First U.S.-based insurance securitization
completed
Staff announcements
AAI Syndicate #1 Ltd. Liquidated
What's new on the net
Exam reports filed
Company action
Charitable gift annuities
Producer regulatory action
Department rules review
Hearings
Illinois' INEX Insurance Exchange has completed the nation's first onshore insurance-linked securities offering. The transaction is also the first securitization with sole exposure to Midwest earthquakes.
The Illinois Department of Insurance set the stage for the transaction with its November 1998 approval of an INEX regulation to conduct U.S. based securitization transactions. The regulation allows INEX to transfer high level insurance risks to special purpose limited syndicates. They in turn issue securities to private investors and place the proceeds in a fully collateralized trust to secure the underlying insurance risks. Both the special purpose syndicates and all proposed insurance securitizations are subject to approval by the Insurance Department.
The capital markets transaction announced by INEX on March 26, 1999, funded a fully collateralized reinsurance agreement providing $100 million of Midwest earthquake coverage to the Kemper Insurance Companies. The transaction, approved by the Department of Insurance, was structured, underwritten and distributed by Aon Capital Markets, the investment banking affiliate of Aon Corporation. Both Kemper and Aon are headquartered in Illinois.
AAI Syndicate #1 Ltd., a member of the INEX Insurance Exchange (formerly known as the Illinois Insurance Exchange), was placed under an Agreed Order of Liquidation on February 9, 1999. The Cook County Circuit Court granted Illinois Insurance Director Nat Shapo's petition based on the Insurance Department's finding that the company's policyholders' surplus was impaired by over $2 million. The Court's order included a finding of insolvency.
AAI's most recent financials reflect approximately $2.5 million in direct premium as of December 31, 1998. The company wrote excess and surplus lines policies in seventeen states, primarily in garage keepers' liability, commercial trucks, and errors & omissions programs. Policyholders have been notified that all policies were canceled as of 12:01 a.m. March 12, 1999, unless they expired or were terminated at an earlier date.
The liquidation proceedings are being handled by the Director's Office of the Special Deputy Receiver, 222 Merchandise Mart Plaza, Suite 1450, Chicago, Illinois 60654; (312) 836-9500.
Etta Mae Credi, Assistant Deputy Director of the Corporate Regulation Section, celebrated her 45th anniversary with the Department of Insurance on February 23. Etta joined the Department in 1954 as a Clerk Steno in the Property & Liability Division. Over the years, she has worked for twenty insurance directors and eight governors.
Etta Mae is truly one of our most valuable resources. Her vast knowledge and understanding of the Department and insurance law, her loyalty and dedication, and her outgoing, friendly personality have made her a favorite of her coworkers and industry and regulatory colleagues alike.
In recognition of the growth in size and responsibility of the Department's Senior Health Insurance Program (SHIP), Director Shapo named program director, Kathy Claunch, an Assistant Deputy Director on February 11. Illinois' SHIP has become one of the most successful senior counseling programs in the country.
Peter Gallanis has resigned as Special Deputy Receiver effective April 1. Peter has managed the activities of the Director's Office of the Special Deputy (OSD) since the fall of 1995. Prior to that he served as General Counsel for OSD for four years. Peter will relocate to Reston, Virginia, where he has accepted the position of President of the National Organization of Life and Health Guaranty Associations.
It's been quite sometime since we've spotlighted our web site (http://www.ins.state.il.us). Readers who have not visited there in awhile will likely find a great deal of useful information.
In addition to old standbys such as the Department Overview (organizational and statistical information), General News (back issues of press releases and Illinois Insurance), interactive premium comparisons for auto, homeowners and Medicare supplement insurance, and the on-line complaint form, our home page now features several new consumer fact sheets and links to other sources of information on senior health insurance issues.
The Industry Information section has been expanded to facilitate producer information. Those seeking a producer's license, can access the Insurance Licensing Examination Candidate Handbook and forms for a non-resident individual license and a non-resident business entity registration. Producers can also search for continuing education vendors and view pre-licensing and CE requirements.
Other forms available are those relating to public adjusters, individual premium finance companies, third party administrators, third party prescription administrators, employee leasing companies (lessor) and viatical settlement providers.
