STATE OF FLORIDA DIVISION OF ADMINISTRATIVE HEARINGS REVISED JOINT PRE-HEARING STIPULATION

Transcription

1 STATE OF FLORIDA DIVISION OF ADMINISTRATIVE HEARINGS PREMIER GROUP INSURANCE COMPANY, Petitioner, vs. OFFICE OF INSURANCE REGULATION, DOAH Case No.: Respondent. / REVISED JOINT PRE-HEARING STIPULATION Petitioner, Premier Group Insurance Company, ( Premier ) and Respondents, the Office of Insurance Regulation (the Office ) file this Revised Joint Pre-hearing Stipulation to revise and supplement the Joint Pre-hearing stipulation previously filed in the above case, and state as follows: I. Nature of the Controversy. 1. This case is a challenge to the Office s Notice of Intent to order Premier to return excess profits pursuant to section , Florida Statutes, which requires workers compensation insurers, and certain other insurers, to return any excessive profits earned by the insurer to their policyholders. 2. In conjunction with this case, Premier filed a challenge to the Office s reliance on an agency statement of general applicability that was not promulgated as a rule in the excessive profits context. The cases were originally consolidated, but were severed for purposes of holding a final hearing on the rule challenge case. A Final Order was entered on July 5, 2012, determining that: Filed September 11, :38 PM Division of Administrative Hearings

2 the Office s statement that federal income taxes may not be included as an expense which may be deducted on Form F for purposes of calculating excess profits under section is a statement meeting the definition of a rule that has not been adopted pursuant to section (1), and the Office must immediately discontinue all reliance upon the statement or any substantially similar statement as a basis for agency action. 3. Although the Parties have resolved most of the issues relating to Premier s excessive profits filing, there remains a dispute between the Parties as to the appropriate amount of federal income tax expense that may be deducted by Premier in its excess profits filing. The appropriate methodology to allocate federal income tax expense was not at issue in case number RU and was not addressed in the Final Order entered in that case. 4. In order to calculate whether workers compensation insurers have earned excessive profits, section requires workers compensation insurance companies to file annually, on a form prescribed by the Commission, information regarding the insurer s premium, losses, expenses, and dividends with regard to each respective reporting period. If the information submitted by the insurer indicates that the insurer has earned an excessive profit for the reporting period, section requires the Office to order a return of those excess profits either by cash refund or credits to their policyholders. 5. An excessive profit as defined by Section , has been realized if the net aggregate underwriting gain for [the subject lines] is greater than the net aggregate anticipated underwriting profit for these lines plus 5 percent of earned premiums for the 3 most recent calendar years for which data is to be filed under [Section ]. The net aggregate underwriting gain or loss is to be determined according to the following formula: The sum of the accident year incurred losses and loss adjustment expenses as of December 31 of the year, developed to an ultimate basis, plus the administrative and selling expenses incurred in the calendar year, plus policyholder dividends applicable to the 2

3 calendar year, shall be subtracted from the calendar-year earned premium to determine the underwriting gain or loss , Fla. Stat. If the Office determines that an excessive profit exists over the three year reporting period taken as a whole, the Office may order that the excessive profit be refunded. II. Petitioner Premier s Position 6. The Parties have agreed that the amount of excessive profit earned by Premier for the period is $3,067,220.00, not including a deduction for federal income tax expense. 7. Section (1)(3)3. provides that insurance companies may deduct for excessive profit purposes [t]he administrative and selling expenses incurred in this state or allocated to this state for the calendar year. 8. Insurance companies routinely allocate expenses pursuant to section , and the Office routinely accepts such allocations. It is up to insurance companies to identify an allocation methodology and provide an expense allocation to the Office. The Office will accept the allocation methodology if it is a reasonable methodology. 9. Methodologies that have been accepted in the past by the Office include expense allocations based on (1) the percentage of premium written in Florida, (2) the percentage of premium earned in Florida, and (3) methodologies utilizing time studies, among others. 10. Insurance companies are currently required to utilize a statutory allocation methodology to allocate federal taxable income to the State of Florida for Florida corporate income tax purposes. This allocation methodology is required by section , Florida Statutes, and expressly states the appropriate allocation is direct written premium on Florida risks divided by direct written premium on risks anywhere. 3

