Opinion ID: 2598249
Heading Depth: 1
Heading Rank: 18

Heading: Reduction in surplus

Text: There is no dispute that the surplus will be reduced by at least $131 million, and John Knack, BCBSKS's vice president, admitted there was absolutely no commitment from Anthem that more capital will be added. Nevertheless, Anthem and BCBSKS first argue that the $131 million reduction has already been approved by the Commissioner in the conversion process, which they claim included a finding that the continued operations of the new stock insurer would not be hazardous to existing or future policyholders or the public. Accordingly, they imply there can be no substantial competent evidence supporting her findings which contradict this one. This argument was previously addressed and rejected. Among other things, the Commissioner made no such finding and made no express conclusion approving the conversion part of the sponsored demutualization. Second, Anthem and BCBSKS argue the Commissioner's finding that the remaining surplus of $155 million will be reduced again  to between $90 and $112.5 million  is not supported by substantial evidence. They assert that the finding was improperly based on the testimony of Michael Smith, Anthem's Chief Financial Officer, that Anthem typically seeks over time to capitalize its subsidiaries at 200-250% of control level risk-based capital. We note, however, that although BCBSKS argues the Commissioner guessed as to its authorized control level, Anthem admits the Commissioner used the testimony of BCBSKS's Vice-President of Finance, Donald Lynn, that the control level of risk-based capital for BCBSKS was in the range of $40 to $45 million. Moreover, the record on appeal discloses Smith agreed that at the time, BCBSKS had a surplus of over 600% ($286 million) of the authorized control level ($45 million). According to the Commissioner's math, the resultant range after reduction to 200-250% would equal the $90-$112.5 million. Nevertheless, BCBSKS argues that the Commissioner disregarded the part of Smith's qualifying testimony that did not suit her purposes, i.e., that Anthem's practice in capitalizing its subsidiaries takes into account their current and projected capital needs and that Anthem regularly monitors its subsidiaries to ensure that they meet all internal, NAIC, state, and Blue Cross Blue Shield Association capitalization requirements. The Commissioner found it more important, however, to rely on Mr. Smith's testimony that it had been Anthem's practice, and Anthem's intention in the future, based upon that practice, to capitalize all of its subsidiaries in a range of 200 to 250% of the State-mandated minimum authorized control level on a state-by-state basis in order to ensure Anthem's maximum flexibility. Anthem and BCBSKS point out, however, that Smith also testified that these reductions were done over reasonable periods of time, not precipitously. They further argue that K.S.A. 40-3306 provides that the Commissioner may disapprove any future requests to reduce surplus via dividend distribution which are not reasonable. Accordingly, she retains authority to ensure that the company does not fall below the statutory surplus minimums. We addressed this argument earlier as well. Whether future reductions are precipitous or not, the acquisition statue allows her latitude to be proactive, not reactive. As mentioned above, we apply a very deferential standard of review to findings of fact. Based upon that standard, we hold that substantial competent evidence exists to support the Commissioner's finding. In short, consistent with Anthem's typical business practice, it is likely that Anthem will seek to reduce, or that it plans to reduce, BCBSKS's surplus to 200-250% of control level risk-based capital. This reduction, coupled with the earlier reduction of $131 million, decreases by more than one-half the original surplus of $286 million. This ground alone is sufficient to support her conclusions that the sponsored demutualization is unfair and unreasonable to policyholders, not in the public interest, and likely to be hazardous or prejudicial to the insurance-buying public. In their discussion of an alleged total absence of substantial evidence to support the Commissioner's finding regarding surplus reduction, Anthem and BCBSKS also allege the absence is dramatized by the fact that Anthem offered to guarantee all of the insurance obligations of BCBSKS. According to them, that guarantee would effectively replace the $131 million of distributed surplus with Anthem's $2.2 billion surplus. They argue that she disregarded the guarantee offer and this disregard was also clearly arbitrary and capricious. Sixteen days after the evidentiary hearing had closed on January 9, the guaranty offer was attached to the record via Anthem's post-hearing memorandum and proposed findings of fact and conclusions of law. Although not required to do so, the Commissioner did reference the offer in her order as follows: The Applicants argue that Anthem will offer guarantees that achieve the stated goal of enhanced strategic and financial flexibility. The guarantees offered, however, do not extend beyond the company's obligations to policyholders. The company's creditors would experience a company that is not as well capitalized, as before the sponsored demutualization. This evidence is given little weight. The acquisition statute requires the Commissioner to evaluate the impact of the proposed acquisition on the policyholders, the insurance-buying public, and the public at large. The creditors of a large company can be numerous and are part of the public. It is doubtful the proposed guaranty would be judicially construed to include creditors. See Iola State Bank v. Biggs, 233 Kan. 450, Syl. ¶ 2, 662 P.2d 563 (1983) (After the intention of the parties or the scope of the guarantor's undertaking has been determined by general rules of construction, the obligation is strictly construed and may not be extended by construction or implication.). The Commissioner also argues that she had to weigh the value of the guarantee against the value of the actual cash in hand available from the existing surplus in determining which option better protected the policyholders, insurance-buying public, and the public at large. She chose the certainty of the surplus. This is not an unreasonable decision, since guaranties can be more difficult to enforce than the contract underlying the debt itself. See Trego Wakeeney State Bank v. Maier, 214 Kan. 169, 176, 519 P.2d 743 (1974) ([T]he contracting of a debt is a single act, resulting in an immediate and unconditional obligation, while the contract of guaranty is complicated, and subject to many conditions which may defeat its enforcement.); Iola State Bank v. Biggs, 233 Kan. at 456 (listing several defenses which relieve the guarantor of obligation to pay). We conclude the Commissioner did not err in choosing the surplus over the guaranty. See Mitchell v. Liberty Mut. Ins. Co., 271 Kan. 684, 24 P.3d 711 (2001).