(Release No. 35-27722; 70-9813)
AGL Resources Inc., et al.
Supplemental Order Authorizing Proposal Regarding Provision of Insurance Services; Reservation of Jurisdiction
September 16, 2003
AGL Resources Inc. ("AGLR"), Atlanta, Georgia, a registered holding company under the Public Utility Holding Act of 1935, as amended, ("Act"), and its wholly-owned subsidiary, Global Energy Resource Insurance Corp. ("GERIC") Tortola, British Virgin Islands, (together, "Applicants") have filed with the Securities and Exchange Commission ("Commission") a post-effective amendment ("Application") under sections 9(a) and 10 of the Act to their application previously filed with the Commission under sections 6(a), 7, 9(a) and 10 and rule 43 under the Act. The Commission issued a notice of the filing of the Application on August 20, 2003 (HCAR No. 27715).
The Application requests authorization for GERIC (1) to provide finite insurance program services to AGLR and its subsidiaries ("AGLR System") as described in more detail below, and (2) to retain additional risk associated with the AGLR System's self-insured retention.
By an order dated April 13, 2001 (HCAR No. 27378) ("Captive Order"), the Commission authorized AGLR to organize a subsidiary to underwrite a certain portion of the insurance purchased by the AGLR System companies, which risks it would then transfer to third-party reinsurance companies. In particular, the subsidiary would underwrite coverage for the AGLR System companies over their self-insured retention and above a layer of traditional insurance. The subsidiary was also authorized to retain a small amount of risk, not to exceed $1 million, for each type of insurance coverage ("GERIC Retained Risk Limit"). In accordance with the authorization provided by the Captive Order, AGLR formed GERIC, which began to provide insurance services to the AGLR System on May 1, 2001.
Applicants state that the AGLR System maintains insurance for automobile and general liability exposures, directors and officers liability, "all risk" property coverage, workers' compensation liability and other risks. In addition, the AGLR System companies may provide wrap-up construction insurance coverage to nonaffiliated construction contractors working for the AGLR System. The AGLR System currently maintains a self-insured retention with respect to its insured risks of up to $1 million (except with respect to automobile liability and terrorism insurance, where the self-insured retentions are $2 million and $5 million, respectively) and purchases insurance to cover risks over and above that amount.
The Captive Order noted that GERIC was authorized to operate as an insurance company in the British Virgin Islands. Initially, GERIC would focus on providing insurance coverage for automobile, general liability, risk property, boiler and machinery, directors and officers, crime, fiduciary and workers compensation. The Captive Order noted that, in the future, GERIC might seek to underwrite additional types of insurance and retain a small amount of risk that for each additional type of insurance would not exceed $1 million. GERIC may underwrite additional types of insurance only when: (1) a reinsurer is ceded 100% of the underwritten risk; (2) the insurance is related to an authorized or permitted AGLR System business activity; (3) direct placement of reinsurance by GERIC could be reasonably expected to save the AGLR System a portion of the risk premium it would otherwise have paid; and (4) normal deductible amounts are retained by the AGLR System companies and where GERIC can obtain, as appropriate, excess or stop-loss coverage.
The Applicants state that GERIC targets its underwriting activity on the portions of the AGLR System's liability program where the greatest cost savings are possible. Presently, GERIC provides excess coverage for the types of insurance listed above that is placed above the AGLR System's self-insured retention and above a layer of traditional coverage that is maintained by AGLR for the benefit of the AGLR System. GERIC reinsures all of the risks that it underwrites with reinsurance companies, except with respect to coverage for property crime where it also covers a $500,000 AGLR System deductible. GERIC intends to begin providing construction wrap-up insurance in the near future.
Applicants now propose that GERIC offer the AGLR System a finite insurance program that would provide coverage for the layer of risk, currently covered by traditional retail insurance carriers, that resides between the self-insured retention and the excess risk reinsured by GERIC with reinsurance companies. This intermediate layer of insurance coverage extends generally from the self-insured retention level to the $10,000,000 level. Applicants state that because this intermediate level of coverage is more likely to be accessed by a claim than the higher layer of excess coverage, it is responsible for a significant percentage of the AGLR System's premium costs.
Under the proposed finite insurance program the AGLR System companies would use premium dollars presently used to acquire traditional insurance coverage for the intermediate risk layer to fund a reserve that would be used instead of traditional insurance coverage to cover losses related to the intermediate risk level (i.e., the risk above the self-insured retention and below the reinsured risk). For example, the AGLR System's premiums for intermediate risk layer coverage are expected to be approximately $2.5 million per year, including the construction wrap-up program that GERIC intends to initiate in October, 2003. After collecting the AGLR System's finite premium payments, GERIC would invest the payments in reserves consisting of U.S. Treasury securities and other securities permitted by section 9(c) of the Act and rule 40. The balance of the premium payments (less GERIC's at-cost administrative expenses) not invested in reserves would be used to purchase third-party coverage for any loss that could not be covered by the reserve maintained by GERIC. As the reserves accumulate over several years, the third party coverage would be expected to become less expensive. In addition, when the reserves reach an amount adequate to cover anticipated losses, the reserve funding commitment from the AGLR System companies can be reduced with commensurate premium savings.
