02-001657 John Deere Insurance Company vs. Department Of Insurance Status: Closed Recommended Order on Friday, November 15, 2002.

Summary: Section 627.215(14), Florida Statutes, prohibits Department of Insurance from considering Petitioner`s commercial property and casualty experience in determining Petitioner`s excessive profits.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

JOHN DEERE INSURANCE COMPANY, )

)

Petitioner, )

)

vs. ) Case No. 02 - 1657

)

DEPARTMENT OF INSURANCE, )

)

Respondent. )

)

RECOMMENDED ORDER

Administ rative Law Judge Don W. Davis of the Division of

Administrative Hearings conducted a final hearing in this case

on July 31, 2002, in Tallahassee, Florida.

APPEARANCES

For Petitioner: Frank J. Santry, Esquire

Granger, Santry and Heath, P.A.

283 3 Remington Green Circle

Post Office Box 14129

Tallahassee, Florida 32317

For Respondent: Elenita Gomez, Esquire

Richard M. Ellis, Esquire

Department of Insurance

200 East Gaines Street

612 Larson Building

Talla hassee, Florida 32399 - 0333

STATEMENT OF THE ISS UE

Whether the Department of Insurance (Respondent) properly

determined that John Deere Insurance Company, now known as

Sentry Select Insurance Company (Petitioner), realized excessive

profits pursuant to S ection 627.215, Florida Statutes, for the

calendar/accident years 1995, 1996 and 1997 in the amount of

$571,197.00.

PRELIMINARY STATEMEN T

On April 6, 2000 Respondent filed a Notice of Excessive

Profits finding that Petitioner had realized excessive profit s

in the amount of $571,197.00 for calendar/accident years

1995 - 1997. Petitioner timely filed an Election of Rights with

Respondent on February 2, 1999, requesting an informal hearing.

Respondent received a Petition for Formal Administrative Hearing

f rom Petitioner on April 19, 2000. Respondent filed the

Petition with the Division of Administrative Hearings (DOAH) on

April 26, 2002.

At the final hearing, Respondent presented testimony of one

witness and 13 exhibits. Petitioner presented the test imony of

two witnesses and 10 exhibits. A Transcript was filed with DOAH

on August 19, 2002, and the parties were granted leave to file

proposed recommended orders more than ten days following the

receipt of transcript by DOAH. Proposed Recommended Order s were

filed on October 28, 2002, and have been reviewed and considered

in the preparation of this Recommended Order.

FINDINGS OF FACT

1. Petitioner, John Deere Insurance Company, is currently

known as Sentry Select Insurance Company. It holds a

Certif icate of Authority to do business in the State of Florida

as a foreign property and casualty insurer and was so licensed

at all material times.

2. Section 627.215, Florida Statutes, requires insurance

companies writing workers’ compensation and employer’s liability

insurance to file periodic reports with the Respondent. The

reports are made using Respondent's Form DI4 - 15, which is

adopted by Rule 4 - 189.007, Florida Administrative Code.

3. Section 627.215, Florida Statutes, was enacted by the

1979 Legis lature and became effective July 1, 1979.

Chapter 79 - 40, Laws of Florida. The statute was passed as part

of a wage loss reform whose purpose was to change the benefits

structure for workers’ compensation insurance and to "pass - on"

benefits of the re ductions to the employers who purchase

workers’ compensation insurance.

4. From its inception, Section 627.215, Florida Statutes,

has required insurers to file workers’ compensation and

employer’s liability insurance data with Respondent prior to

July 1 o f each year. The data which is required includes

"calendar year" earned premium, "accident year" incurred losses

and loss adjustment expenses, administrative and selling

expenses incurred in or allocated to Florida for the calendar

year, and policyholder dividends applicable to the calendar

year. Section 627.215(1), Florida Statutes.

