of this subject, Part 3, will address the Prognosis.

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The Limits of FDIC Coverage, Explained.

����The way in which the Federal Deposit Insurance Corporation calculates its Insurance limits are explained in this comprehensive and timely article by Helen Huntley, Times Personal Finance Editor, "Decoding FDIC Limits" (St. Petersburg Times Online, Friday, August 1, 2008).� One thing to keep in mind from the beginning is that the limits of available Insurance through the Federal Deposit Insurance Corporation apply to deposits and not to securities or money market mutual funds.� Bank deposits mentioned in the article that attract this Insurance Coverage include:

����Individual and Joint Accounts;

����Retirement Accounts, like IRA's, 401(k)'s, Keogh's, and SEP's;

����Revocable Trusts and "Payable on Death" Accounts; and

����Irrevocable Trust Accounts.

Check out the FDIC information at its own site, too:� www.fdic.gov.

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Note to my readers:  Do you see the "boxes" above?  As most of you know, they are ASCII symbols indicating 'tab' and 'space' formatting.  That these symbols appear in this published post comes to you from the good people at typepad.com, the current host of this web log.  They inform me that their engineers are working on their problem, and they hope to have a solution "by the end of the week."  In the meantime, after several hours of trying to fix the typepad.com software problem, the author is just not able to control this one.  Sorry for the inconvenience to you and to me, though, and we will just do the best we can until typepad.com solves their problem.--Dennis J. Wall, Esquire.

FFB Raises Rejected Rate Request.

     In 2007, Florida Farm Bureau requested a Premium Rate Increase of 26.8% in Florida.

     In early July, 2008, FFB exhausted its appeals of the Florida Office of Insurance Regulation's denial of that request.

     In late July, 2008, FFB asked for a Premium Rate Increase of 28.4% in Florida.  Tom Zucco, "Insurer Still Seeks Rate Hike" (St. Petersburg Times Online, Wed., July 30, 2008).  FFB reportedly has 100,000 Florida Policyholders.

Please Read The Disclaimer.

    

Collateralized Debt Obligations, Credit Default Swaps, And Credit Insurance, Continuation ....

.... Part 1 -- What Are These Things?

      Collateralized Debt Obligations and Credit Default Swaps belong to a group collectively labeled "toxic securities" in the media.  See "Merrill CDO Sale Not As Good As It Looks:  Analyst," a Reuters report published online at washingtonpost.com, Wed., July 30, 2008.  A more polite name that they go by is "structured finance revenue," meaning revenue from "structured products" like CDOs and other securities backed by mortgages on peoples' houses or commercial properties, "and credit derivatives."  Jonathan Stempel, Reuters report, "Moody's Profit Tumbles, To Be Sued By Connecticut" (washingtonpost.com, Wed., July 30, 2008).

     Perhaps a little more sharpness in definition will aid in understanding.  Perhaps not.  It is worth a try.  CDOs are securities.  They "repackage pools of bonds and loans and divide" the cash flow from these pools of bonds and loans "into notes of varying risk and returns that are sold to investors."  John Glover, "Merrill CDO Deal May Be Model, Bank of America Says (Update 1)" (Bloomberg.com Friday, August 1, 2008).

     CDOs "package pools of securities, including those backed by subprime mortgages, and slice them into pieces of varying risk."  Christine Richard & Jody Shenn, "Ambac to Pay $850 Million in Citigroup CDO Settlement (Update 7)" (Bloomberg.com, Friday, August 1, 2008).  More simply put, "CDOs repackage bonds, loans and credit-default swaps and use the income to pay investors."  John Glover, "Merrill Gives Up Gains, Is 'On Hook' For CDO Losses (Update 2)" (Bloomberg.com, Wed., July 30, 2008).  [Emphasis added.]  

     So, then, "Collateralized Debt Obligations" include "Credit Default Swaps," it appears.  CDSs have been defined by the same financial reporter as "contracts conceived to protect bondholders against default, [they] pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements."  John Glover July 30, 2008, supra.  CDSs, in addition, are defined by their use "to speculate on a company's ability to repay debt."  John Glover, August 1, 2008, supra.  See also Christine Richard & Jody Shenn, August 1, 2008, supra.

     If this is confusing, try wrapping your mind around what the media describes simply as "complex European products known as constant proportion debt obligations (CPDOs)".  Jonathan Stempel, July 30, 2008, supra. 

     There is no present need to venture into the world of CPDOs.  It is enough to recognize that reporters, through no fault of their own, do not appear to understand what Collateralized Debt Obligations and Credit Default Swaps are all about, how they function, what they actually do.  They function like Insurance.  Although it is the job of reporters to report to the public what these things are all about, it is not at all the fault of reporters that they do not understand financial vehicles backed by or involving packages of subprime mortgages.  People and particularly regulators were never supposed to understand that CDOs and CDSs are really Insurance.  They function just like Insurance, and they insure credit obligations every bit as much as regulated Credit Insurance.  They are called seemingly impenetrable names for a reason, which is that their makers do not wish them to be understood for what they are:  Insurance.

     The title of this post reflects that it is a Continuation.  In many posts in this space, see, e.g., the post here of July 10, 2008, the similarity between these seemingly mystical securities and Credit Insurance was found to be identical.  The disguise worn by these securities has so far deflected closer examination and prevented any kind of regulation.  The damage done by this deception is the subject of the next post in this series, Continuation Part 2, Devalue, Destory and Divest.

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Renter's Insurance a Small Market, Insurance Study Finds.

     Renter's Insurance markets in Florida are the subject of a study recently conducted by Allstate and by Opinion Research Corporation.  Reportedly, more than 2,000,000 or 2 Million Floridians rent their homes, whether apartments, houses, or townhouses.  The Allstate-Opinion survey reportedly found that only 37% of the Floridians reached by the survey have Renter's Insurance Policies.  Tom Zucco, "Renters Often Uninsured, Allstate Study Finds" (St. Petersburg Times Online, Thursday, July 24, 2008).

     According to Allstate figures used in the newspaper report, the "average cost to replace" personal property "in a typical apartment" is over $13,600.00.  Id.

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Homeowner's Associations and Condominium Associations: Professionalism, Business ... And Insurance.

      Boards of Directors of Condominium Associations, and of Homeowner's Associations and of other similar Community Associations, have a hard job.  Their many obligations and expectations are explored by Kay Senay, Forum Publishing Group, published online on Thursday, July 31, 2008 at South Florida Sun-Sentinel .com under the headline, "Board Responsibility Makes All the Difference".

     Among the responsibilties summarized there, is this one at the top of the list:  "Confirm that the association's master insurance policy is appropriate, including D&O coverage."

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Pitfalls of Investing in Certain Property Insurance Companies.

       Some of the pitfalls of investing in certain Property Insurance Companies are generally explored by Florida Sun-Sentinel reporter Julie Patel, who offers a specific example to illustrate some of the issues in her Web Log, "House Keys," found at http://weblogs.sun-sentinel.com/business/realestate/housekeys/blog/2008/08.

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