Citation Numbers: 149 Misc. 18
Judges: Frankenthaler
Filed Date: 8/9/1933
Status: Precedential
Modified Date: 1/12/2023
This is an application by the Globe and Rutgers Fire Insurance Company for an order, pursuant to subdivision 3 of section 402 of the Insurance Law, terminating a proceeding for its rehabilitation and permitting it to resume possession of its property and the conduct of its business.
On March twenty-fourth of this year an order was entered in this court, upon the consent of the board of directors of the Globe
The attempt to reorganize the company, however, soon proved abortive. The original plan of reorganization was objected to by certain of the larger creditors. An amended plan, drafted to meet their objections, turned out to be unacceptable to a majority of the stockholders. In this impasse, with no progress being made in the direction of reorganization, the Superintendent of Insurance suggested, for the protection of creditors and policyholders, that the speculative and inferior securities in the company’s portfolio be sold and the proceeds employed to pay claims against the company as they became payable. The present motion to terminate the rehabilitation proceeding and to permit the company to resume the conduct of the business is the company’s answer to the Superintendent’s suggestions.
Subdivision 3 of section 402 of the Insurance Law, pursuant to which the present application has been made, provides that no order terminating rehabilitation and permitting an insurer to resume possession of its property and the conduct of its business
That the company was solvent on July 3, 1933, on the basis of the market value of its securities on that day, is admitted by the Superintendent of Insurance, although it is his claim that the net worth was only $6,103,703.23. Since that time, however, fluctuations in the market prices of the company’s securities have been such that by July twenty-second the net worth of the company was reduced to $3,785,216 and its surplus to $1,785,216. Included in the assets is an award by the Mixed Claims Commission which is valued by Kingston, the company’s accountant, at $2,600,000 and by Wolfe, the accountant employed by the Insurance Depart-
However, even if the solvency of the company with an unimpaired capital were satisfactorily established it would not necessarily follow that it would be proper or necessary to grant the application for the termination of rehabilitation. ¡Subdivision (e) of section 401 of the Insurance Law provides for an order of rehabilitation if an insurance company “ is found, after an examination, to be in such
Approximately eighty-five per cent of the assets of the Globe and Rutgers Company consists of security holdings. Upon the basis of market valuations on July 15, 1933, about twenty-three and four-tenths per cent of these securities consisted of bonds, and about seventy-six and six-tenths per cent of stocks. The affidavit of Collins, one of the State insurance examiners, states, without contradiction, that approximately fifty per cent of the bonds fall into “ rating classifications below the first four investment grades and many issues held ” are “ distinctly inferior.” This is confirmed by the court’s independent examination of the securities comprising the company’s portfolio. Many of the stocks held by the company are of a highly speculative character, the company’s investment policy in the past having been influenced very largely by speculative
It must be obvious that a portfolio which is subject to such violent fluctuations in market value fails to offer the creditors and policyholders any reasonable assurance that their claims will be paid as they are adjusted and become payable. As previously pointed out, the company, even if now solvent, is perilously close to insolvency. One or two days of falling security prices, no worse than many which have been experienced in the recent past, would be sufficient to produce insolvency about which there could be no question. A company whose assets are of such a character that it swings back and forth between solvency and insolvency from month to month, or week to week, or even from day to day, is hardly entitled to have proceedings for its rehabilitation terminated and to be permitted to resume its business at a time when the margin between solvency and insolvency is a very narrow one. Clearly, the Superintendent of Insurance is correct in his conclusion that to allow the company to once more take over the conduct of its business in its present financial condition and with its highly volatile speculative portfolio, would, in the language of subdivision e of section 401 of the Insurance Law, be “ hazardous to its policyholders, * * * its creditors ” and “ to the public.” The Superintendent declares that he “is in favor of preserving and continuing, wherever feasible and possible, the business of any company under the jurisdiction of your deponent’s department ” and that he “ is in favor of the rehabilitation of Globe and Rutgers Fire Insurance Company and the reopening of said company to transact the business for which it was incorporated, provided said Company, when reopened, is a sound insurance institution, adequately financed and properly managed for the protection and safety of the public for which it transacts business.” (Italics the court’s.) He takes the