5. Effective October 1, 1988, the Legislature amended

Section 627.215, Florida Statutes, by adding commercial property

and casualty insurance to the statute. Chapter 88 - 3 90, Laws of

Florida. The operative terms of Section 627.215, Florida

Statutes, which had previously applied only to workers’

compensation and employer’s liability insurance, were then

applied to commercial property and casualty insurance as well.

Under S ection 627.215, Florida Statutes, as amended in 1988,

commercial property and casualty experience was to be reported

to Respondent on a rolling three - year basis in the same manner

as workers’ compensation and employer’s liability insurance.

Losses and los s adjustment expenses were also valued in the same

manner for all four lines of business; that is, not at the end

of the three - year compilation period, but one year after the

conclusion of the three - year compilation period. Section

627.215(2) and (3), Flo rida Statutes (Supp. 1988). All four

lines of insurance were then to be combined for determining

whether there were excessive profits under the statute. Section

627.215(7), Florida Statutes (Supp. 1988).

6. The 1995 Legislature then added Subsection (14 ) to

Section 627.215, Florida Statutes. Section 627.215(14), Florida

Statutes, became effective June 14, 1995. Chapter 95 - 276, Laws

of Florida. Subsection (14) states that Section 627.215,

Florida Statutes, no longer applies to commercial property and

c asualty insurance as of January 1, 1997.

7. The Legislature made a further clarification in 1997,

making clear that commercial umbrella liability was included as

a part of commercial property and casualty. Subsequent to that

legislative change, Respond ent issued Bulletin 97 - 012 dated

October 9, 1997, which advised insurance companies that the

Legislature had passed Senate Bill 840. It stated that, by law,

Respondent would not be able to use a profit and contingencies

factor less than zero. It also cla rified that commercial

property and casualty insurance specifically included commercial

umbrella liability insurance.

8. The terms "calendar year" and "accident year" are

actuarial terms of art. A premium may be "written" (that is,

collected) in one ca lendar year, but not fully "earned" until

the succeeding calendar year, when the one - year period of the

insurance policy is complete. A calendar year - earned premium,

therefore, is the premium associated with a policy representing

the portion of the policy expiring during a given year.

9. Because losses and loss adjustment expenses are not

fully paid in the same calendar year in which the pertaining

accidents are reported, losses and loss adjustment expenses are

monitored on both a "paid" and estimated b asis over time and

attributed to the year in which the pertaining accidents are

reported -- that is, the "accident year," which is January 1

through December 31. Losses and loss adjustment expenses are

then valued as of December 31 of the first year followi ng the

latest accident year. Section 627.215(2), Florida Statutes.

10. A loss development factor is a factor that the company

uses to take the losses as they exist today and project them

into the future at what it ultimately expects to pay on a claim.

G enerally, a loss development factor is calculated based on

historical data and historical patterns of development.

11. A company can project its own loss development factor,

including its own workers’ compensation data in Florida or it

can use the factor s published by the National Council on

Compensation Insurance ("NCCI"), if it does not have sufficient

experience to project losses. However, the company must be able

to justify whatever loss development factors it chooses to use.

12. NCCI’s circul ars are provided to their affiliated

companies and those circulars include its loss development

factors, but NCCI advises the companies that whatever factors

they use, they must be able to justify their use to Respondent.

The choice of loss development fa ctors directly affects the

calculation of losses which affects what a company owes for

excess profits. Petitioner was an affiliated company of NCCI.

13. The data which is filed on a yearly basis is for the

three years prior to the most recent accident yea r.

Section 627.215(2), Florida Statutes. This results in the

reporting of a "rolling" three - year experience period; for

example, 1993 - 1995, followed by 1994 - 1996, followed by

1995 - 1997.

14. Applied to 1995 - 1997, which is the experience period

at issue in this case, Section 627.215, Florida Statutes,

therefore, operates to require calendar/accident years 1995 - 1997

be calculated as to losses and loss adjustment expenses as of

December 31, 1998, and the filing of Form DI4 - 15 by July 1,

1999.

