12-000439 Premier Group Insurance Company vs. Office Of Insurance Regulation Status: Closed Recommended Order on Wednesday, December 19, 2012.

Summary: Petitioner demonstrated a reasonable methodology for allocation of federal income tax expense for purposes of excess profit reporting pursuant to Section 627.215.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

PREMIER GROUP )

INSURANCE COMPANY , )

)

Petitioner , )

)

vs. ) Case No . 12 - 0439

)

OFFICE OF INSURANCE REGULATION , )

)

Respondent . )

)

RECOMMENDED ORDER

On May 22 - 23, 2012, and September 13, 2012, Administrative

Law Judge Lisa Shearer Nelson of the Division of Administrative

Hearings conducted a hearing pursuant to section 120.57(1),

Florida Statutes , in Tallahassee, Florida .

APPEARANCES

For Petitioner: James A. McKee, Esquire

Wes Strickland, Esquire

Foley & Lardner, LLP

106 East College Avenue, Suite 900

Tallahassee, Florida 32301

For Respondent: Kenneth Tinkham, Esquire

Timothy Gray, Esquire

Office of Insurance Regulati on

200 East Gaines Street

Tallahassee, Florida 32399

STATEMENT OF THE ISSUE S

The issue s to be r esolved in this case are what amount of

federal income tax expense is properly included as an expense in

Premier's excessive profits filings for the years 2005 - 2007, and

in light of that deduction, how much Petitioner must refund as

excessive profits pursuant to section 627.215, Florida Statutes

(20 09) ?

PRELIMINARY STATEMENT

On March 19, 2010, the Office issued a Notice of Int ent to

Issue Order to Return Excess Profits to Petitioner, Premier Group

Insurance Company ("Premier" or "PGIC"). Premier challenged the

intended agency action, and eventually, on January 13, 2012,

filed an Amended Petition for Administrative Hearing Invo lving

Disputed Issues of Fact with OIR. The Office referred the case

to the Division of Administrative Hearings the same day, and the

case was docketed as DOAH Case No. 12 - 0439 (hereinafter referred

to as "the merits case") , which is the subject of this

R ecommended Order . The pivotal issue contested by the parties in

the merits case is the Office's treatment of federal income taxes

when determining the amount, if any, of excess profits pursuant

to section 627.215.

The merits case was scheduled for hearing April 10 - 11, 2012.

At the request of the parties, the case was continued because the

parties advised that a Petition Challenging Agency Statements

Defined as Rules had been filed with the O ffice and was going to

be referred to DOAH, and that the cases sh ould be consolidated

for hearing. Accordingly, the merits case was rescheduled for

hearing on May 22 - 23, 2012.

On April 5, 2012, the Petition Challenging Agency Statements

Defined as Rules was filed with the Division, and docketed as

Case No. 12 - 1201RU (r eferred to herein as the unadopted rules

case) . On April 10, 2012, the cases were consolidated for

hearing. The Order of Consolidation stated that the case would

be heard May 22 - 23, as previously noticed in the merits case,

unless the parties requested e arlier dates.

The hearing on both cases began as scheduled. However, at

the beginning of the hearing, the undersigned was notified that

Petitioner had discovered a statute not previously contemplated

by either party dealing with the allocation of federal income

taxes for insurance companies. Because the potential application

of this allocation method would materially affect the

presentation of the merits case, it was agreed that the merits

case would be continued and the unadopted rules case would

proceed . It was also agreed that the record in the unadopted

rules case would also be used for the merits case.

Prior to the May 22 - 23 hearing, the parties submitted a

Joint Prehearing Stipulation containing stipulated facts that, to

the extent that they are rel evant to the merits case, are

incorporated into the Findings of Fact below. At the May portion

of the hearing, Petitioner presented the testimony of

Robert Prentiss, Esquire; James Watford ; Raymond Neff; and Donnie

Hunter. Respondent presented the testimony of Donnie Hunter and

James Watford.

After the hearing, the cases were severed so that a final

order could be issued in the unadopted rule challenge, and the

merits case was continued until after the issuance of the final

order unadopted rules case. T he parties were directed to file a

Joint Status Report no later than ten days after the issuance of

a final order in the unadopted rules case, identifying how many

days would be needed for hearing and several mutually acceptable

dates for reschedul ing a hearing on the merits case, should one

be necessary.