4 11. Premier utilized the statutory allocation methodology set forth in section and allocated its federal taxable income to the State of Florida based on the percentage of direct written premium Premier writes in Florida. To account for the fact that investment income is not considered for excessive profits purposes, Premier reduced the amount of its federal taxable income by the amount of investment income reflected on its federal income tax return. Having apportioned federal taxable income to Florida pursuant to the statutory allocation method, and having excluded investment income from the calculation, Premier multiplied the Florida portion of its federal taxable income by its 35% federal tax rate to arrive at federal income tax expense allocated to Florida. 12. Utilizing the above allocation methodology, Premier has determined that $2,406, in federal income tax expense is appropriately allocated to Florida for calendar years , resulting in an excess profit pursuant to section of $660, Although the Office has not identified any appropriate allocation methodology to be utilized by Premier or any other insurance company to allocate federal income tax expense, the Office has stated that the statutory allocation methodology utilized by Premier is not a reasonable methodology. The Office reached this conclusion despite the fact that it has previously determined the same allocation methodology is reasonable to apportion other expenses, and despite the fact that the allocation methodology is set forth in statute 14. Section requires expenses to be valued as of the reporting year and does not take into account future impacts on calendar year administrative and selling expenses. The Office does not permit insurance companies to look to future impacts to adjust administrative and selling expenses. 4

5 15. Because administrative and selling expenses are measured for the calendar year, and in this case were reported as of December 31, 2008, any future impact on Premier s tax returns caused by the return of excessive profits is speculative and irrelevant to the amount of federal income tax expense included in its excess profits filings for the years Accordingly, the appropriate allocation of federal income tax expense for Premier, and for every other insurance company for that matter, is the allocation methodology already set forth in Florida Statutes and utilized by insurance companies for Florida corporate income tax purposes. The appropriate allocation results in federal tax expense of $2,406, for calendar years and an excess profit pursuant to section of $660, This excess profit amount should be determined to be the amount owed by Premier as an excess profit for the years III. Respondents Position 17. Premier s methodology allocates Federal Income Tax expenses that relate to business in other states to Florida in contradiction of the Section , Florida Statutes. Furthermore, the Office is unaware of any method of allocation which could be applied to all companies that would accurately reflect that portion of Federal Income Tax which pertains to business in Florida. 18. Moreover, based upon the data provided by Premier, it is impossible to know exactly how much Federal Income Tax pertains to Florida workers compensation underwriting profit. Under a strict interpretation of the Office s rule, form, and of Section , Florida Statutes, Premier s failure to provide such data should result in an allocation of $0 which would result in excess profit of $3,067,220. 5

6 19. However, to the extent that an amount must be allocated, the Office is of the position that the maximum allowable deduction is $640,711, which would result in an excess profit of $2,426, This maximum allowable deduction for Federal Income Tax is based on the statutory maximum retained underwriting profit for Premier and Premier s effective tax rate of 35% and accounts for the fact that Premier will receive a credit to income (deduction) in the form of a policyholder dividend in an amount equal to the excess profit returned, thus reducing the amount of federal income tax paid. IV. Joint Exhibits No. Description 1 Section , Florida Statutes 2 Section 69O , Florida Administrative Code 3 Form No. OIR-B1-15 and instructions 4 Notice of Intent to Issue Order to Return Excess Profits 5 July 1, 2009, Workers Compensation Excessive Profits Form F 6 December 11, 2009, Amended Workers Compensation Excessive Profits Form F 7 June 21, 2010, Second Amended Workers Compensation Excessive Profits Form F 8 January 13, 2012, Third Amended Workers Compensation Excessive Profits Form F 9 July 1, 2009, Excess Profits Report 10 December 11, 2009, Excess Profits Report 11 June 21, 2010, Excess Profits Report 12 January 13, 2012, Excess Profits Report 13 Complete Copy of Rule File # [corresponding to OIR BATES ] 6

7 14 April 25, 2011, Letter from Benjamin Biscoglia to James Watford 15 1/4/10 from Benjamin Biscoglia to Erdell Maurice and Donnie Hester re: Explanations 16 3/23/10 from Benjamin Biscoglia to Jim Watford re: Florida Intent to Issue Order 17 11/10/10 from Jim Watford to Donnie Hester re: Notice of Development of Rulemaking. 18 3/21/11 from Benjamin Biscoglia to Jim Watford re: 2009 Florida Excess Profits Exhibits with Explanations 19 5/2/11 from Benjamin Biscoglia to Donnie Hester and Kenneth Tinkham re: Premier Group Insurance Company - Excess Profit Case 20 Deposition of Shannon Doheny 21 Premier State and Federal Corporate Income Tax Returns for Rule 12C , F.A.C. 23 Text of Section Exhibit prepared by the Office reflecting calculation of excess profit utilizing agreed upon numbers without accounting for federal income tax expense V. Petitioner s Exhibits No. Date Description Objections/ 1 3/13/12 Office s Response to Petitioner s Interrogatories 2 12/7/09 Respondent s Response to FFVA Mutual Insurance Company s First Set of Interrogatories 3 8/5/09 FFVA Mutual Insurance Company Petition Challenging Agency Statements Defined as Rules 4 1/21/10 FFVA - Joint Motion to Continue Final Hearing and Stay Proceedings. 5 1/21/10 FFVA - Order Granting Continuance and Placing Case in Abeyance 6 2/3/10 from Brittany Brenner to J. McDermott, B. Relevance/ 7