When our home page debuted in May 1996, we averaged less than forty or fifty "hits" a week. Thus far in 1999, monthly on-line visitors have totaled 1,338 in January, 1,543 in February, and well over 2,200 in March.
We invite our readers to take advantage of the resources currently available on the Department's web site and to periodically revisit it in the months ahead, as we work to enhance our format and add new information.
Financial
Lutheran Mutual Fire Insurance Company -- 12/1/98
UML Mutual Insurance Company -- 12/1/98
American Services Insurance Company -- 12/11/98
Farmers Pioneer Mutual Insurance Company -- 12/11/98
Gallant Insurance Company -- 12/11/98
Pontiac Mutual Insurance Company --12/11/98
Travelers Casualty and Surety Company -- 12/11/98
Travelers Property Casualty Company of Illinois -- 12/11/98
Universal Casualty Company -- 12/11/98
Valor Insurance Company -- 12/11/98
Hamlet Mutual Insurance Company -- 12/21/98
Illinois Insurance Company -- 12/21/98
Golden Rule Insurance Company -- 1/7/99
Berlin Mutual County Fire Insurance Company -- 1/14/99
Underwriters at Lloyd's London -- 2/17/99
National Catholic Society of Foresters -- 3/16/99
Market Conduct
Physicians Life Insurance Company -- 1/27/99
Physicians Mutual Insurance Company -- 1/27/99
Cincinnati Insurance Company -- 2/10/99
Fireman's Fund Insurance Company -- 2/19/99
Conseco Direct Life Insurance Company -- 3/17/99
Fines
The following entities were issued Stipulation and Consent Orders and fined for Insurance Code violations and/or improper claims practices cited in their Illinois market conduct examinations:
Central Mutual Insurance Company, OH, 3/26/99, $75,000
Cincinnati Insurance Company, OH, 2/10/99, $10,000
Conseco Direct Life Insurance Company, PA, 3/18/99, $15,850
Time Insurance Company (Fortis), WI, 3/18/99, $50,000
Suspension
Capitol Life Insurance Company, CO, Order of Suspension renewed effective 3/21/99 to 3/21/01; company has not been allowed to write any Illinois business since March 1993.
In Illinois, charitable gift annuities are authorized by an exemption to the Unauthorized Companies Article of the Insurance Code (215 ILCS 5/121-2.10). "Charitable organization" is defined by reference to federal law.
In general, the Department of Insurance interprets the statute with the goal of ensuring that the obligations to the donor/annuitant would be protected if the charitable organization were to become insolvent and be liquidated.
Two alternatives methods for issuing charitable gift annuities are authorized by the statute:
"(i) an insurer authorized to transact business in this State is directly obligated to the annuitant."
This method may be used where an insurer licensed in Illinois issues the annuity contract or guarantees the charity's payments to the donor. Under this option there may actually be two contracts: the contract issued by the insurer; and the agreement between the charity and the donor/annuitant. The contract may allow the insurer to make payments either to the annuitant or the charity, so long as the insurer's primary obligation is to the annuitant. For example: an insurer makes annuity payments to a charity on behalf of a donor, then the charity issues its own check to the annuitant or credits the annuitant's account.
The Department encourage charities to utilize alternative (i) in most cases because:
The annuitant is protected by the Department's regulation of the insurance company and can take comfort in the insurance company's expertise and financial strength.
The charity and its board of directors may avoid liability regarding the proper management of the funds needed to reserve for and pay the annuity obligations.
If the insurer issues the annuity, the charity knows up-front the extent to which it will benefit from the charitable donation and is free to immediately use its share for charitable purposes. For example, the charity pays for the single premium annuity and then is free to use the remaining funds.
Charities are often not aware of option (i) because it was not in the original legislation and because it is not the method advocated by the American Council on Gift Annuities, an association that widely promotes the charitable gift annuity form of fund raising to charities.
"(ii) the organization has been in active operation for not less than 20 years before the date the annuity is issued and has an unrestricted fund balance of not less than $2,000,000 on the date the annuity is issued."