On July 5, 2012, a Final Order was issued in Case No. 12 -

1201, finding that the Office's p olicy regarding the inability to

deduct federal income taxes as an expense for excess profits

filings met t he definition of a rule and had not been adopted as

a rule in violation of section 120.54(a). That same day, an

Order was issued directing the parties to file a Joint Status

Report no later than July 16, 2012. An Order Re - Scheduling

Hearing set the final day of hearing for September 13, 2012. The

parties filed a Revised Joint Pre - Hearing Statement on

September 11, 2012, and the hearing commenced as scheduled.

At the September 13 hearing, Petitioner presented the

testimony of Donnie Hester and Raymond Nef f. Respondent

presented the testimony of Mr. Hester and James Watford. During

the course of all three days of hearing, Joint Exhibits 1 - 24;

Petitioner's Exhibits 1 - 5, 10, 12, 14, and 20 - 46; and

Respondent's Exhibits 1, 2, 4, 10 - 12, 15 - 23, 25, 34, 36, and 47 -

51 were admitted into evidence. Respondent's Exhibits 43 and 44

were proffered.

A two - volume Transcript for May 22 - 23, 2012, was filed with

the Division on June 4, 2012. A one - volume Transcript for

September 13, 2012, was filed on October 1, 2012. A t the request

of the parties, the time for filing proposed recommended orders

as extended to October 26, 2012. Both parties timely filed

Proposed Recommended Orders that were carefully considered in the

preparation of this Final Order.

FINDING S OF FACT

1. Premier is a foreign insurer authorized to write

workers' compensation insurance in the State of Florida. As a

workers' compensation insurer, Premier is subject to the

jurisdiction of the Office. Premier began writing workers'

compensation insurance coverage in Florida on January 1, 2005.

2. The Office is a subdivision of the Financial Services

Commission responsible for the administration of the Insurance

Code, including section 627.215.

3. Section 627.215(1)(a) requires that insurer groups

writin g workers' compensation insurance file with the Office on a

form prescribed by the Commission, the calendar - year earned

premium; accident - year incurred losses and loss adjustment

expenses; the administrative and selling expenses incurred in or

allocated to Florida for the calendar year; and policyholder

dividends applicable to the calendar year. Insurer groups

writing types of insurance other than workers' compensation

insurance are also governed by section 627.215 . Its purpose is

to determine whether ins urers have realized an excessive profit

and if so, to provide a mechanism for determining the profit and

ordering its return to consumers.

4. Insurer groups are also required to file a schedule of

Florida loss and loss adjustment experience for each of th e three

years prior to the most recent accident year. Section 627.215(2)

provides that "[t]he incurred losses and loss adjustment expenses

shall be valued as of December 31 of the first year following the

latest accident year to be reported, developed to an ultimate

basis, and at two 12 - month intervals thereafter, each developed

to an ultimate basis, so that a total of three evaluations will

be provided for each accident year."

5. Section 627.215 contains definitions that are critical

to understanding the method for determining excess profits.

Those definitions are as follows:

a. "Underwriting gain or loss" is computed as follows : "the

sum of the accident - year incurred losses and loss adjustment

expenses as of December 31 of the year, developed to an ult imate

basis, plus the administrative and selling expenses incurred in

the calendar year, plus policyholder dividends applicable to the

calendar year, shall be subtracted from the calendar - year earned

premium." § 627.215(4). While the sum of the accident - year

losses and loss adjustment expenses are required by the statute

to be developed to an ultimate basis, the administrative and

selling expenses are not.

b. "Anticipated underwriting profit" means "the sum of the

dollar amounts obtained by multiplying, for each rate filing of

the insurer group in effect during such period, the earned

premium applicable to such rate filing during such period by the

percentage factor included in such rate filing for profit and

contingencies, such percentage factor having b een determined with

due recognition to investment income from funds generated by

Florida business, except that the anticipated underwriting profit

. . . shall be calculated using a profit and contingencies factor

that is not less than zero." § 627.215(8).

6. Section 627.215 requires that the underwriting gain or

loss be compared to the anticipated underwriting profit, which,

as previously stated, is tied to the applicable rate filing for

the insurer. Rate filings represent a forecast of expected

results, while the excess profits filing is based on actual

expenses for the same timeframe.