15. The six - month period between the valuation and the

report being due to Respondent is to allow companies to gather

data, do an evaluation, complete the form, and file it with

Respondent. During the six - month period, the company also

develops its losses an d loss adjustment expenses to an ultimate

basis.

16. Generally, excessive workers’ compensation profits

result where the insurance company’s "underwriting gain" for

workers’ compensation exceeds its "anticipated underwriting

profit" plus five percent. Se ction 627.215(7)(a), Florida

Statutes.

17. Since January 1, 1997, Respondent has not taken

commercial property and casualty experience into account when

calculating a company’s workers’ compensation and employer’s

liability excessive profits, nor has it combined commercial

property and casualty with workers’ compensation and employer’s

liability in making a determination of excessive profits.

18. During the time period when workers’ compensation and

employer’s liability experience were combined with c ommercial

property and casualty to determine if excessive profits were

owed by an insurer, Respondent maintained two separate sections

for review of the data. Workers’ compensation had its own

reporting forms, rule, analysis, and staff; and commercial lin es

had its own reporting forms, rule, analysis, and staff. Each

section would conduct analysis of the data and make a

determination as to whether excessive profits had been realized

in the applicable line of insurance. Respondent then combined

its work p roduct to make an overall determination of whether

excessive profits were owed.

19. At the time that Respondent reviewed commercial

property and casualty excess profits reporting, such reports

were required to be on Form DI4 - 358, adopted by rule of

Resp ondent. That form is not used anymore because the law

ceased to apply to commercial property and casualty experience

as of January 1, 1997.

20. For the workers’ compensation calendar/accident years

1995 - 1997 at issue in this case, Petitioner timely subm itted its

Form DI4 - 15 to Respondent along with the required certification,

explanations, and supporting data dated June 16, 1999. The form

appropriately contained only data for workers’ compensation and

employer’s liability experience. No commercial prop erty and

casualty data was submitted to Respondent at that time.

21. By letter dated November 19, 1999, Respondent was

notified by Petitioner of the acquisition of John Deere

Insurance Company and the name change to Sentry Select Insurance

Company. John Deere Insurance Company was headquartered in

Moline, Illinois, prior to its acquisition.

22. The John Deere operations in Moline, Illinois, were

discontinued. Accounting records were transferred to Stevens

Point, Wisconsin. Actuarial records were also t ransferred to

Stevens Point, Wisconsin, in 2000.

23. Using the data submitted, Respondent generated a

report dated January 3, 2000, indicating a total of $571,197.00

in workers’ compensation and employer’s liability excessive

profits for 1995 - 1997. Resp ondent then issued a Notice to

Petitioner dated April 6, 2000, alleging the sum of $571,197.00

was owed to Petitioner’s policyholders in excessive profits.

24. On May 4, 2000, Respondent received a fax from

Petitioner's employee Diane Huber advising that the Petitioner

had left off some numbers for its residual market. These

numbers should have been included in the DI4 - 15 report which was

due by July 1, 1999; however, Respondent was willing to consider

these numbers because it appeared that the omission of the data

was a clerical oversight, and such data is routinely considered

by Respondent. By including the residual market data,

Petitioner’s excess profits would be reduced to $488,150.

25. By cover letter dated June 14, 2002, Petitioner

submitted wha t was represented as the company’s commercial and

property casualty experience for 1995 and 1996 to Respondent, on

Form DI4 - 358, along with revised workers’ compensation data.

This was the first commercial documentation submitted to

Respondent.

26. Nei ther the workers’ compensation nor the commercial

data were accompanied by a certification, explanations, or

supporting data. Form DI4 - 15 is adopted by reference, along

with its instructions, by Rule 4 - 189.007, Florida Administrative

Code.