This option requires both the 20 years and the $2,000,000 balance. Certain organizations can count an affiliated organization's history in qualifying for the 20 years. Legislative intent also allows organizations that have changed their legal form at some time in the history of the organization to qualify. It is the Department's position that the following two situations meet this requirement:
The Department, by internal memorandum, has defined "unrestricted fund balance" as "the balance of the organization's assets less its liabilities in funds that are not dedicated to uses inconsistent with the payment of annuity obligations." Nonprofit organizations typically have restricted funds whose use is limited to specified purposes such as capital/plant replacement and expansion or endowments with limited authorized uses. The balances of these funds would not be considered in determining whether an organization meets the $2,000,000 unrestricted fund balance requirement.
The organization issuing the charitable gift annuities must itself maintain $2,000,000 in unrestricted fund balances. It is not acceptable for those funds to be maintained by another entity, even though the organizations may be closely related. The funds must be available to meet the obligations to annuity holders in the event the issuing organization is liquidated.
Illinois has no filing requirements for issuers of these contracts. However, charities should be aware that an organization issuing charitable gift annuities that does not meet the requirements of the exemption is violating the Insurance Code and the Department will take regulatory action against them as an unauthorized insurer. Issuing charitable gift annuities in violation of this law is a business offense punishable by fines of up to $10,000 for each offense. The Department is authorized to take regulatory action against the unauthorized insurer (charity) ranging from seeking an injunction against the unauthorized practice to liquidating an entity found to be in hazardous financial condition. The Attorney General is authorized to enforce the Department's regulatory actions.
(Copies of regulatory orders are available upon written request to the Producer Regulatory Unit, at a cost of $1/page. The number of pages are indicated in parentheses following the effective date.)
Revocation of Licensing Authority
Thomas F. Brady
7222 South Calumet
Chicago, IL
Effective 1/4/99 (3)
Michael S. Burack
4200 North Marine Street
Chicago, IL
Effective 2/3/99 (7)
Thomas F. McEnerney
510 South Cleveland
Arlington Heights, IL
Effective 1/13/99 (5)
James W. McEnerney, Inc.
1235 East Davis Street
Arlington Heights, IL
Effective 1/13/99 (5)
Edwin M. Ortiz
840 Judson
Evanston, IL
Effective 2/4/99 (4)
Keith E. Scott
1426 Timber Lane
South Elgin, IL
Effective 1/25/99 (6)
McKenley Wilson
16907 South Luella Avenue
South Holland, IL
Effective 2/3/99 (6)
Voluntary Revocation
Jeffrey R. Brackett
400 Martin Street
Newton, IL
Effective 2/4/99 (1)
Charterhouse Agencies, Inc.
250 South Wacker Drive #635
Chicago, IL
Effective 2/11/99 (1)
Gary E. Kingery
472 Knoll Wood Drive
Barrington, IL
Effective 2/11/99 (1)
Order of Suspension
Lorenzo Fiol, Jr.
8600 School Street
Morton Grove, IL
Effective 1/4/99 (2)
Stipulation and Consent Order - Civil Forfeiture Paid
Stanley Bilinski
33 Faville Avenue
Dodgeville, NY 13329
Effective 2/10/99 (3)
Robert R. Brown
9821 South Tripp
Oak Lawn, IL
Effective 2/9/99 (3)
James L. Campbell
RR 7, Box 238A
Mt. Vernon, IL
Effective 12/23/98 (3)
Joseph R. Holman
4425 West Carroll
Chicago, IL
Effective 12/14/99 (4)
Samuel Kerney
1239 South Keeler
Chicago, IL
Effective 12/14/98 (4)
William E. McLaughlin
8538 West 107th Street
Palos Hills, IL
Effective 2/10/99 (3)
Jerome S. Richman
6281 Park Ridge Road
Loves Park, IL
Effective 2/3/99 (3)
Rosamund D. Streety
5328 South Greenwood
Chicago, IL
Effective 1/25/99 (5)
Stipulation & Consent Order - No Civil Forfeiture
Reginald Bass
1100 Bishop Street
West Chicago, IL
Effective 2/16/99 (3)
Lorenzo Fiol, Jr.
8600 School Street
Morton Grove, IL
Effective 2/23/99 (3)
Herman Williams
8918 West Paulina Street
Chicago, IL
Effective 2/4/99 (4)
Denial of Request for License
Mark James May
1106 Chalet Drive #304
Darien, IL
Effective 1/19/99 (4)
Director's Order
Michael B. Heath
1780 West Parkside
Hoffman Estates, IL
Effective 1/8/99 (9)
The full text of Department rules is printed in the Illinois Register published weekly by the Illinois Secretary of State's Index Department, 111 E. Monroe St., Springfield, IL 62756. Subscriptions are available from that source for an annual fee of $290. Issue numbers and a Department contact person are listed below after each rule summary.