7. The actual calculation for determining whether an

insurer has reaped excess profits is included in section

627.215(7)(a):

Beginning with the July 1, 1991, report for

workers' compensation insurance, employer's

liability insurance, and commercial casualty

insurance, an excessive profit has been

realized if the net aggregate underwriting

gain for all these lines combined is greater

than the net aggregate anticipated

und erwriting profit for these lines plus 5

percent of earned premiums for the 3 most

recent calendar years for which data is

filed under this section. . .

8. Should the Office determine, using this calculation, that

an excess profit has been realized, th e Office is required to

order a return of those excess profits after affording the insurer

group an opportunity for hearing pursuant to chapter 120.

9. OIR B1 - 15 (Form F) is a form that the Office has adopted

in Florida Administrative Code Rule 69O - 189. 007, which was

promulgated pursuant to the authority in section 627.215.

10. The information submitted by an insurer group on Form F

is used by the Office to calculate the amount of excessive

profits, if any, that a company has realized for the three

cal endar - accident years reported.

11. The terms "loss adjustment expenses," and

"administrative and selling expenses," are not defined by

statute. Nor are they defined in rule 69O - 189.007 or the

instructions for Form F.

12. Form F 's first page includes sec tion four, under which

calendar - year administrative and selling expenses are listed.

Section four has five subparts: A) commissions and brokerage

expenses; B) other acquisition, field supervision , and collection

expense; C) general expenses incurred; D) taxes, licenses , and

fees incurred; and E) other expenses not included above.

13. No guidance is provided in section 627.215, in rule

60O - 189.007, or in the instructions for Form F, to identify what

expenses may properly be included in the Form F filing. There is

no indication in any of these three sources, or in any other

document identified by the Office, that identifies whether

federal income taxes are to be included or excluded from expenses

to be reported in a Form F filing. While the form clearly

r eferences taxes, licenses , and fees incurred under section 4(D),

the instructions do not delineate what types of taxes, licenses ,

and fees should be included. The instructions simply state:

"for each of the expenses in item 4, please provide an

explanati on of the methodology used in deriving the expenses,

including supporting data."

14. On or about June 30, 2009, Premier filed its original

Form F Filing with the Office pursuant to section 627.215 and

rule 69O - 189.007. Rule 69O - 189.007 requires that a Fo rm F be

filed each year on or before July 1.

15. On March 19, 2010, the Office issued a Notice of

Intent , directing Premier to return $7,673,945.00 in "excessive

profits" pursuant to section 627.215. Premier filed a petition

challenging the Office's dete rmination with respect to the amount

to be refunded, based in part on its position that federal income

tax expense is appropriately included as an expense for

calculation of excess profits.

16. The parties attempted to resolve their differences over

the n ext year or so. As part of their exchange of information,

Premier subsequently filed three amendments to its Form F filing

on December 11, 2009; on June 21, 2010; and on January 13, 2012.

In each of its amended filings, Premier included the federal

incom e tax expense attributable to underwriting profit it earned

during the 2005 - 2007 period. These expenses were included under

section 4 (E).

17. As reflected in the Preliminary Statement, Premier

filed a challenge to the Office's policy of not allowing fede ral

income taxes to be used as an expense for excess profits filings

as an unadopted rule. On July 5, 2012, a Final Order was issued

in Case No. 12 - 1201, finding that the Office's Policy regarding

the inability to deduct federal income taxes as an expense for

excess profits filings met the definition of a rule and had not

been adopted as a rule, in violation of section 120.54(a). The

Final Order in Case No. 12 - 1201 directed the Office to

discontinue immediately all reliance upon the statement or any

subst antially similar statement as a basis for agency action.

18. At this point, the parties have resolved their

differences with respect to all of the calculations related to

the determination of excess profits, with one exception. The

sole issue remaining is the amount, if any, that should be

deducted as an administrative expense for payment of federal

income tax.

1 9 . The parties have also stipulated that, before any

adjustment to federal income tax is made, Premier's underwriting

profit for 2005 was $2,9 23,157 and for 2006 was $2,119,115. For

2008, Premier suffered an underwriting loss of $785,170.

2 0 . Premier's federal income tax rate for all three years

was 35%.