Resolutions passed by the board of directors of the company, as well as the affidavits presented on its behalf, indicate clearly, however, that the company is opposed to any change in its investment portfolio and even to any substantial sales of securities at this time for the purpose of increasing the company’s cash resources. The company is opposed to any sales of its securities in addition to those already authorized by orders of this court except to the extent necessary “ to cover claims payable at the time the direction of the company is: restored to its management, and a reasonable cash reserve in addition.” The affidavits submitted by the company establish, however, as previously indicated, that it takes the position that the cash resources required in order to enable it to resume business are only $4,045,162.55, most of which is covered by cash on hand and to be realized from sales already authorized. Although it is estimated that, in addition to the $4,045,162.55 needed immediately, $2,290,000 will be required to satisfy claims to be paid within thirty days after reopening, $3,430,000 to meet claims payable within ninety days after reopening, $2,435,000 to cover claims to be paid within ten months subsequent to resumption of business, and $2,175,000 to pay claims payable thereafter (a total of $14,375,162.55, inclusive of the $4,045,162.55), the company is unwilling to permit the sale of any of its securities at the present time except the small amount necessary to make up the difference between the cash resources required upon reopening, and the cash on hand and to be realized from sales already ordered, taking the stand that no sales should be made except at such times as cash is needed to satisfy claims immediately payable, and only to that extent. In other words, to quote from the affidavit of Deputy Superintendent of Insurance Brennan, sworn to July 19, 1933: “ There is no intention on the part of the company’s officers to liquidate securities until the obligations of the company mature and become adjusted, which, as they argue, will not be for some time — perhaps months — and in the interval there is no indication of any desire on their part to transform the
This insistence by the company upon the retention of the highly speculative securities which make up a very large part of its portfolio is sought to be justified by the claim that “ it is the consensus of the best opinion in the financial world that the value of securities will be higher in the last months of 1933 and in 1934, so that the value of the securities available to the company should be greater.” Whatever may be said for a contention of this character in the case of a company with a substantial surplus, it must be manifest that it is entitled to little weight when applied to a company on the very border line between solvency and insolvency — especially where such company is already in the possession of the Superintendent of Insurance for the purposes of rehabilitation as a result of insolvency directly attributable to the volatile and speculative character of the company’s investments. In such a situation the right of the company to determine its own investment policy is subordinate to the rights of creditors, policyholders and the general public. The paramount consideration at all times should be the protection and proper safeguarding of the interests of the creditors, policyholders and the public. At the present time the assets of the company appear to be sufficient, if a substantial amount of speculative securities are converted partly into cash and partly into conservative stable investments, to assure the payment in full of all claims against the company. To allow the securities portfolio of the company to remain in its present form would be to permit the stockholders to engage in speculative market activities at the risk and possible expense of creditors and policyholders. This the court cannot sanction.
The necessary revamping of the security holdings of the company, involving as it does the partial liquidation of the present portfolio, would, it is estimated, require several months, and perhaps longer, depending upon market conditions. Liquidation of substantial amounts of securities in quantities too great for the market to absorb would cause prices to break materially and would, therefore, defeat its own purpose. The past history of the company satisfies the court that the interests of creditors and policyholders would be better served if the choice of the securities to be sold and the time and manner of their liquidation were exercised by the Superintendent of Insurance under the court’s supervision than they would be if the present management of the company were intrusted with the task, especially in the face of the favor in which die manage
It may be that after the Superintendent has accomplished the proposed changes in its portfolio and proceeded with its rehabilitation in other respects, the affairs of the company will be in such condition as to permit termination of rehabilitation and the resumption of business by its officers and directors with perfect safety to creditors, policyholders and the general public. It is unnecessary to determine at this time whether all the recommendations made by the Superintendent of Insurance, such as changes in business policy and in personnel, would have to be complied with as a condition of terminating rehabilitation. Suffice it for the purposes of the instant application to state that in the court’s opinion the condition of the company at the present time is such that the termination of rehabilitation and the resumption of its business would be hazardous to its policyholders, its creditors and the public. The motion is denied.