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THE HOME IN SUPERVISION

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NEW YORK-Worse-than-expected losses helped put The Home Insurance Co. under formal state supervision after it fell nearly $552 million short of its authorized risk-based capital requirements.

The move last week by the New Hampshire Insurance Department comes less than two years after the department approved a controversial deal under which the poor-performing business of The Home was placed into runoff while Zurich Insurance Group took over the better business in return for a $1.3 billion reinsurance contract (BI, June 5, 1995).

Higher claims costs have hurt the results of The Home, say officials at New York-based Risk Enterprise Management Inc., the Zurich-owned company running off The Home.

The New Hampshire department has allowed The Home to improve its financial results by discounting its reserves, which lets the company account for future interest income on the reserves.

Still, with the discounted reserves and The Home's recoverable reinsurance accounted for, the company has only a $55 million surplus, which observers and REM officials say is a slim margin for error.

The New Hampshire department placed The Home under formal supervision last Tuesday after its 1996 annual financial statement revealed it had a capital deficit of $226.6 million, before discounting its loss reserves. The insurer has an authorized risk-based capital requirement of $325.1 million under National Assn. of Insurance Commissioners requirements.

The New Hampshire department is authorized under NAIC rules to take The Home under supervision because it failed to meet the required risk-based capital level.

Formal supervision is less severe than rehabilitation or liquidation. The Home under supervision can still be run off by its own managers, but it must seek the department's approval:

To pay any single claim of more than $1 million.

Make any payment to creditors more than $500,000.

Make any single payment to cedents or reinsurers in excess of $250,000.

Release any obligation or collateral in excess of $500,000.

Materially change any contracts-not only insurance and reinsurance-worth more than $500,000.

The New Hampshire department also will review the budget of The Home and will supervise an intensified review of The Home's books.

The New Hampshire department commissioned a new actuarial review of The Home last year after it was clear the insurer was suffering a greater-than-expected erosion of assets (BI, July 15, 1996).

At the time the Zurich deal was approved, actuaries assessed that under a possible worst-case scenario, The Home's loss reserves could fall short by $1.9 billion. But The Home's reinsurance contracts and its assets were expected to cover that deficiency.

The new actuarial report is still pending, but it seems clear that The Home's loss reserves are deteriorating at a faster-than-expected rate for several reasons, said David Nichols, the examiner appointed by the New Hampshire Insurance Department to oversee the runoff of The Home.

In particular, new analysis of asbestos and environmental claims liabilities is revealing loss information and estimates not available when the Zurich deal was approved, he said.

Also, the original actuarial analysis assumed that The Home would be in runoff from the beginning of 1995, whereas the insurer ran as an ongoing insurer for the first half of 1995 and had to pay higher expenses than had been forecast by the actuaries.

For The Home's 1996 financial filings, the insurer was allowed to discount its reserves at 7%, which generates $469.4 million. However, the department recognizes only 60% of that gain, giving The Home an accounting surplus of $55 million.

"That's not a large margin of error," conceded Mark Davidowitz, assistant controller and investment relations manager at REM.

The Home has a $1.3 billion stop-loss reinsurance contract supplied under the Zurich deal as well as $1.78 billion in paid and collectible reinsurance under other contracts.

Also, the Zurich reinsurance program will pay an additional $290 million if The Home is allowed to make dividend payments to the holding company, Home Holdings Inc., earmarked for Home bond holders and the money is needed to pay claims.

After publication of the financial results Standard & Poor's Corp. lowered its rating of Home Holdings' debt security to CC from B-, and Moody's lowered its rating to Ca from B3.

The rapid deterioration in The Home's financial results is largely due to a higher loss development than ori-ginally expected, Mr. Davidowitz said. Possible mitigation of further loss development by commuting claims will be up to the New Hampshire department, which will have to approve the settlements, he said.

The Home added $440 million to pollution and environmental loss reserves last year, bringing its total net loss reserves to $2.1 billion.

The 1996 results show The Home would find it difficult to withstand any further deterioration of its financial position, said Eric M. Simpson, vp at A.M. Best Co. in Oldwick N.J. "With the discounting of the reserves taken into account, they won't have any net contributions going forward, so the $55 million surplus will have to withstand any surprises," he said.

The Home's efforts to negotiate settlements early reflects the trend in the insurance industry as a whole, said Alan Levin, managing director at S&P's Insurance Rating Service. "The Home's losses have been a little higher than expected, and they may be paying the losses a little earlier, but its position is not materially more gloomy than it was last year," he said.

The runoff status of The Home has also highlighted its reserve deficiencies, said Ted Collins, vp at Moody's Investors Services. "In the case of a runoff company, you tend to be able to focus on the reserves somewhat better than you do when you have an ongoing business operation, which is generating new business and the problems of the past can be borne over time and offset against current income," he said.

The Zurich offer usurped an earlier, more conventional takeover of The Home by an investor group led by John J. Byrne, who was credited with turning around GEICO Corp. in the 1970s and Fireman's Fund in 1980s.

Under the Byrne proposal The Home would have received $630 million in new funds and been run as an ongoing concern. However, The Home's major shareholder, Trygg Hansa SPP Holding A.B., favored the less orthodox Zurich proposal.

The controversial deal was opposed by other insurers that said Zurich should be made to accept all of The Home's liabilities if it wanted to take over its good business.

However, after a heated public hearing on the proposal, New Hampshire Insurance Commissioner Sylvio L. Dupuis approved the Zurich deal.

Mr. Nichols of the New Hampshire department said the data provided to the actuaries at the time of the deal was not as complete as they wanted.

The approval process would have had to have lasted substantially longer than the six months it took to provide the actuaries with all of the possible data, he said. "If that had happened, there may not have been a transaction," Mr. Nichols said.