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CIGNA Corp. will face some regulatory challenges to its reorganization plan even if Pennsylvania regulators approve it.

Insurance regulators from several states are raising concerns over the plan, though only officials in Missouri and Illinois have explicitly said that the plan violates their respective state's regulations.

The Missouri department would seek a court order to block the plan if Pennsylvania Insurance Commissioner Linda S. Kaiser approves it, a spokesman said.

Illinois regulators are still assessing their legal options, but they would hold CIGNA officials liable for any shortfall in the proposed runoff operation for CIGNA's long-tail liabilities if CIGNA does not first jump through some legal hoops, a department attorney said.

However, more importantly for CIGNA, Illinois-unlike Missouri-is one of seven states besides Pennsylvania that must approve various components of the plan before CIGNA can implement it. Various CIGNA subsidiaries are domiciled in those seven states, which would have to approve, for example, new reinsurance arrangements for those companies under the plan.

The plan to date has received a favorable review only from regulators in Connecticut, another state that must sign off on a portion of the plan.

Other states that must sign off are California, Indiana, New Jersey, Ohio and Texas. Among those domiciles, only regulators in Texas have acknowledged they are concerned about the plan. Regulators in the other four states will not comment on the plan until after Ms. Kaiser's ruling.

A CIGNA spokesman said that regulators who have raised objections to the plan are misinterpreting how the reorganization would be accomplished under an unusual Pennsylvania statute.

The spokesman said the insurer hopes other state regulators will recognize and honor Pennsylvania laws because of the state's leading role in evaluating and ruling on the plan.

The insurer also is beginning to step up its contact with regulators in all states in an effort to counteract the strong push that critics of the plan have made with regulators nationwide. However, CIGNA has been in contact with state regulators since it announced its plan, the spokesman said.

A court challenge by several CIGNA competitors over the Pennsylvania department's handling of public hearings on the reorganization plan could delay implementation of the plan even before Ms. Kaiser rules on it. A Pennsylvania Commonwealth judge last Thursday promised to issue a ruling this week on motions by those rivals for courtroom-type hearings on the plan or a stay of Ms. Kaiser's ruling if she approves the plan.

Ms. Kaiser has set a Jan. 12 deadline for public comment, after which she will decide the plan's fate.

A CIGNA spokesman could not say exactly when CIGNA would need to obtain regulatory approval so it could implement the plan retroactive to Jan. 1, which would give CIGNA more polished financial statements for all of 1996.

However, he noted that CIGNA must make its first regulatory filings by late February.

Under the plan, CIGNA's Insurance Co. of North America unit would be split in two under an unusual Pennsylvania law that allows corporations to divide. One portion of the split INA, which would be named CCI Indemnity Co, would retain INA's long-tail asbestos and environmental liabilities. The other portion would retain ongoing business and INA's name. CCI would be merged immediately into CIGNA's Century Indemnity Co. Century would be the lead unit in a separately capitalized runoff operation.

CIGNA estimates the runoff unit would have $7.3 billion of capital, including investment income, to pay long-tail claims. In addition, the active operation would write $500 million of excess-of-loss reinsurance protection for the runoff unit.

Missouri and Illinois regulators are most troubled by the part of the reorganization plan that they say involves transferring policies to an unlicensed insurer-CCI-in the process of moving CIGNA's long-tail liabilities to the runoff operation.

That interpretation has dogged CIGNA since it announced its plan in October. CIGNA policyholders first raised it to support their argument that the plan amounts to a novation, which would require CIGNA to obtain policyholder approval.

The argument also underpins the position taken by the National Conference of Insurance Guaranty Funds that state guaranty funds would not respond if the runoff operation were to fail (BI, Dec. 11, 1995).

CIGNA counters that, under Pennsylvania's corporate division law, the surviving INA in CIGNA's reorganized active operation no longer would be the "issuing" insurer for policies that cover long-tail liabilities. CCI, as the legal successor to INA under that law, would retain those obligations because CIGNA would allocate them to CCI during the division process, CIGNA explained.

As a result, the movement of INA's long-tail liabilities to Century, a licensed insurer, is accomplished through CCI's merger with Century, CIGNA said. After that merger, Century would legally become the "issuing" insurer for the INA policyholders with long-tail liabilities, according to CIGNA.

But CIGNA's own documents state that INA's licenses would transfer to the new INA, not CCI, noted John Palombi, an Illinois department attorney in charge of evaluating CIGNA's plan. "They both can't be licensed" after the division of INA because CIGNA has not sought and obtained separate licenses for the companies, he said.

That would mean Illinois policyholders would be transferred to an unlicensed and unauthorized insurer, he contended.

CIGNA can do that, but it first would have to give Illinois policyholders 30 days' notice, he said.

In addition, CIGNA would have to deposit with Illinois regulators the amount of statutory reserves that would cover the long-tail liabilities of CIGNA's Illinois policyholders, according to Mr. Palombi. How that reserve level would be determined is unclear, he said.

If CIGNA does not follow those steps, Illinois regulators-even if they sign off on the portion of the plan that requires their approval-would hold CIGNA officials liable if the runoff operation could not fully indemnify Illinois policyholders, Mr. Palombi said.

