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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form U-1
APPLICATION-DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
AGL RESOURCES INC.
817 West Peachtree Street NW
10th Floor
Atlanta, Georgia 30308
____________________________________________________________________
(Names of company or companies filing this statement
and addresses of principal executive offices)
Paul R. Shlanta, General Counsel
AGL RESOURCES INC.
817 West Peachtree Street NW
10th Floor
Atlanta, Georgia 30308
____________________________________________________________________
(Name and address of agent for service)
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Item 1. Description of Proposed Transaction
(a) Furnish a reasonably detailed and precise description of the proposed
transaction, including a statement of the reasons why it is desired to
consummate the transaction and the anticipated effect thereof. If the
transaction is part of a general program, describe the program and its
relation to the proposed transaction.
Introduction
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AGL Resources Inc. ("AGLR"), a Georgia corporation, and a holding
company registered under the Public Utility Holding Company Act of 1935 (the
"Act"), requests authorization to establish a subsidiary captive insurance
company ("the Captive") to provide certain key layers of insurance coverage for
AGLR and its associate companies (the "System") as described below. By using the
Captive to underwrite some risks and maintaining traditional insurance with
respect to other risks, the System can minimize its cost of obtaining insurance
and managing claims while maintaining adequate coverage of the risks it
encounters in its businesses.
It is important to note, however, that although the Captive will
replace certain insurance sold to the System by traditional insurance providers,
the Captive will not increase the risk of loss to the System. To the extent
traditional insurance programs are reduced, the System will obtain equal levels
of loss protection and coverage in the reinsurance market available only to
insurance companies such as the Captive. With the exception of a small amount
not to exceed the System's current $1,000,000 self-insured retention in
connection with insurance programs that the Captive may undertake in the future
and discussed within, the Captive will cede to third-party reinsurance carriers
all of the risks that it underwrites. The Captive is essentially an
administrative mechanism that permits the System to access the reinsurance
markets that are only available to insurance companies or brokers. The Captive
also provides a less costly way to handle the System's claims.
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The Captive is expected to result in an immediate reduction in
insurance premiums and will provide other benefits discussed below. AGLR
estimates that it can significantly reduce its cost of purchasing traditional
insurance without increasing the System's risk exposure by accessing the
reinsurance market directly through the Captive and by using its own 15-year
loss experience to "actuarially" identify its losses for property and casualty
lines. In the discussion below, we first describe how AGLR's current insurance
program functions and then explain in detail the operations of the proposed
captive insurance company.
AGLR's Current Risk Management Program
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AGLR considers risk management to be a key corporate function. By
protecting the physical and financial assets of each System company, the risk
management program allows the System to reach its goals and objectives without
the disruption that could be caused by a significant unexpected loss. Risk
management is coordinated by AGL Services Company ("AGSC"), a mutual service
company serving the AGLR System. One of the AGSC Risk Management Department's
primary responsibilities is the procurement of a broad array of insurance
coverage and services on behalf of the entire System. On an annual basis, the
System spends approximately $5,000,000 for the purchase of traditional insurance
and related services (including payment of deductibles). This is a significant
expenditure and, in view of the increasingly competitive nature of the System's
business, it is important for the System to maintain and enhance its competitive
position by continuing to aggressively monitor and manage the cost for insurance
and related services.
As shown in Exhibit A, under the System's current insurance program,
AGSC, on behalf of the System, maintains a per occurrence deductible, also known
as a self-insured
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"retention", of $1,000,000 for automobile and general liability exposures,
$200,000 for directors & officers liability, $125,000 for "all-risk" property
coverage and $500,000 for workers compensation liability. AGSC purchases
traditional insurance to cover losses in excess of the self-insured retention.
In addition, certain AGLR subsidiaries maintain separate deductibles and
purchase separate coverage limits outside the System program.