27. The revis ed workers’ compensation data proposed two

changes to the excess profits calculation: The first was to

change the loss development factors and the ultimate losses for

each of the accident years, and the second was the proposal to

include the residual mark et data. The net effect of those two

changes is that Petitioner’s excess profits increase to

$672,488.00.

28. Ms. Patricia Ferguson, a statistical manager with

Sentry Insurance Group, made the modifications to the workers’

compensation data and compiled the commercial property and

casualty data, which was not an original submission of John

Deere. Ferguson agrees that using the revised loss development

factors and the direct method of calculation raises Petitioner’s

workers’ compensation excess profits t o $672,488.00. The method

of loss development used by Ferguson was the "incurred including

IBNR." IBNR stands for "incurred but not reported."

29. Upon review of the commercial data submitted by

Petitioner, it was determined that Petitioner only submit ted

data for calendar/accident years 1995 and 1996 and nothing for

1997, which should have been included in the calculation,

assuming that commercial property and casualty data were still

being collected. Ferguson concedes that she did not include the

199 7 data because per the statute, commercial data could not be

included to calculate excess profits for that year.

30. If Respondent were to apply the excess profits statute

as it once functioned to the commercial data for years 1995 -

1997, the situation i s worse than for the prior years 1994 - 1996,

because the valuation date for 1995 - 1997 is two years after the

law ceased to apply to commercial property and casualty

experience and the filing date is two and a half years beyond

when the law ceased to apply.

31. The June 14, 2002, commercial data does not include

any numbers for countrywide data, although Petitioner did do

business in states other than Florida. The form on its face

requires a derivation of IBNR loss reserves which was not

provided (Line 7) . Also on its face, the form requires that a

derivation be attached for the profit and contingencies factor

(Line 17). None was provided. Unlike the workers’ compensation

experience submission, the commercial lines filing does not

contain a certificati on or any explanations or supporting

documents.

32. On July 12, 2002, Petitioner submitted a revised

Form DI4 - 358, also prepared by Ferguson. Assuming that the

commercial portion of the law was still in effect, the revised

Form DI4 - 358 would have bee n late because it would have been due

July 1, 1999. Even with the revisions to countrywide data and

expense numbers in the Florida line, the company is still only

reporting data for 1995 and 1996. There was still no derivation

included for the profit and contingencies factor.

33. An Explanation of Methodology was included, but it was

a carbon copy of the one prepared by John Deere for the prior

filing and did not have sufficient details to evaluate the

reasonableness of the IBNR calculation. Ferguson co ncedes that

she does not know who wrote the explanation and that neither the

claims reporting patterns nor the historical data was provided

to Respondent. Further, the development triangles referenced in

the explanation and the historical patterns to deve lop case

reserves were not provided either. Loss development triangles

are helpful to actuaries in that they assist the actuary in

evaluating the appropriateness of the IBNR number.

34. Petitioner’s allocated loss adjustment expense

reserves were not d etermined by adding up a series of numbers by

accident year, but were instead "spread" across the accident

years using a ratio of countrywide split by accident year, which

is contrary to the appropriate method of calculating those

reserves.

35. Petition er’s countrywide commercial auto liability

unallocated loss adjustment expenses are greater than the

countrywide numbers shown in Petitioner’s Schedule P of their

annual statement. For calendar/accident year 1995, the number

on the revised DI4 - 358 form is $657,000.00 greater than what is

on the company’s Schedule P. For calendar/accident year 1996

the number on the revised DI4 - 358 form is $916,000.00 greater

than what is on the company’s Schedule P. Schedule P is the

countrywide all - inclusive total for t he company. This is an

audited number; therefore, it is not possible or appropriate for

the countrywide number on the revised DI4 - 358 form to be greater

than what appears on the company’s Schedule P.

36. Petitioner’s countrywide commercial auto liabili ty

allocated loss adjustment expense reserve for calendar/accident

year 1996, is $836,000.00 greater than what is found on

Schedule P of the company’s annual statement. The countrywide

number on the revised DI4 - 358 form should not be greater than

what ap pears on the company’s audited Schedule P.