Applicants assert that the finite program would not increase the risk of an uncovered loss since amounts held by GERIC in reserve would be invested in secure assets and available to fund claims. Uncovered losses also would be avoided because third party provided coverage would be in place to the extent GERIC's reserves were not fully funded at the time of a loss. Reinsurance would continue to be maintained to cover liabilities that would exceed the intermediate layer of liability coverage that would be provided by the combination of GERIC's reserves and the third party coverage. The finite program would provide the opportunity to further reduce the AGLR System's insurance costs because once GERIC's reserves have been fully funded, subsequent contributions by the AGLR System companies can be substantially reduced to a level adequate to maintain the reserves at a fully funded level and to provide reinstatement coverage that would step in to provide protection if the reserves were exhausted.
Applicants state that the third-party coverage would be provided either by a reinsurance company or through the acquisition of a capital markets product that is entered into on an exchange or with an investment-grade counterparty. Applicants request that the Commission reserve jurisdiction with respect to the use of capital markets products to provide third-party coverage until the record has been supplemented with additional detail about the nature of the product. GERIC will establish reserves consistent with the insurance regulations of the British Virgin Islands and sound actuarial practices.1 As provided in the Captive Order, GERIC will not be operated to generate profits beyond what is necessary to maintain adequate reserves. To the extent that premiums and interest earned on the reserves exceed current claims and expenses, GERIC would accumulate reserves that will allow it to cover claims in years when claims and expenses exceed premiums. To the extent that losses are lower than projected, GERIC would correspondingly lower premiums and thus return excess capital to AGLR System companies.
Applicants assert that GERIC's current insurance program has been effective in managing the AGLR System's insurance costs. As shown in the certificate of notification under rule 24, filed on April 1, 2003, GERIC's operations for the period May 1, 2001 to May 31, 2002 resulted in first year premium savings for the AGLR System of $386,751. For the period June 1, 2002 through May 31, 2003, GERIC contributed benefits to the AGLR System by making possible the avoidance of a portion of the increase in insurance premiums that followed the terrorist attack of September 11, 2001, and other events. Applicants assert that this experience demonstrates that by providing the AGLR System with the flexibility to access the insurance markets independent of traditional insurers, GERIC serves a valuable function that, although not readily quantifiable, can be a significant factor in managing insurance costs.
Similarly, Applicants project that the proposed finite program would produce savings for the AGLR System companies. GERIC has compared the AGLR System premium costs for the intermediate risk layer (losses of $1 million to $10 million) over four years with the costs associated with funding the captive insurance program. Projected losses over this same period also were analyzed. GERIC's analysis concludes that the finite insurance program could provide savings of several million dollars.
Applicants state that a British Virgin Islands management company has been retained to provide administrative services to GERIC. AGL Services Company ("AGSC") employees are directors and principal officers of GERIC and they oversee the performance of the administrative activities by the management company. The administrative functions directed by AGSC through the management company include: (1) accounting and reporting activities; (2) legal, actuarial, banking and audit services; (3) negotiating reinsurance contracts, policy terms and conditions; (4) invoicing and making payments, and; (5) managing regulatory affairs. The existing AGSC claim staff performs the claims adjusting function. It is not anticipated that managing the finite program would require additional staff or materially increase the administrative costs associated with GERIC's operations. All goods and services provided by AGSC to GERIC would be provided in accordance with section 13 of the Act and any applicable rules under that section, and costs incurred by GERIC would be recovered in premiums charged to the AGLR System companies.
Applicants propose that in addition to the authorization requested for the finite program, that the Commission increase the GERIC Retained Risk Limit from $1 million to $5 million. In some lines of insurance the AGLR System has increased, or expects that it may increase, its self-insured retention. For example, in the automobile liability line of coverage the AGLR System's self-insured retention is now $2 million. Increasing the self-insured retention helps the AGLR System to manage its insurance costs and to adjust limits in response to inflation. An increase in the GERIC Retained Risk Limit would allow GERIC to retain the risk associated with the self-insured retention of the AGLR System beyond the current $1 million limit. GERIC would maintain appropriate reserves to cover any risk of loss that it retains under an increased GERIC Retained Risk Limit.
Applicants note that GERIC will continue to be bound by the condition in the Captive Order that it may underwrite additional types of insurance only when: (1) a reinsurer is ceded 100% of the underwritten risk; (2) the insurance is related to an authorized or permitted AGLR System business activity; (3) direct placement of reinsurance by GERIC would be reasonably expected to save the AGLR System a portion of the risk premium it would otherwise have paid; and (4) normal deductible amounts are retained by the AGLR System companies and where GERIC can obtain, as appropriate, excess or stop-loss coverage.
Fees and expenses in the estimated amount not to exceed $18,000 are expected to be incurred in connection with the proposed transactions. Applicants state that no state or federal commission, other than this Commission, has jurisdiction over the proposed transactions.
Due notice of the filing of the Application has been given in the manner prescribed in rule 23 under the Act, and no hearing has been requested of or ordered by the Commission. On the basis of the facts in the record, it is found that the applicable standards of the Act and rules under the Act are satisfied, and no adverse findings are necessary.
IT IS ORDERED, under the applicable provisions of the Act and the rules under the Act, that, except as to matters as to which jurisdiction has been reserved, the Application, as amended, be, and hereby is, granted and permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act.
IT IS FURTHER ORDERED that jurisdiction be, and hereby is, reserved, pending completion of the record with additional detail about the nature of the product, over Applicants' proposal to provide third-party coverage through the acquisition of a capital markets product that is entered into on an exchange or with an investment-grade counterparty.
For the Commission, by the Division of Investment Management, pursuant to delegated authority.
Margaret H. McFarland