Copies of rules are also available upon written request to the Department of Insurance at a $1 per page charge. Adopted rules are codified in Title 50 of the Illinois Administrative Code.
Rule 201 (Subordinated Indebtedness) was amended March 10, 1999, to provide consistency with NAIC codification of statutory accounting principles and other state practices. The amendment deletes language in Section 201.20 that allowed an artificial floor for repayment of subordinated indebtedness. With the advent of risk-based capital, that language is no longer needed. New language in the section provides an additional safeguard for prepayment without the Director's approval. Section 201.50 was amended to clarify the accounting for accrued interest; Section 201.60(b) has been deleted. (Vol. 23, #13; Jim Hanson)
Rule 301 (Accumulation of Guaranty Fund or Guaranty Capital - Reporting and Accounting of Such Indebtedness) was amended March 10, 1999, to delete language allowing artificial payment floors, add new language providing an additional safeguard for prepayment without the Director's approval, and clarify the accounting for accrued interest. (Vol. 23, #13; Jim Hanson)
Rule 2008 (Minimum Standards for Individual and Group Medicare Supplement Insurance) was amended March 10, 1999, to make our regulatory standards consistent with Federal law and the latest NAIC model regulation on Medicare Supplement insurance. (Vol. 23, #13; Linda Fritz)
Paragon Automation, Inc.
National Council on Compensation Insurance
4/1/99 Hearing No. 3712
Rate Classification
National Employer Benefit Association
National Employees Union Health & Welfare Fund
National Employees Union, Danville, IL
National Employees Union, Harrison, NJ
Interstate Administrative Services
Robert J. Jennings
4/13/99 Hearing No. 3713
Cease and Desist
Judith Hedberg
State Farm Fire & Casualty Co.
4/13/99 Hearing No. 3715
Cancellation
Heisler Green Chemical Co.
National Council on Compensation Insurance
4/13/99 Hearing No. 3714
Rate Classification
Industrial Shippers Association
National Council on Compensation Insurance
4/28/99 Hearing No. 3706
Rate Classification
Brian Gehrich
Allied Property & Casualty Company
4/29/99 Hearing No. 3716
Cancellation
H. Thomas Lane, Jr.
5/4/99 Hearing No. 3711
Revocation of licensing authority
Matters Settled without Hearing:
Gloria R. Waters
Hearing No. 3689
Stipulation and Consent Order 3/12/99
Kenneth C. Waters
Hearing No. 3690
Hearing dismissed 3/16/99
James Hillock
American Service Insurance Company
Hearing No. 3701
Hearing dismissed 1/14/99
John S. Wrona
Allstate Insurance Company
Hearing No. 3704
Hearing dismissed 2/23/99
Ella Hoopes
State Farm Mutual Automobile Insurance Co.
Hearing No. 3705
Hearing dismissed 2/19/99
Jimmie and Doris Harmon
Allstate Insurance Company
Hearing No. 3707
Hearing dismissed 3/2/99
Hilario Bautista
State Farm Mutual Automobile Insurance Co.
Hearing No. 3708
Hearing dismissed 3/23/99
Sandra Weir
Allstate Insurance Company
Hearing No. 3710
Hearing Dismissed 3/4/99
Completed Hearings:
McKenley Wilson
Hearing No. 3634R
Licensing authority revoked 2/3/99
Rice Precision Machining, Inc.
National Council on Compensation Insurance
Hearing No. 3674
Board's previous finding overturned 3/3/99
Michael E. Burak
Hearing No. 3679
Licensing authority revoked 2/3/99
Michael B. Heath
Hearing No. 3684
Letter of denial rescinded; license shall be issued
after payment of civil penalty 1/8/99
Ronald W. South
Hearing No. 3697
Licensing request denied 3/24/99
Patricia Barlow
State Farm Fire & Casualty Co.
Hearing No. 3700
Cancellation effective 2/11/99
Tri-Star Automation, Inc.
National Council on Compensation Insurance
Hearing No. 3702
Tri-Star's appeal of previous decision denied 3/23/99
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