37. Much of the documentation supplied by Petitioner

included computer - generated numbers which were then crossed out

and replaced by hand - written numbers, with no explanation being

provided for the changes.

38. The paid losses for Florida for calendar/accident

years 1995, 1996, and 1997 do not have the appropriate level of

detail or underlying documentation (as there is for 1998) to

show the source of those numbers.

39. Regarding how the numbers for Florid a paid loss, paid

allocated expense, and loss reserves to case outstanding and

IBNR outstanding were derived in the four - page document

entitled, Summary of Data Used in P&C Florida John Deere

Excessive Profits Filing as of 12/31/98 , statements are made

tha t indicate that there is an unknown problem with the source

of the documents from which to get the information to fill out

the DI4 - 358 form. In some instances, Ferguson did not have the

data and had to estimate to get the accident year numbers to put

on t he form. ("However, the paid loss and paid ALE were off in

total to page 15. The difference is with the transportation

part. One thing is that the fiche for JDTSI included the

outside adjusters for the ALE paid, and the page 15 data does

not. Not sure what causes the paid loss difference. We had

total numbers for optional and floaters, but did not have

accident year data, so had to estimate that split.")

40. On July 15, 2002, Petitioner submitted another revised

version of its workers’ compensation data which proposed

adjustments to reflect reinsurance calculations. Reinsurance

was not a factor in the submission received by Respondent on

June 14, 2002. These revisions have the effect of reducing the

company’s excess profits to $467,846.00. Such a result is not

possible because Petitioner is not ceding the amount of premium

for reinsurance to a non - affiliated company. Petitioner is

ceding it to affiliated companies, Rock River Insurance Company

and John Deere Casualty Company, under an intercompany pooling

arrangement. Under circumstances where Respondent has allowed

credit to be taken for reinsurance, such reinsurance has been

purchased from a company that is not affiliated or within the

company’s group.

41. Respondent has never knowingly allow ed a company to

cede premiums to an affiliate and thereby exclude that amount

from its excess profits. Reporting for excess profits net of

reinsurance has only been allowed for non - affiliated companies

and the credits are only proper in those instances be cause the

money leaves the company.

42. Neither the pooling arrangement nor reinsurance

contracts have been provided to Respondent, and Petitioner’s

pooling arrangement affects prior years’ losses because the

agreement was entered into in 1997, yet it a ffects losses for

prior years. Further, Petitioner in this revised version, while

adding reinsurance, is still using the loss development factors

based on direct losses, so there is a "mismatch" between the

loss development factor and how it is calculated and the losses

to which it is applied.

43. Reinsurance contracts must be reviewed to confirm the

existence of reinsurance, the time period for that reinsurance,

and the amounts available to the insurer.

44. Ferguson is not familiar with the reinsuran ce

arrangements and has never seen the contracts to verify their

existence or terms. She was just told to do it that way.

45. John Deere Insurance Company was acquired in October

1999, by Sentry Insurance Group and then renamed Sentry Select

Insurance C ompany. The former officers of John Deere Insurance

Company were replaced, as were certain operating personnel. The

individual who is responsible for the content of supporting

documentation for the DI4 - 358 form submitted on June 14, 2002,

is not known.

46. The sum of Petitioner’s evidence in support of its

1995 and 1996 commercial property and casualty experience is the

DI4 - 358 form submitted on June 14, 2002, by Ferguson who states

that she never worked for John Deere Insurance Company, is not

an actu ary, that none of the people in the Sentry Select

Insurance Company accounting department worked for John Deere

Insurance Company, and that she can’t say the records were

directly transferred from John Deere Insurance Company to Sentry

Select Insurance Com pany.