In today's insurance market, and as more fully described below, traditional
insurance programs are relatively expensive to maintain, largely because of the
costs of doing business with a "full service" traditional insurer. Traditional
insurance programs are, in fact, supported and underwritten through a robust
"reinsurance" market that is available, generally speaking, only to insurance
companies. By eliminating the insurance "middleman" for selected transactions
and coverage, opportunities exist for significant savings for those companies
who can deal directly in the reinsurance market for certain elements of their
insurance programs.
AGLR believes that a comprehensive insurance program that blends
traditional insurance and alternative insurance obtained through a captive
insurance company is the best way to maximize cost effectiveness, minimize risk
exposure and provide each System company with the flexibility that each needs to
meet its strategic goals and objectives.
The Proposed Captive Insurance Program
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AGLR proposes to establish the Captive as a new subsidiary, that would
be authorized to operate as an insurance company in the British Virgin Islands.
As shown in Exhibit B, the Captive would underwrite a layer of risk within each
line of insurance coverage that is now being provided by traditional insurance.
In particular, the Captive will initially focus on providing the following
insurance coverage for the benefit of the System: 1) automobile and
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general liability above the $1,000,000 self-insured retention, and; 2) excess
coverage that will include all risk property, boiler & machinery, directors &
officers, crime, fiduciary and workers compensation and that will be placed (a)
above the self-insured retention, and (b) above traditional coverage that will
continue to be maintained by AGLR for the benefit of the System. The Captive
will target its underwriting activity on the portions of the liability program
where the greatest cost savings are possible. As stated, all risks associated
with insurance coverage proposed above provided by the Captive will be ceded in
their entirety to reinsurance companies. Accordingly, providing the coverage
through the Captive will not expose the System to any additional risk.
Under the insurance regulations of the British Virgin Islands, an
insurance company must be capitalized in proportion to its net underwritten
business. The net underwritten business consists of the gross amount of
insurance that a company writes less the amount that is reinsured with other
insurers. Because the Captive will reinsure all of the insurance that it
underwrites, its net underwritten business will be zero. Accordingly, the
minimal capitalization proposed for Captive will be fully adequate and
commensurate with the very low risk, on a net basis, that it will assume.
The initial Captive participation in the blended insurance program
would represent approximately 30% of the total System coverage. As stated above,
however, the Captive will cede all risk associated with coverage provided by it
to reinsurance companies and, consequently, will not increase the risk exposure
of the System. AGSC would continue to purchase certain traditional insurance for
all other coverage above the Captive coverage, just as is done under the current
program.
In the future, the Captive may seek to underwrite additional
insurance coverage
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and retain a small amount of risk that is within the System's current self-
insured retention. This coverage may include performance bonds and construction-
related insurance (wrap-up construction program) for contractors working on
projects for the System. A wrap-up construction program is utilized by a project
owner to provide economies of scale to the general contractor and all sub-
contractors. A wrap-up construction program avoids costly insurance duplication
by providing the general contractor and all sub-contractors access to the same
insurance program versus each contractor purchasing a smaller separate insurance
plan. In this case, the Captive would retain up to, but no more than, $1,000,000
of self-insured retention risk, which is consistent with the System's normal
self-insured retention amount. The Captive would than cede 100% of the risk
above the self-insured retention amount to reinsurers and would further minimize
the risk of the retained amount with stop loss coverage protection. In addition,
the Captive's capitalization would be increased to commensurate any additional
net written premium to comply with the British Virgin Islands' capital
requirements.
Any additional types of insurance would be underwritten by the Captive
only under the following limited circumstances: (1) where a reinsurer is ceded
100% of the risk underwritten by the Captive above the System's normal one
million dollar ($1,000,000) self-insured retention; (2) where the insurance is
related to an authorized or permitted System business activity; (3) where direct
placement of reinsurance by the Captive would be reasonably expected to save the
System a portion of the risk premium it would otherwise have paid; and (4) where
normal deductible amounts are retained by System companies and where the Captive
can obtain, as appropriate, excess or stop-loss coverage.