8 Prentiss, C. Meadows, A. Durham, S. Parton 7 2/16/10 from Jim McKee to Christopher Meadows re: Excess Profits rule development 8 3/4/10 from Jeffrey Joseph to C. Meadows and J. Watford re: Excess Profits 9 6/17/10 from Jim Watford to M. Milnes and R. Koon re: Excess Profits Rule and Form with attachments 10 7/2/10 from Jim Watford to Belinda Miller and M. Milnes re: Excess Profits Rule and Form Relevance/ Relevance/ Relevance/ 11 10/19/10 from Jim Watford to S. Doheny and R. Koon re: Administrative Rule 69O ; Form OIR-B /19/10 from Bob Prentiss re: Rule Workshop 13 10/22/10 from Jim Watford to Christopher Meadows re: Proposed Rule and Form 14 11/19/10 from Ray Neff to D Hester, B. Biscoglia re: Excess Profits - Status of Rule Making Process 15 12/16/10 from Debra Seymour re: Workshop and Hearing List for OIR 16 2/7/10 from Bob Prentiss to Shannon Doheny re: Excess Profits Rule 17 2/7/11 from Shannon Doheny to Jim Watford re: Excess Profits Rule 18 8/8/11 from Shannon Doheny to Jim Watford and Bob Prentiss re: potential conversation with Commissioner on 8/23/ /18/11 from Jim Watford to Shannon Doheny re: meeting with commissioner Relevance/ Relevance/ Relevance/ Relevance/ Relevance/ Relevance/ 20 June 17, 2010, Proposed Draft of Form No. OIR-B September 1, 2010, Draft of Rule September 17, 2010, Draft Form No. ORI-B1-15 8

9 23 December 14, 2010, Draft of Rule /22/10 Neff & Associates Comments to the Record 25 11/24/10 Neff & Associates Comments to the Record 26 Notice of Development of Rulemaking (2/22/10) 27 Notice of Development of Rulemaking (11/17/10) 28 8/21/009 from Benjamin Biscoglia to Donnie Hester re: summary of filing 29 12/15/09 from Benjamin Biscoglia to Donnie Hester re: review of submission 31 3/22/10 from Donnie Hester to Benjamin Biscoglia and Ray Neff re: Florida Inten t to Issue Order 33 3/29/10 from Benjamin Biscoglia to Donnie Hester and Ray Neff re: Florida Intent to Issue Order 34 8/24/09 from Benjamin Biscoglia to Donnie Hester re: Excess Profits 35 8/27/09 from Donnie Hester to Ray Neff re: Reviewing the Premier Submissions 36 4/1/10 from Donnie Hester to Benjamin Biscolgia and Ray Neff re: Request for Proceeding 37 4/6/10 from Donnie Hester to Benjamin Biscolgia and Ray Neff re: Petition 38 4/8/10 from Donnie Hester to Benjamin Biscolgia and Ray Neff re: Action re: Notice of Intent to Issue Order 39 4/13/10 from Donnie Hester to Benjamin Biscolgia and Ray Neff re: Excess Profits 40 6/2/10 from Benjamin Biscoglia to Donnie Hester and Ray Neff re: Premier Group Insurance Company 41 6/21/10 from Donnie Hester to Benjamin Biscolgia and Ray Neff re: Florida Excess Profits 42 Instructions to Florida Corporate Income Tax Form 43 Exhibit demonstrating statutory allocation methodology 9

