Wednesday, September 17, 2008, 09:10 AM - Political developmentsA.I.G.? You now own it.
You, the taxpayer, own it to the tune of up to $850 per household.
Last night the Federal Reserve struck a deal to keep A.I.G. out of bankruptcy. The Federal Reserve will loan A.I.G. up to $85 billion, giving the United States as much as an 80% equity stake in the insurer while it raises other cash, sells assets, or otherwise orders its finances.
A two year loan at the LIBOR (London interbank rate) plus 8.5%. It will be an expensive workout for the company. The loan will be secured by A.I.G.'s assets.
Effectively, you the taxpayer are now rooting for A.I.G.'s insurance businesses to succeed.
Yesterday, as this drama played out here in New York (where I am at the moment), the National Association of Insurance Commissioners tried to calm concerns by noting that 71 U.S. based insurance companies owned by A.I.G. are financially sound. Presumably that includes the insurance subsidiaries of A.I.G. who write workers' comp coverage for the California market.
Quoted in a piece on today's workcompcentral.com, Wayne Wilson, the Executive Director of the California Insurance Guarantee Association noted that CIGA is monitoring the situation but knows of no financial
downgrades to the A.I.G. companies that write workers' comp for the California market.
Insurance Commissioners across the country have been watching calls by A.I.G to shift assets from subsidiaries to the parent company, a move that was apparently allowed in New York.
A.I.G is multinational, of course. The company started in China and has a big presence in the Asian insurance market. Holdings range to aircraft leasing, Bulgarian telecommunications and Vermont ski resorts.
A.I.G.'s troubles come principally from arcane insurance ventures in insuring mortgage securities. Investment banks packaged mortgages into securities and then sold them to investors. When the mortgage crisis hit, A.I.G. lacked sufficient collateral. Cuts in the credit rating of the A.l.G. parent company exacerbated the problem.
And short sellers may have further driven A.I.G. into the ground. Last night on "Mad Money", commentator Jim Cramer was ranting about how lack of oversight over short sellers by Bush appointee and Securities and Exchange Commission Chairman Christopher Cox had allowed the short sellers to reap big profits by attacking A.I.G. and other financial firms.
The knives will be out on this one.
Meanwhile, today's press and op-ed headlines are fascinating.
"Are We Running Out of Rescue Cash? by Holman Jenkins in the Wall Street Journal.
"Who Replaces A.I.G. on the Dow? How About the Fed?"
"What Should Government Guarantee?" by Arnold Kling
"Government Stands to Make a Lot of Money Off of A.I.G." by F. Salmon
Further details about this deal will emerge in the next few days. Free marketeers will criticize the deal. Others will criticize it for privatizing profits and socializing losses.
Nouriel Roubini, professor at NYU's Stern School of Business, has suggested that it would be better to aid homeowners with a massive package like this rather than Wall Street firms.
And who's up next? Washington Mutual? Morgan Stanley? Ford? General Motors? United Airlines? The list goes on.
Chrysler? Hey, been there, done that.
But from a strict workers' comp standpoint, it probably means that California's workers' comp industry has dodged a big bullet for at the moment, at least. Even if A.I.G. workers' comp subsidiaries were solvent, the meltdown of the whole company would have been a gargantuan mess to unravel.
But does each workers' comp judge now have to recuse him or herself on A.I.G cases? After all, as taxpayers we're all in this together.
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Tuesday, September 16, 2008, 11:03 AM - Political developmentsAfter passing a budget, the California Senate has now adjourned.
Carrie Nevans, the AD of California's Division of Workers' Compensation, was not confirmed before the Senate adjourned.
Without confirmation, Nevans will presumably have to step down soon. In politics, anything is possible, of course. But unless the Governor calls a special session and vetos the budget agreement handed him yesterday (an agreement that kicks the California budget crisis down the road but does not solve the underlying problems), there will be no vote on Nevans.
So her tenure is likely to end with a whimper rather than a bang.
Meanwhile, keep your eyes on the drama unfolding in New York (where I am at the moment). A.I.G's may be filing for bankruptcy in the next 48 hours absent a dramatic move by the Federal Reserve. Weak financial results at Goldman Sachs and Morgan Stanley make it unlikely that investment banks will be able to raise capital to save AIG without explicit guarantees by the Fed.
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Monday, September 15, 2008, 07:04 PM - Political developmentsHere's tonight's report on A.I.G. from Bloomberg.com:
http://www.bloomberg.com/apps/news?pid= ... refer=home
Clearly, parts of A.I.G. will be auctioned.
One immediate concern is whether regulatory authorities in various states will object to transfer of assets from some solvent A.I.G. subsidiaries to the parent A.I.G. It's complicated because various types of insurance have different capital requirements.
The parent company could end up cannibalizing various subsidiaries.
Aircraft leasing? Life insurance? Property and casualty? Workers comp?
AIG writes and adjusts California workers comp under a variety of subsidiaries.
Given the complexity of A.I.G. and the number of countries and insurance products it offers, it's hard for an outside observer to know
whether reserves for California's workers' comp will be prime targets to be tapped for capital to "save the parent".
We'll see over the next few days whether they can survive or whether the parent crashes and buzzards pick over the bones of solvent subsidiaries.