21. The maximum amount of underwriting profit that a

company can retain is the net aggreg ate anticipated profit, plus

five percent of ear ned premiums for the ca lendar years reported

on worker s ' compensation business. For the 2005 - 2007 reporting

years, Premier's maximum underwriting profit is stipulated to be

$1,189,892. Anything over this am ount is considered excessive

profits which must be returned to policyholders.

22. The parties also agree that, prior to any deduction for

federal income tax paid by Premier, the amount of excess profit

earned by Petitioner and subject to return to policyh olders is

$3,067,220.

2 3 . Premier has filed a fourth amended Form F, which

incorporated all of the stipulations of the parties to date. The

fourth amended Form F also includes an allocation of federal

income tax expense based upon the statutory allocatio n

methodology outlined in section 220.151, Florida Statutes (2009) .

2 4 . Section 220.151 provide s the statutory method for

allocating federal income tax expenses for purpose of paying

Florida corporate income taxes. This section di re ct s that

insurance com panies shall allocate federal taxable income based

on the ratio of direct written premium the insurance company has

written in Florida for the relevant period , divided by the direct

written premium anywhere.

2 5 . Premier paid its Florida corporate income t ax based

upon this statutory methodology.

2 6 . Consistent with the methodology in section 220.151,

Premier allocated its federal taxable income to the State of

Florida based upon the percentage of direct premium written on

risks in Florida, and reduced the amount of its federal taxable

income by the amount investment income reflected on its federal

tax return. Premier then multiplied the Florida portion of its

taxable income by its 35% federal tax rate, resulting in the

federal income tax expense allocated to Florida.

2 7 . For the year 200 5 , Premier's federal taxable income

according to its tax return is $7,614,512.89. After subtracting

investment income listed on the tax return of $969,051.97, the

taxable income attributable to premium is $6,645,460.92.

2 8. For 2006, Premier's federal taxable income according to

its tax return is $6,577,534.06. After subtracting investment

income of $2,011,614.86, the taxable income attributable to

premium is $4,565,919.20.

29. For 2007, Premier's federal taxable income according to

its tax return was $4,359,742.88. After subtracting investment

income of $2,266,291.99, the taxable income attributable to

premium is $2,093,450.89.

30. For the three years combined, the federal taxable

income was $18,551,789.83. The amoun t of investment income

subtracted was $5,246,958.82, leaving a balance of taxable income

attributable to premium a s $13,304,831.01.

31. For the years 2005 through 2007, Premier paid

$2,665,079.51; $2,302,136.92; and $1,525,910.01 respectively, in

federal income tax.

32. During those same years, Premier wrote 58.8388%;

51.2514%; and 29.8536%, respectively, of its direct premium in

Florida.

33. Allocating a portion of Premier's federal tax income

and income tax liability to Florida, consistent with sect ion

220.151, results in a calculation of Florida's portion of taxable

underwriting income. For 2005, this amount is $3,910,109.46; for

2006, $2,340,097.51; and for 2007, $624,970.45. The total amount

of federal taxable income allocated to Florida for the three - year

period of $ 6 , 875 , 177.42 .

34. The taxable income is then multiplied by the applicable

tax rate of 35%, which results in a federal income tax expense

allocated to Florida of $1 ,368,538.46 for 2005; $819,034.13 for

2006; and $218,739.45 for 2007, totaling $2,406,312.10 for the

three - year period at issue.

35. The undersigned notes that Premier only writes workers'

compensation insurance. It does not write other lines of

insurance, which makes the allocation of earned premium much

simpler than it would be for a company writing multiple lines of

insurance.

36. Under the methodology described above, Premier

determined that $2,406,312.10 is the appropriate amount of

federal income tax expense to be deducted for calendar years

2005 - 2007, resulting in an excess profit pursuant to section

627.215, of $660,907.

37. Mr. Hester, a certified public accountant and p resident

of Premier, testified that this methodology was used by Premier

in determining its Florida corporate income tax liability.

38. The me thodology described above uses the amounts that

Premier actually paid in taxes, and therefore reflects the actual

expense experienced by Premier. It is accepted as a reasonable

method.

39. According to Mr. Watford, the Office does not determine

the metho dology that must be used in allocating expenses. The

insurance company provides the methodology and the data to

support it, and then the Office determines whether, in a given

case, the methodology is appropriate.