10 44 Exhibit demonstrating effect of statutory allocation methodology and alternative allocation methodology on excess profit filing 45 Form F filing completed using statutory allocation method for federal income tax expense Premier further reserves the right to introduce rebuttal exhibits. VI. Respondent s Exhibits No. Description Objections/ 1 Actuarial Standards Board, Actuarial Standards of Practice # 29 [OIR BATES ] 2 Actuarial Standards Board, Actuarial Standards of Practice # 30 [OIR BATES ] 3 dated December 11, 2009 between Benjamin Biscoglia and Erdell Maurice 4 dated January 4, 2010 between Benjamin Biscoglia and Erdell Maurice 5 chain between Jim Watford and Benjamin Biscoglia corresponding to BATES PGIC between Chris Meadows and Benjamin Biscoglia dated June 23, 2010 Relevance Relevance Relevance 7 PGIC 2007 Federal Tax Return 8 PGIC 2006 Federal Tax Return 9 PGIC 2005 Federal Tax Return 10 NCCI Rate Filing January 1, NCCI Rate Filing January 1, NCCI Rate Filing January 1, NCCI Rate Filing January 1, 2008 Relevance 10

11 14 NCCI Rate Filing January 1, 2009 Relevance 15 PGIC Annual Statement Insurance Expense Exhibit PGIC Annual Statement Insurance Expense Exhibit PGIC Annual Statement Insurance Expense Exhibit Official NAIC Annual Statement Instructions 19 NAIC Accounting and Procedures Manual 20 Consent order in March 8, 2010 Letter from Foley Lardner with attached comments from Ray Neff associated with File Comments from Harry Shufford associated with File Filing # Profit and Contingencies Factor Exhibit All objections 25 Explanatory presentation re: Florida Excessive Profits Law created by Jim Watford 26 PGIC Florida Corporate Tax Return PGIC Florida Corporate Tax Return PGIC Florida Corporate Tax Return Deposition of Benjamin Biscoglia All objections 30 Deposition of Donnie Hester All objections 31 Deposition of Ray Neff All objections 32 Deposition of Donnie Hester All objections 33 OIR File # [corresponding to OIR BATES ] All objections preserved as to this composite exhibit. 34 Text of Chapter , Laws of Florida passed during the 2012 Legislative Session 11

12 35 All documents listed by Premier; All documents provided by Premier in discovery; All documents provided to Premier by the Office in discovery All objections 36 Additional worksheet reflecting Premier s calculation relied upon during deposition of James Watford. 37 Worksheet reflecting Premier s calculation of Excess Profit utilizing the apportionment factor found in Section , Florida Statutes Presented to Office prior to May 22, 2012 hearing. 38 Deposition of Ray Neff taken on May 22, 2012 All objections This witness is available to testify at hearing. 39 Deposition of Donnie Hester taken on August 30, 2012 All objections This witness is available to testify at hearing. 40 Notes to Financial Statements part of Premier s 2011 Annual Statement filed on or around March 1, Relevance. 41 I.R.S. Form 1139 Relevance. 42 I.R.S. Instructions to Form 1139 Relevance. 43 I.R.S. Form 1120PC Relevance. 44 I.R.S. Instructions to Form 1120PC. Relevance. 45 I.R.S. Publication 542 Relevance Instructions I.R.S. PC 1120 Relevance. 47 Exhibit prepared by James Watford referencing Premier s December 2009 methodology 48 Exhibit prepared by James Watford referencing Premier s June 2010 methodology 49 Exhibit prepared by James Watford referencing Premier s May 2012 methodology 12

13 50 Exhibit prepared by James Watford reflecting Office s methodology for calculating maximum allowable Federal Income Tax deduction 51 Exhibit prepared by Office reflecting calculation of excess profit utilizing agreed upon numbers 52 Schedule T from Annual Statement for 2005, 2006, and All Exhibits Prepared by James Watford and disclosed to Premier All objections 54 All other matters identified by the Office in discovery All objections 55 All materials listed as exhibits by Premier All objections 56 All rebuttal exhibits. All objections VII. Petitioner s Witnesses A. Donnie Hester (Expert) Premier Group Insurance Company, Murfreesboro, TN; B. James Watford Office of Insurance Regulation, Tallahassee, FL; C. Ray Neff (Expert) Neff & Associates Consulting, Sarasota, FL; F. All witnesses listed by the OIR; G. All rebuttal witnesses. VIII. Respondent s Witnesses A. James Watford Office of Insurance Regulation, Tallahassee, FL; B. Donnie Hester Premier Group Insurance Company, Murpheesboro, TN; C. Ray Neff Neff & Associates Consulting, Sarasota, FL; D. Robert Ducasse Florida Department of Revenue, Tallahassee, FL; E. All witnesses listed by Premier; F. All rebuttal witnesses. 13

