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Tower Group International, L.Ş. Message Board

  • joebigbuck joebigbuck Sep 27, 2013 7:44 PM Flag

    How do you BK an Insurance Company?

    I know how normal companies use BK, but have no idea how this would play out. They have assets, yet unknown liabilities. So does the state come in and close them down because of being underfunded? Or do they just stay open and whittle down assets to pay off claims until the assets are gone? I'm assuming their rating downgrade, which is coming, will prevent them from writing additional policies.
    So if they can't find a buyer or raise cash, what happens?

    Sentiment: Hold

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    • Publicly-held insurance companies are typically structured such that a holding company whose stock is publicly traded actually owns the insurance underwriting company as a subsidiary. Insurance companies themselves are permitted only under very limited condition to use borrowed money in their capital base, but a holding company can borrow money (sell bonds) and contribute the funds to their insurance subsidiaries to use as capital.

      The insurance subsidiaries are regulated at the state level by the states' insurance commissioners. If the commissioner determines that the insurance company (the holding company's subsidiary) has a capital deficiency, the state is then permitted to seize the subsidiary. At that point, the subsidiary is no longer permitted to upstream a dividend to the holding company. Without the upstream dividends from the subsidiary, the holding company (that usually holds little cash by itself) can no longer pay its bills including debt service on bonds it may have issued. Kill the body, and the head will die -- Ch 11 follows.

      When the commissioner seizes an insurance company, the decision may be take to rehabilitate the insurer, sell it to a buyer (usually with little or no funds going to the holding company), or shut it down completely.

    • There's an entirely separate creditor, court restructuring regime where they are on watch by regulators to protect policyholders, then potentially in rehabilitation, conservatorship, then liquidation. Chapter 11 filing could happen at any of the stages mentioned and the order of the stages can be accelerated. But ultimately the state regulator would have to sign off on and support a Ch. 11 plan I believe.

    • insurance companie are insured by another insurance company. usually it is themselves so they will bail themselves out in the even to of a BK