Here's the report on today's developments re A.I.G. just filed by the New York Times:
http://www.nytimes.com/2008/09/16/busin ... nted=print
The Wall Street Journal recap of today's A.I.G. developments is here:
http://online.wsj.com/article/SB1221485 ... l_coverage
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Sunday, September 14, 2008, 08:20 PM - Political developmentsIt's a beautiful night in New York. An hour ago I was strolling in Times Square after going to the theater.
A full moon was hanging right over the Empire State Building. You'd never know that beneath the veneer, Gotham City was in the grips of a crisis that may have far reaching implications.
But in boardrooms across the city, there was high financial drama today as key financial firms made desperate attempts to keep themselves afloat.
Among the firms endangered: AIG (the American International Group), one of the world's leading insurers and a major player in the California workers' comp insurance market.
Tonight the New York Times reports that AIG is seeking a $40 billion bridge loan from the Federal Reserve. AIG may be facing a ratings downgrade that would reflect the company's frail financial health and further doom its future.
AIG executives are said to have spent the weekend trying to figure out ways to get a capital infusion by selling assets or getting assistance from buyout firms. At least one report said that AIG officers were meeting with regulators to see if they could transfer capital from some AIG subsidiaries to the AIG holding company.
The folks at the California Insurance Guarantee Association had better perk up their ears. It's not clear how all of this will play out. CIGA would be required to pay off claims if AIG failed completely. That would be a whopper.
I look forward to hearing what California Insurance Commissioner Steve Poizner says about all of this. AIG is a major player in other lines of insurance in California in addition to comp.
Defense attorney firms could see payments of their AIG receivables frozen.
Perhaps the Federal Reserve will come to the rescue. But how many firms can the taxpayer be expected to guarantee (or bail out)?
If AIG fails, perhaps the company will be sold and profitable units such as workers' compensation absorbed by other carriers or financial behemoths. Every day over the next week is likely to bring some more drama to this story.
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Sunday, September 14, 2008, 09:26 AM - Understanding the CA WC systemYou're late on your mortgage payment. You owe a penalty.
You're late on your credit card payment. You owe a penalty.
You're late on your cell phone bill. Your service probably gets cut off.
But if you're a California workers' comp insurer and you are late on payments, what happens to you?
The answer? It depends.
The California Workers' Comp Appeals Board issued a ruling last week clarifying penalty rules, Ramirez vs. Drive Financial Services and One Beacon Insurance. We'll look at that. But first, some background.
For years, California law under Labor Code 5814 allowed penalties for unreasonably delayed payments of up to 10% of the "species" of benefits delayed.
Later, an automatic penalty for late payments was enacted, Labor Code 4650(d). Conceived as a "self-imposed penalty", 4650(d) required the insurer to automatically add 10% to any late payment of temporary disability, permanent disability, or vocational rehab maintenance allowance. 4650(d) did not require a judicial finding of fault or "unreasonable delay". Rather, 4650(d) was like the added payment you might make if you fail to pay your mortgage on time, sort of like an automatic late fee. This does provide some incentive for carriers to pay
benefits in a timely fashion.
The real kicker was the 5814 penalty. Insurers could be tagged with large penalties if there was "unreasonable delay".
But the problem? Since the penalty amount was based on the "specie of benefits", penalty amounts were tied to what amounts of a particular benefit had been paid out. In mature cases with large medical treatment and large indemnity costs, 10% of the specie of benefit might be a five-figure sum, or even more.
Some applicant attorneys went prospecting for penalty claims.
The unreasonable delays of medical treatment or temporary disability undoubtedly caused medical or financial suffering in many instances. The possibility of significant monetary penalties acted as an incentive for carriers to pay benefits and for attorneys to press aggressively on delay issues.
But in many other instances the imposition of a 10% penalty for a single delay created a windfall when the penalty was assessed against an entire specie of benefits. Moreover, there were penalties on penalties.
The remedy was at times excessive.
Frankly, the applicants bar was in denial over problems with the application of former 5814.
And thus The Golden Goose does sometimes get killed.
As part of the SB 899 reforms, Labor Code 5814 was amended. Penalties are now allowed at the discretion of the WCAB for unreasonable delay or denial of compensation up to 25% of the amount delayed or denied, or up to $10,000, whichever is less.
An employer can avoid the potential 25% penalty by paying a self-imposed 10% penalty along with the delayed payment if made within 90 days of discovery, if delay is discovered by the employer before the employee makes a claim for penalty.
Labor Code 5814 now provides that any 4650(d) automatic penalty is credited against the 5814 "unreasonable delay" 25% penalty.
Penalty litigation has slowed considerably, partly due to the automatic penalty offset and partly due to the imposition of ACOEM medical treatment guidelines, second surgical opinion procedures, medical provider networks and utilization review.
Moreover, collecting a 25% penalty on delay of a $1,000 MRI is simply not cost effective in the majority of cases from a litigation expense-standpoint.
Thus, penalty issues lack the urgency that they had several years ago.
But under what circumstances will the WCAB exercise its discretion to award 25% penalties?
What factors are relevant to the imposition of a penalty?
Is the impact of the delay on the disabled worker a relevant factor?
Does the worker's attorney has a right to do discovery on defendant's claims handling practices?
Ramirez vs. Drive Financial Services and One Beacon Insurance Co. answers some of these questions.
Here is a pdf copy of the WCAB en banc decision in Ramirez vs. Drive Financial Services and One Beacon Insurance Co.:
http://www.dir.ca.gov/wcab/EnBancdecisi ... 8-EB-3.pdf
In my next post I'll provide more commentary on Ramirez.
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