WHEN AN INSURER MAY NOT BE QUITE AS GRAND AS ITS NAME
Mention the words "Dai Ichi" and finance types immediately think of Dai-Ichi Kangyo Bank Ltd., the world's largest bank, or perhaps giant Dai-Ichi Mutual Life Insurance, Japan's venerable insurer. But these days, especially among insurance regulators, there's talk of a third Dai Ichi, something called Dai Ichi Kyoto Reinsurance Co. And much of the talk isn't good.
The company has become an intriguing mystery to regulators on three continents, who are concerned about insurer solvency. While there's no hard evidence that Dai Ichi Kyoto has done anything wrong, regulators have become increasingly concerned about a rash of shaky foreign reinsurers dealing with U. S. companies. Some take on risks and then walk away when they're called upon to pay claims that cover losses.
Dai Ichi Kyoto, which is incorporated in Belgium, says it is financed by 64 Japanese pension funds. But state insurance regulators throughout the U. S. have been unable to determine the company's owners, and government officials in Tokyo say the pension funds don't exist. Dai Ichi Kyoto, according to Dai-Ichi Mutual, has misrepresented itself as affiliated with the insurer. Says one U. S. regulator: "Nobody knows who the hell these guys are." Adds David B. Simmons, general counsel for the National Association of Insurance Commissioners: "There have been questions raised as to how substantial Dai Ichi Kyoto is."
MURKY ROOTS. The company insists that it is solid. John E. Mitchell, Dai Ichi Kyoto's London-based head underwriter, says it is a legitimate reinsurer with $ 50 million in capital. He says the company writes a limited volume of U. S. business that it views "closely and with caution."
Determining Dai Ichi Kyoto's ownership and wherewithal is important: Reinsurance, by which insurers share risks, is a vital financial backstop. But a third of the $60 billion-plus that U. S. insurers now reinsure goes to offshore companies whose finances often are shielded from official U. S. scrutiny.
U. S. officials first heard of Dai Ichi Kyoto in 1990, in connection with the now insolvent World Life & Health Insurance Co. of Pennsylvania. Dai Ichi was listed in World Life documents as one of several reinsurers of health coverage sold by the company. World Life had bought reinsurance from thinly capitalized groups represented by Atlanta-based insurance broker Alan Teale. Teale's business dealings have been probed by the Senate permanent subcommittee on investigations and also are the subject of a federal grand jury inquiry in Georgia (BW -- July 29). Dai Ichi Kyoto has denied it ever had reinsurance deals with World Life or Teale, who won't comment.
MASQUERADER. Regulators in several states now believe Dai Ichi Kyoto may be trying to masquerade as an affiliate of more established companies. An official of Dai-Ichi Mutual Life told a Delaware regulator that Dai Ichi Kyoto had unsuccessfully tried to borrow money from a Belgian branch of Britain's Barclays Bank PLC by misrepresenting itself as a subsidiary of Dai-Ichi Mutual. The reinsurer's Mitchell could not be reached on this point.
Although the nature and volume of Dai Ichi Kyoto's U. S. operations are murky, the company seems to be focusing on reinsuring financial-guarantee bonds. Lenders buy such bonds from insurers to guarantee repayment by less-than-creditworthy borrowers. Bonds also are bought by borrowers who otherwise would have been unable to get credit.
One of Dai Ichi Kyoto's recent deals involves Grassy Hills Country Club of Orange, Conn., which is in Chapter 11. To get out of bankruptcy court, its owner, Fairway Land Acquisition Co., is borrowing $2 million to repay a mortgage on the club. To get the loan approved, the owner plans to pay $253,000 in fees for a $2 million bond, issued by United Financial Operations of Englewood, Colo., and reinsured by Dai Ichi Kyoto. Neither United nor the reinsurer could be reached for comment on this issue.
Grassy Hills' accountant, Michael J. Knight, says the club's owners still are checking out the Dai Ichi deal. "We got it through a lot of different contacts," says Knight. "I chased the chain all the way around the world myself." He says he has seen financial information on Dai Ichi Kyoto but adds: "I'm not sure it's satisfactory yet." The club's creditors also are skeptical. Says Frances Pennarola, the lawyer for one debt holder: "I don't think a reasonably prudent lender would make a loan on the basis of this." The bankruptcy court is scheduled to consider the proposed reorganization on Nov. 25.
Regulators are busily probing Dai Ichi Kyoto's background, especially its claim that it was organized in 1989 with money from 64 Japanese pension funds. A recent letter from the Japanese Finance Ministry to the National Association of Insurance Commissioners says Tokyo authorities "have not found any information on their existence in Japan." Dai Ichi Kyoto apparently was bought last year by a London outfit named Dai Ichi Holdings PLC, whose stockholders are three Delaware corporations that share a single agent, a Wilmington woman who will not identify just who is behind the threesome.
NO AUDIT. Uncertainty even surrounds Dai Ichi Kyoto's accountants. At the time of its founding, Dai Ichi Kyoto issued promotional materials listing the Brussels office of Ernst & Young as its auditor. While the firm had advised Dai Ichi Kyoto on incorporation, it says it did not undertake any audit work. Coopers & Lybrand did audit Dai Ichi, but the firm recently reported to Delaware authorities that it had withdrawn because "the company failed to provide us with any information over a period of months."
Not surprisingly, such reticence doesn't sit well with state regulators. Dai Ichi Kyoto is unlikely to enjoy much more time in the shadows.