40. Premier points out that the Office ha s provided no

guidance on how to allocate federal income tax expense for excess

profits reporting. That no guidance has been offered is

understandable, inasmuch as the Office h o ld s firmly to the belief

that no allowance for federal income tax expense shou ld be made.

Nonetheless, the Office reviewed the method provided by Premier

and did not find it to be reasonable.

41 . Premier included in its Form F filing for the years

2005 - 2007 a deduction for the portion of Florida c orporate income

tax expense not re lated to investment income. The Office

accepted the Florida corporate income tax deduction, which is

calculated using the same allocation method Premier used to

allocate federal income tax expense.

42 . Indeed, the Office acknowledged at hearing that it has

permitted the methodology of direct written premium in Florida

divided by direct written premium written everywhere for the

determination of other expenses for excess profits filings, and

has only rejected the methodology on one occasion. However, it

has not accepted this same methodology for determining the

appropriate amount of federal income tax expense and does not

believe it to be a reasonable methodology . The rationale for

this distinction is that, in Mr. Watford's view, federal income

tax is "a totally different type of expense."

43 . Mr. Watford did not consult an accountant or certified

public accountant in making the determination that the

methodology used was impermissible.

44. Mr. Watford opined that in order to determine that a

propos ed methodology is reasonable, the insurance company would

need to have an adjustment in the profit factor, i.e., submit a

new rate filing for the years in question; have a projected tax

expense that did not exceed the expense he calculated , based on

the ef fect on future tax expenses caused by the return of excess

profits; and submit a methodology that was "appropriate for the

insurance company."

45. This approach is rejected. First, the rate filing is

supposed to be a forecast, and the Office cited to no authority

for adjusting the forecast in light of actual events. Further,

Mr. Watford admitted that in this instance, the profit and

contingencies factor is already at zero for the years at issue,

and section 627.125 provides that no factor less than zero can be

used to determine excess profits.

46 . Second, the excess profits statute specifies that the

deduction for administrative and selling expenses is for those

expenses incurred in Florida or allocated to Florida for the

current year. Unlike incurred losses and loss adjustment

expenses, administrative and selling expenses are not developed

to an ultimate basis, which appears to be what the Office is

attempting to require. Administrative expenses are incurred by

calendar year. 1/ Other than the net co st of re - insurance, the

Office has not permitted any expense that is to be valued at a

date that is later than the end of the calendar year(s) at issue

in the excess profits filing. The future effect of these

expenses would be considered in the year that effect is realized.

47 . Third, allowing whatever is "appropriate for the

insurance company" is simply too nebulous a standard, to the

extent it is a standard at all, to apply. 2 /

48 . As noted by Mr. Hester, federal income tax liabilities

are governed by the Internal Revenue Code and its attendant

regulations, and not tied specifically to underwriting gain or

loss. 3 / Similarly, Fl orida corporate income tax liabilities are

governed by Florida's taxing statutes. The fact that their

calculation is not gover ned by the Florida I nsurance C ode does

not change the fact that they are administrative expenses borne

by the insurance company.

CONCLUSIONS OF LAW

4 9 . The Division of Administrative Hearings has

jurisdiction over the parties and the subject matter of this

proceeding pursuant to section s 120. 569 and 120.57(1), Florida

Statutes (2012).

50 . Premier is subject to the jurisdiction and regulation

of the Office pursuant to the Florida Insurance Code, and is

subject to the requirements of section 627.215.

51 . The issue originally presented in this case was whether

Premier was required to return the amount of excess profits

listed in the Office's Notice of Intent to Issue Order to Return

Excess Profits. During the course of the proceeding, the parties

have stipulated to all but the resolution of how much, if any,

federal income tax expense could be deducted as an administrative

or selling expense in determining the amount of excess profits.

52 . Premier has asserted that it is the Office's burden to

demonst rate that the allocation it proposes violated section

627.215. However, it is Premier who is asserting that it should

be able to deduct a portion of federal income tax, and that the

methodology in section 220.151 is a reasonable means to determine

the amo unt to be deducted. Because Premier is asserting this

affirmative position, the undersigned concludes that Premier

bears the burden to prove by a preponderance of the evidence that

its allocation method is permissible and reasonable. Fla. Dep't

of Transp . v . J.W.C. Co. , 396 So. 2d 778 (Fla. 1st DCA 1981);

Balino v. Dep't of HRS , 348 So. 2d 349 (Fla. 1st DCA 1977);

§ 120.57(1)(j), Fla. Stat. The undersigned also concludes that

Premier has met its burden.

