Wednesday, September 7, 2011
Court Upholds Poizner’s Rejection of Insurance Company Sale
Panel Says Commissioner Properly Acted to Protect Policyholders
By KENNETH OFGANG, Staff Writer
The First District Court of Appeal has upheld state regulators’ rejection of the proposed sale of a California insurance company to a subsidiary of the giant Swiss Reinsurance Company.
Div. Five Friday granted the state’s request that it certify for publication its Aug. 8 opinion affirming San Francisco Superior Court Judge Charlotte Woolard’s denial of a writ of mandate sought by Aurora S.A., a French holding company.
The litigation is one piece of the continuing fallout from the failure of Executive Life Insurance Company, which was the largest life insurer in the state before crashing in 1991 under the weight of its heavy investments in so-called junk bonds. At least 16 state and federal court opinions have been generated by the ensuing litigation.
Then-Insurance Commissioner Steven Poizner rejected the sale by Aurora S.A. of its Aurora National Life Assurance Company subsidiary to Reassure America Life Insurance Company, citing danger to policyholders resulting from the complex relationship among various entities involved in the transaction.
The liquidator of Executive Life sold the company’s assets to MAAF Group—a consortium of French and Swiss insurers—and Altus S.A., an entity controlled by the French government. Those companies then created New California Life Holdings, which spawned Aurora National, to which all of Executive Life’s policies were transferred.
Altus S.A. later joined with French businessman Francois Pinault in a joint venture called Artemis S.A., which acquired controlling interest in New California Life Holdings. Artemis eventually became the parent of Aurora S.A, which became the parent of New California Life Holdings, which remains the parent of Aurora National.
In 1999, the insurance commissioner sued Altus, MAAF, Artemis, Aurora S.A., New California Life Holdings, and Pinault. The complaint, brought on behalf of Aurora National policyholders, accused the defendants of, among other things, conspiring to evade California’s restrictions on ownership of insurance companies by foreign governments.
Artemis was accused of submitting false and misleading documentation to the Department of Insurance in order to cover up the conspiracy. All of the defendants eventually settled or were dismissed, except for Artemis and Pinault.
In 2000, Aurora S.A. and Reassure America reached the agreement for the sale of Aurora National. The agreement gave Reassure America 15 years in which to complete the purchase, and included a reinsurance provision under which Reassure America would assume 95 percent of the liabilities from Aurora National policies in exchange for 95 percent of profits generated by Aurora.
In 2005, a jury in the U.S. District Court for the Central District of California awarded the commissioner $700 million in punitive damages against Artemis, to which the district judge later added $241 million in restitution. The judgment was stayed pending appeal, on condition that $55 million in proceeds from the sale of New California Life Holdings/Aurora National—out of an anticipated total of $227.8 million—be set aside to satisfy the judgment.
In 2008, the Ninth Circuit reversed, holding that the punitive damage award could not stand in the absence of compensatory damages, and that the restitution award had to be reversed because the amount was calculated, in part, on the basis of the damage award, but that the jury’s finding of liability on the part of Artemis entitled the plaintiff to a new trial on the issue of damages, following which the trial court may reinstate the restitution award.
Less than a month later, Reassure America filed its application for approval to purchase Aurora National.
Then-Insurance Commissioner Steven Poizner, through counsel, informed Reassure America in 2009 that the purchase would not be approved unless 100 percent of the proceeds were placed in escrow for the benefit of policyholders standing to benefit from the 1999 litigation. Otherwise, the commissioner said, Reassure America would be “putting its interests ahead of the interest of [Aurora National] policyholders .”
The reinsurer refused the commissioner’s demand, and on Nov. 23, 2009, Poizner formally rejected its application to purchase Aurora National. He cited Insurance Code Sec. 1215.2, which sets the grounds on which approval may be denied, including that the proposed change in ownership would not be “fair and reasonable to policyholders,” that the company would no longer meet the requirements for licensing, and that the sale would place the company under persons lacking in “competence, experience, and integrity.”
Woolard last year denied mandate relief, saying the commissioner did not abuse his discretion. Current Insurance Commissioner Dave Jones took over the defense of the appeal after succeeding Poizner in January.
Presiding Justice Barbara J.R. Jones, writing for the Court of Appeal, said Aurora S.A. lacked a persuasive argument under the abuse-of-discretion standard. She cited evidence that the parties were prepared to move hundreds of millions of dollars in sale proceeds to France in order to make it difficult for the commissioner to collect damages awarded in the Executive Life litigation, including correspondence in which Artemis proposed to put 50 percent of the sale proceeds in escrow and suggested that the policyholders might not see any of that money if the offer was refused.
Under those facts, and given that Reassure America “already enjoys most of the economic benefit of owing Aurora as a result of its agreements with Aurora S.A.,” it was reasonable for the commissioner to conclude that Reassure America “lacked the integrity that is necessary in order to operate an insurance company in California,” the presiding justice wrote.
The case is Aurora S.A. v. Poizner, 11 S.O.S. 5023.
Copyright 2011, Metropolitan News Company