47. Holly Lauer is an assistant comptroller with Sentry

Select Insurance Company. She has worked with the company for

22 years and has never been employed by anyone else. Lauer was

never employed or worked for John Deere Insurance Company. She

is licensed as a CPA in Wisconsin, not in Florida, and she is

not an actuary. Further, Lauer was not involved and had nothing

to do with the transfer of the actuarial work product of John

Deere Insurance Company. Lauer did, however, agree that there

could be documentation (that is, accident year loss data and

documentation) kept by an insurance company’s actuarial

department that would not be included in that same insurance

company’s accounting department and that that could have been

the case with John Dee re Insurance Company.

48. Even assuming that the law currently applies to

commercial property and casualty excess profits, Petitioner's

supporting documentation is insufficient to allow an actuarial

determination of what the correct numbers would be for

underwriting profit or underwriting loss.

49. Pursuant to the information supplied by Petitioner

(taking into account the residual market and allowing for the

change in NCCI loss development factors to the correct years),

the company owes workers’ compen sation excessive profits in the

amount of $672,488.00.

CONCLUSIONS OF LAW

50. The Division of Administrative Hearings has

jurisdiction over the parties and the subject matter of this

cause, pursuant to Sections 120.569(1) and 120.57(1), Florida

Statutes .

51. The burden of proof in this case is on Respondent,

Florida Department of Insurance. The party seeking to prove the

affirmative of an issue has the burden of proof. Florida

Department of Transportation v. J.W.C. Company, Inc. , 896 So. 2d

778 (Fla. 1st DCA 1981); and Balino v. Department of Health and

Rehabilitating Services , 348 So. 2d 349 (Fla. 1st DCA 1977).

Pursuant to Section 627.215, Florida Statutes, Respondent has

jurisdiction over workers compensation excessive profits in the

State of Flori da.

52. Section 627.215, Florida Statutes, is the casualty

insurance excess profits law. Chapter 95 - 276, Laws of Florida,

added Subsection (14) to Section 627.215, Florida Statutes,

effective June 14, 1995. Subsection 14 provides:

The application of this law to commercial

property and commercial casualty insurance,

which includes commercial umbrella liability

insurance, ceases on January 1, 1997.

53. The excessive profits experience in this cause covers

calendar/accident years 1995, 1996 and 1997. Subs ection (14)

removed the authority under Section 627.215, Florida Statutes,

for Respondent to consider commercial property and casualty

experience for the purpose of determining excess profits for the

filing for calendar/accident years 1995, 1996 and 1997.

Respondent has correctly determined that Petitioner has realized

excessive profits in the amount of $672,488.00.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of

Law, it is

RECOMMENDED that Respondent enter a final order finding

that Petitioner has realized excessive profits for

calendar/accident years 1995, 1996 and 1997 in the amount of

$672,488.00 .

DONE AND ENTERED this 15th day of November, 2002, in

Tallahassee, Leon County, Florida.

___________________________________

DO N W. DAVIS

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399 - 3060

(850) 488 - 9675 SUNCOM 278 - 9675

Fax Filing (850) 921 - 6847

www.doah.state.fl.us

Filed with the Clerk of the

Division of Administrative Hearings

this 15th day of November, 2002.

COPIES FURNISHED :

Elenita Gomez, Esquire

Richard M. Ellis, Esquire

Department of Insurance

200 East Gaines Street

612 Larson Building

Tallahassee, Florida 32399 - 0333

Frank J. Santry , Esquire

Granger, Santry & Heath, P.A.

2833 Remington Green Circle

Post Office Box 14129

Tallahassee, Florida 32317

Honorable Tom Gallagher

State Treasurer/Insurance Commissioner

Department of Insurance

The Capitol, Plaza Level 02

Tallahassee, Florida 32399 - 0300

Mark Casteel, General Counsel

Department of Insurance

The Capitol, Lower Level 26

Tallahassee, Florida 32399 - 0307

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within

15 days from the date of t his Recommended Order. Any exceptions

to this Recommended Order should be filed with the agency that

will issue the final order in this case.