He also said CIGNA cannot transfer INA's Illinois license to the new INA during the proposed reorganization. "We're taking the position now that the license would be pulled back," leaving both the new INA and CCI unlicensed in Illinois, he said.

Obtaining an Illinois license for CCI before the reorganization could not resolve the license transfer problem because CCI is not created until after INA is divided, he added.

Illinois regulators also are concerned that other insurers might try a similar reorganization plan, though they are not certain how many states have a corporation division law like Pennsylvania's, Mr. Palombi said.

Illinois regulators' concerns track with those that Missouri regulators raised last month. As structured, the plan could lead to criminal complaints against CIGNA officers, directors and shareholders, a Missouri regulator informed the company (BI, Dec. 18, 1995).

A group of CIGNA officials failed to sway the regulators during a Dec. 20 meeting in Missouri. Missouri regulators still maintain that CIGNA could salvage its plan only by directly transferring Missouri policyholders' coverages from INA to Century without moving them through the unlicensed CCI, a spokesman said. Before that, however, CIGNA would have to obtain policyholder and regulatory approval, he said.

Since CIGNA would not acknowledge that Missouri has jurisdiction in this matter, Missouri regulators will seek a court injunction against the plan if Pennsylvania's Ms. Kaiser approves it, the Missouri spokesman said.

In Texas, which is among the states that must sign off on a portion of the plan, Commissioner Elton Bomer not only is reviewing the concerns that Missouri and Illinois regulators have raised, he also has ordered an independent review of the actuarial study of CIGNA's reserves that Tillinghast conducted for Pennsylvania's regulators.

Arthur Andersen L.L.P. will conduct that peer review, which will not independently examine the adequacy of CIGNA's reserves for long-tail liabilities, even though Pennsylvania regulators hired other firms to perform similar reviews of Tillinghast's work.

A sampling of regulators in other states that do not have a formal role in the plan approval process found that they also have concerns.

The New York Insurance Department has raised the strongest objections. Citing the concept of establishing a runoff operation for certain liabilities and its concerns over how to set adequate reserves for such an operation, a spokesman said the department would not approve CIGNA's plan if the department had a role in the plan approval process.

But while it has informed Pennsylvania's Ms. Kaiser about its position, it "will stand beside her ruling," the New York spokesman said.

The Florida department is seeking additional information from Pennsylvania regulators. Among other things, the department wants to review the Tillinghast report and the actuarial study that Milliman & Robertson Inc. performed at CIGNA's request, a spokesman said.

Regulators in Washington and Oregon also have some concerns about the plan but are not undertaking any independent reviews at least until Ms. Kaiser rules, spokesmen said.

In Louisiana, Commissioner Jim Brown said he is monitoring the situation closely, largely because of the state's past problems with insolvent insurers and their impact on the state guaranty fund.

In addition, the "GE case has raised some concerns among a cross-section of regulators, including myself," he said.

Mr. Brown was referring to the recent collapse of a General Electric Co. liability insurer soon after it reorganized-citing CIGNA's reorganization plan-to separate loss-plagued GE policies from more profitable ongoing business.

Electric Mutual Liability Insurance Co. filed for voluntary liquidation in Bermuda after recognizing a roughly $750 million shortfall in reserves for GE-related asbestos and environmental claims. It is at least $500 million insolvent, making it one of the largest P/C insurer failures on record (BI, Dec. 11, 1995).

A CIGNA official, though, said that its plan differs from the EMLICO plan in many ways, including that it is subject to far more regulatory scrutiny (BI, Jan. 1).

One problem that CIGNA faces is that its critics have far more effectively reached out to regulators nationwide than CIGNA has, Mr. Brown said.

CIGNA instead has focused on winning regulatory approval in Pennsylvania, he said.

"I'm not saying that's right or wrong," Mr. Brown said. "But all we have to go on is what we've read or hear off the streets."

Mr. Brown said he has encouraged CIGNA to bring its case to the state regulators, advice that CIGNA is heeding. CIGNA officials are scheduled to meet Mr. Brown this week. And, company officials met informally with Oregon regulators over the holidays, an Oregon department spokesman said.

"We want to give them every opportunity to convince us that what they're doing won't negatively impact policyholders in this state," Mr. Brown said. "But, the opposition has raised a lot of questions that have yet to be answered."

Outside of Pennsylvania, only regulators in Connecticut-which is among the seven states that must sign off on the plan-say they support the plan.

Connecticut regulators recommend that Commissioner George Reider Jr. approve the plan if Ms. Kaiser approves it, said Frances J. O'Connor, director of the examination division.

Ms. O'Connor said Connecticut regulators are "fairly comfortable" with both the financial aspect of the plan and with Tillinghast's study.

They also are pleased with the opinions CIGNA obtained from various consultants about Tillinghast's methodology and the fairness of the plan to policyholders, she said.

Additionally, CIGNA has demonstrated its willingness to work with regulators to beef up the plan, Ms. O'Connor said. For example, the $500 million reinsurance feature and $500 million of capital support were not originally part of the plan, she noted. CIGNA added those elements at the Pennsylvania department's request, she said.