14 IX. Stipulated facts: 21. Premier is a foreign insurer authorized to write workers compensation insurance in the State of Florida. As a workers compensation insurer, it is subject to the jurisdiction of the Office. Premier began writing workers compensation insurance coverage in Florida on January 1, The Office is a subdivision of the Financial Services Commission responsible for the administration of the Insurance Code, including Section , Florida Statutes. 23. On or about June 30, 2009, Premier filed, with the Office of Insurance Regulation, its original Form F Filing pursuant to section and Administrative Rule 69O Rule 69O requires that such form be filed each year on or before July OIR B1-15 (Form F) is a form that the Office has adopted in Rule 69O , which was promulgated pursuant to Section , Florida Statutes. 25. The information contained in the Form F is used by the Office to calculate the amount of Excessive Profits that a company has realized for the three calendar-accident years reported. 26. The formula for calculating excessive profits is set forth in Section , Florida Statutes and is: a. Excessive Profits = Underwriting Gain Anticipated Underwriting Profit (.05 x Earned Premium); b. Underwriting Gain = Calendar Year Earned Premium (Accident Year Incurred Losses and Accident Year Loss Adjustment Expenses developed to an ultimate basis+ Calendar Year Administrative and Selling Expenses + Calendar Year Policyholder Dividends); 14

15 c. Anticipated Underwriting Profit = Calendar Year Earned Premium x Profit and Contingencies Factor. 27. Premier filed an amended Form F on December 11, Premier filed a second amended Form F on June 21, A third amended Form F was prepared and attached to Premier s Amended Petition for Hearing filed on January 13, The Office issued its Notice of Intent to Issue an Order to Return Excess Profits (hereinafter Notice ) on March 19, The Notice reflected Office s intent to issue an order to return excess profits in an amount of $7,673, The Notice provided that the company had 21 days from the date therein to file a petition for an administrative hearing in DOAH. Said petition was filed, but it was held in abeyance while the two parties attempted to work toward resolution. 32. The Parties have stipulated to the acceptance of Premier s amended January 13, 2012, Form F filing, with the exception of two items: a. First, the Parties have stipulated Premier will remove from line 4.D. of its January 13, 2012, filing the portion of Florida Corporate Tax it paid that relates to investment income. The Parties accordingly stipulate the number shown on line 4.D. of Premier s January 13, 2012, filing should be reduced by $139, b. Second, the Parties disagree as to the amount of federal income tax expense to be included on line 4.E. of Premier s Form F Filing. 33. Before any adjustment to Federal Income Tax is made, Premier s underwriting profit for each year in question, as calculated pursuant to section and shown on the Form F, is as follows: 2005: $2,923,157; 2006: $2,119,125; 2007: ($785,170). 15

16 34. Premier s federal income tax rate for the years was 35%. 35. Pursuant to section , Florida Statutes, the maximum amount of underwriting profit that a company can retain is the net aggregate anticipated underwriting profit plus five percent of earned premiums for the three most recent calendar years reported on Florida Workers Compensation business. In Premier s case, for the years in question, underwriting profits exceeding $1,189,892 are considered excessive profits under the statute. X. Stipulated Issues of Law 36. The Division of Administrative Hearings has jurisdiction over the parties and subject matter of this proceeding. 37. This proceeding is governed by Chapter 120, Florida Statutes, and Title , Florida Administrative Code. XI. Disputed Issues of Fact A. Petitioner 38. Whether the Office s Notice of Intent to Issue an Order to Return Excess Profits in the amount of $7,673,945 is valid. 39. Whether the statutory allocation methodology utilized by Premier is a reasonable methodology to allocate federal income tax expense. B. Respondent 40. The amount of excess profits that the Office will be required to order Premier to return. 16

17 XII. Disputed Issues of Law A. Petitioner 41. Whether the Office s interpretation of section with regard to the manner in which expenses should be allocated in calculating whether excess profits have been realized is consistent with the statute; 42. Whether the Office s interpretation and application of section in determining that information in excessive profits filings results in excess profits liability, violates the due process provisions of the Florida and United States constitutions; and B. Respondent None XIII. Disagreements as to the application of the rules of evidence A. Petitioner None B. Respondent None XIV. Pending motions and other matters None XV. Length of time required for hearing One day 17

18 Respectfully submitted this 11th day of September /s/ Kenneth Tinkham Kenneth Tinkham, Esq. Timothy Gray, Esq. Office of Insurance Regulation Legal Services Office 200 East Gaines Street Tallahassee, FL (850) Counsel for the Office of Insurance Regulation and Financial Services Commission /s/ James A. McKee Thomas J. Maida Wes Strickland James A. McKee Foley & Lardner, LLP 106 East College Avenue, Suite 900 Tallahassee, Florida Telephone: (850) Facsimile: (850) Counsel for Premier Group Insurance Company 18