No additional staff would be required to operate the Captive. Instead,
as is the
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case with most captives, a British Virgin Islands management company will be
retained to provide administrative services. AGSC employees will be directors
and principal officers of the Captive, and will oversee administrative
functions. The existing AGSC self-administration claim staff would continue to
perform the claims adjusting function. Time and expenses incurred at cost by
AGSC, will be billed to the Captive and recovered in premiums charged by the
Captive to the System. In this manner, savings in premiums will flow through
ratably to System companies. Captive will not be operated to maintain profits
beyond what would be necessary to remain adequately capitalized.
AGLR proposes to provide initial funding of $100,000 cash in exchange
for Captive common stock, $1 par value. Funds will be deposited with the
Captive's U.S. bank and will be managed by an investment manager in accordance
with Rule 40 under the Act as such Rule may be amended from time to time or
until the effective date of any legislation repealing the Act.
Benefits Of Captive
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A) Significant reduction in the 30% to 40% overhead charge for traditional
insurers underwriting risk.
Traditional insurers charge insurance premiums based on actuarially
projected losses plus a 30% to 40% overhead charge. Therefore, for every $1.00
in projected loss, a traditional insurer charges as much as an additional $.40
for administrative charges and overhead. In contrast, the Captive would add only
the actual cost of administration. This cost is largely fixed and will result in
substantial savings, particularly as the business of the Captive is expanded
over several lines of insurance.
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B) Provide direct access to global reinsurers to achieve the most competitive
and cost-effective pricing for AGLR's "unpredictable" insurance exposures.
Reinsurers are generally accessible only by traditional insurers and
brokers who charge a fee. A captive insurance company will provide AGLR with
direct access to reinsurance markets, thereby avoiding the fee. These reinsurers
are not only among the world's largest insurers, they are among the most
competitively priced.
AGLR expects the Captive to realize premium savings of approximately $330,000 in
its first year of providing coverage. Financial projections for the first five
years of the Captive's operations are included in Exhibit FS-1.
C) Provide AGLR System companies with greater control and input over the
resolution process of claims management.
Under traditional arrangements, insurers determine to a large extent,
if and when to settle claims. The Captive in partnership with the reinsurers,
would play the lead role in the claims management process.
D) Less reliance on the traditional insurance market for insuring risks
resulting in less volatility of future premiums.
To the extent that the Captive reduces reliance on traditional
insurers and expands the System's participation in the reinsurance markets,
vulnerability to premium changes is lessened. Sixty percent of the Fortune 500
companies presently utilize a captive insurance company to more effectively
control and manage their insurance costs. A captive insurance company will be
very important in "leveling the playing field" and in providing access for the
System to the most competitive global insurance markets, thereby resulting in
reduced cost for insurance and related services.
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Reporting
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AGLR's Annual Report on Form U5S will include the financial statements
of the Captive. The Commission may, of course, request additional information on
the operations of the Captive, as necessary, under Section 18(b).
Summary of Authorization Requested
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AGLR requests authorization to create a captive insurance company as a
wholly-owned subsidiary for the purpose of engaging in the insurance business as
described above and to fund the Captive through the purchase of up to $100,000
of the Captive's common stock, $1 par value per share.
Item 2. Fees, Commissions and Expenses
(a) State (1) the fees, commissions and expenses paid or incurred, or to be paid
or incurred, directly or indirectly, in connection with the proposed transaction
by the applicant or declarant or any associate company thereof, and (2) if the
proposed transaction involves the sale of securities at competitive bidding, the
fees and expenses to be paid to counsel selected by applicant or declarant to
act for the successful bidder.