53 . Section 627.215 provides in pertinent par t:

627.215 Excessive profits for workers'

compensation, employer's liability,

commercial property, and commercial casualty

insurance prohibited. --

(1)(a) Each insurer group writing workers'

compensation and employer's liability

insurance as defined in s . 624.605(1)(c),

commercial property insurance as defined in

s. 627.0625, commercial umbrella liability

insurance as defined in s. 627.0625, or

commercial casualty insurance as defined in

s. 627.0625 shall file with the office prior

to July 1 of each year, on a form prescribed

by the commission, the following data for

the component types of such insurance as

provided in the form:

1. Calendar - year earned premium.

2. Accident - year incurred losses and loss

adjustment expenses.

3. The administrative and s elling expenses

incurred in this state or allocated to this

state for the calendar year .

4. Policyholder dividends applicable to the

calendar year.

Nothing herein is intended to prohibit an

insurer from filing on a calendar - year

basis.

* * *

(4) Each insurer group's underwriting gain

or loss for each calendar - accident year

shall be computed as follows: The sum of the

accident - year incurred losses and loss

adjustment expenses as of December 31 of the

year, developed to an ultimate basis, plus

the admin istrative and selling expenses

incurred in the calendar year, plus

policyholder dividends applicable to the

calendar year, shall be subtracted from the

calendar - year earned premium to determine

the underwriting gain or loss.

(5) For the 3 most recent cal endar - accident

years for which data is to be filed under

this section, the underwriting gain or loss

shall be compared to the anticipated

underwriting profit, except in the case of

separately reported commercial umbrella

liability insurance for which such

comparison shall be made for the 10 most

recent calendar - accident years.

* * *

(7)(a) Beginning with the July 1, 1991,

report for workers' compensation insurance,

employer's liability insurance, commercial

property insurance, and commercial casualty

insur ance, an excessive profit has been

realized if the net aggregate underwriting

gain for all these lines combined is greater

than the net aggregate anticipated

underwriting profit for these lines plus 5

percent of earned premiums for the 3 most

recent calend ar years for which data is to

be filed under this section. . . .

* * *

(8) As used in this section with respect to

any 3 - year period, or with respect to any

10 - year period in the case of commercial

umbrella liability insurance, "anticipated

underwriting profit" means the sum of the

dollar amounts obtained by multiplying, for

each rate filing of the insurer group in

effect during such period, the earned

premiums applicable to such rate filing

during such period by the percentage factor

included in such rat e filing for profit and

contingencies, such percentage factor having

been determined with due recognition to

investment income from funds generated by

Florida business, except that the

anticipated underwriting profit for the

purposes of this section shall be calculated

using a profit and contingencies factor that

is not less than zero. Separate

calculations need not be made for

consecutive rate filings containing the same

percentage factor for profits and

contingencies.

(9) If the insurer group has reali zed an

excessive profit, the office shall order a

return of the excessive amounts after

affording the insurer group an opportunity

for hearing and otherwise complying with the

requirements of chapter 120. Such excessive

amounts shall be refunded in all in stances

unless the insurer group affirmatively

demonstrates to the office that the refund

of the excessive amounts will render a

member of the insurer group financially

impaired or will render it insolvent under

the provisions of the Florida Insurance

Code .

(10) Any excess profit of an insurance

company as determined on July 1, 1991, and

thereafter shall be returned to

policyholders in the form of a cash refund

or a credit toward the future purchase of

insurance. The excessive amount shall be

refunded o n a pro rata basis in relation to

the final compilation year earned premiums

to the policyholders of record of the

insurer group on December 31 of the final

compilation year. (emphasis added).

54 . In Premier Group Insurance Company v. Office of

Insuran ce Regulation , Case No. 12 - 1201RU (DOAH July 5, 2012), the

Office was ordered to discontinue its reliance on the agency

policy that federal income tax expense cannot be deducted as an

expense for excess profits purposes. While the Office may not

automatic ally reject deductions for federal income tax expenses,

rule 69O - 189.007 still requires the insurance company to provide

an explanation of the methodology used in deriving the expenses,

including supporting data. The Office must then review the

methodolog y and supporting data and determine whether it is

reasonable.

55 . In this case, the methodology used was reasonable. The

methodology is one dictated by the Legislature for insurance

companies in determining an insurance company's allocation of

federal in come tax for purposes of paying Florida corporate

income tax. No credible reason was presented why the method

dictated for use by one state agency in allocating federal income

tax cannot be used by another state agency to determine the same

allocation for another purpose.

56 . The Office claims that the expenses were not incurred

in Florida. Section 627.215, however, allows for the deduction

of administrative and selling expenses "incurred in this state

or allocated to this state for the calendar year ."

§ 627.215(1)(a)4., Fla. Stat. (emphasis added). Section 220.151

provides in pertinent part:

(1)(a) Except as provided in paragraph (b),

the tax base of an insurance company for a

taxable year or period shall be apportioned

to this state by multiplying such base by a

fraction the numerator of which is the direct

premiums written for insurance upon

properties and risks in this state and the

denominator of which is the direct premiums

written for insurance upon properties and

risks everywhe re. For purposes of this

paragraph, the term "direct premiums written"

means the total amount of direct premiums

written, assessments, and annuity

considerations, as reported for the taxable

year or period on the annual statement filed

by the company with the Office of Insurance

Regulation of the Financial Services

Commission in the form approved by the

National Convention of Insurance

Commissioners or such other form as may be

prescribed in lieu thereof.

57 . "Allocate" is defined as "to apportion for a specific

purpose or to particular persons or things." http://www.merriam -

webster.com/dictionary/allocate. "Apportion" is listed as a

synonym for "allocate." Given that the words are virtually

interchangeable in this context, it is concluded that taxes

apportioned to Florida for purposes of section 220.151 are also

allocated to Florida, and as such can be deducted as expenses

incurred in or allocated to Florida for purposes of section

627.215.

RECOMMENDATION

Based on t he foregoing Findings of Fact and Conclusions of

Law, it is RECOMMENDED that the Office enter a Final Order

finding that $2,406,312.10 may be deducted for federal income tax

expense incurred or allocated to Florida for purposes of section

627.215 , and that Premier must return $ 660,907.90 in excessive

profits to its policyholders.

DONE AND ENTERED this 19th day of December , 2012 , in

Tallahassee, Leon County, Florida.

S

LISA SHEARER NELSON

Administrative Law Judge

Division o f Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399 - 3060

(850) 488 - 9675

Fax Filing (850) 921 - 6847

www.doah.state.fl.us

Filed with the Clerk of the

Division of Administrative Hearings

this 19th day of December, 2012 .

ENDNOTE S

1/ T he Office proffered testimony regarding Petitioner's ability

to deduct the amount of returned excess profits in future income

tax returns. While the testimony is consistent with the Office's

argument and was reviewed by the under signed, it is ultimately

rejected as unpersuasive. The timing and amount of any deduction

for return of excess profits is speculative. So is the certainty

that the tax structure for corporate entities will remain the

same.

2 / The undersigned is mindful of the fact that, in light of the

2012 amendment to section 627.125, workers' compensation insurers

will no longer file excess profits reports. This repeal,

however, does not change the fact that t he statute provides for

current - year administrative expen ses.

3 / Indeed, it seems that the federal tax burden could be higher,

as opposed to lower if based solely on underwriting and

investment gain, because there would be adjustment s for

deductions to which the company may be entitled.

COPIES FURNISHED:

Ke nneth Tinkham, Esquire

Timothy Gray, Esquire

Office of Insurance Regulation

200 East Gaines Street

Tallahassee, Florida 32399

James A. McKee, Esquire

Wes Strickland, Esquire

Foley and Lardner, LLP

106 East College Avenue , Suite 900

Tallahassee, Florida 32301

Kevin M. McCarty, Commissioner

Office of Insurance Regulation

200 East Gaines Street

Tallahassee, Florida 32399 - 0305

Belinda H. Miller, General Counsel

Office of Insurance Regulation

200 East Gaines Street, Suite 612K

Tallahassee, Florida 32399 - 4206

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within

15 days from the date of this Recommended Order. Any exceptions

to this Recommended Order should be filed with the agency that

will issue the Final Order in this case.