AGLR has incurred expenses for certain services in connection with the
preparation of this filing as follows:
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<S> <C>
Services of AGL Services Company in connection
with the preparation of the Application-Declaration........ (be filed by Amendment)
Services of LeBoeuf, Lamb, Greene & MacRae, L.L.P.......... (to be filed by Amendment)
Total .................................................... $(to be filed by Amendment)
</TABLE>
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(b) If any person to whom fees or commissions have been or are to be paid in
connection with the proposed transaction is an associate company or an affiliate
of any applicant or declarant, or is an affiliate of an associate company, set
forth the facts with respect thereto.
AGL Services Company is a wholly owned subsidiary of AGLR and has
performed certain services at cost as set forth above.
Item 3. Applicable Statutory Provisions.
(a) State the section of the Act and the rules thereunder believed to applicable
to the proposed transaction. If any section or rule would be applicable in
absence of a specific exemption, state the basis of exemption.
The issuance of new securities by the Captive will be pursuant to
Sections 6(a) and 7 and Rule 43. Sections 9(a), 10 and 12(f) are deemed
applicable to the acquisition by AGLR of the capital stock of the Captive.
The Commission has previously authorized registered holding companies
to organize and fund captive insurance companies. In the matter of Columbia
Insurance Corporation, Ltd., Holding Co. Act Release No. 27051 (July 23, 1999),
the Commission authorized the Columbia Energy Group to expand the reinsurance
activities of its existing captive insurer and to provide additional financial
support to the captive in an aggregate amount of up to $50 million. In that
matter, Columbia's captive insurer was authorized to assume predictable risks
related to the businesses of the Columbia group of companies in lines of
insurance similar to the types of insurance proposed to be underwritten by
AGLR's proposed captive insurance company. Specifically, Columbia's captive
insurance company was permitted to engage in reinsurance activities where: (1) a
primary insurer underwrites the risk; (2) the insurance relates to a permitted
business activity engaged in by a member of the Columbia group; (3) where
captive reinsurance would reasonably be expected to save the Columbia group
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a portion of the risk premium it would otherwise have paid; and (4) where the
captive can obtain, as appropriate, excess or stop-loss coverage. Under the
authorization granted by the Commission, Columbia's captive insurance company
assumed various risks itself in addition to reinsuring those risks with third-
party reinsurers. For this reason, it required substantial capital for reserves
and it presented a potential risk to the Columbia associate companies that did
business with the captive.
AGLR's proposed captive insurance company is fully within the Columbia
precedent in terms of the limitations on the lines of insurance in which it
proposes to engage. AGLR's proposed captive insurance company is significantly
different from Columbia, however, because the Captive will cede 100% of the
risks that it underwrites, above the traditional $1,000,000 self-insured
retention,to other insurers. Consequently, it presents a much lower risk to the
System and allows the System to achieve many of the benefits of a reinsurance
program contracted for by the Captive without the potential financial detriment
connected to retaining insured risk. For these reasons, the Commission should
authorize the proposed transaction.
AGLR does not own or operate, nor is it an equity participant in any
Exempt Wholesale Generator or any Foreign Utility Company and will not be a
company that owns, operates or has an equity participation in an Exempt
Wholesale Generator or Foreign Utility Company as a result of the approvals
requested herein. AGLR does not have any rights, nor will it have any rights or
obligations under a service, sales or construction contract with an Exempt
Wholesale Generator or Foreign Utility Company as a result of the proposed
transactions.
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To the extent that the proposed transactions are considered by the
Commission to require authorization, approval or exemption under any section of
the Act or any provision of the rules and regulations other than those
specifically referred to herein, a request for such authorization, approval or
exemption is hereby made.
(b) If any applicant is not a registered holding company or a subsidiary
thereof, state the name of each public utility company of which it is an
affiliate, or of which it will become an affiliate as a result of the proposed
transaction, and the reasons why it is or will become such an affiliate.
Not applicable
Item 4. Regulatory Approval.
(a) State the nature and extent of the jurisdiction of any State commission or
any Federal commission (other than the Securities and Exchange Commission) over
the proposed transaction.
No state or federal approval other than the authorization of this
Commission is required to enter into the proposed transactions.
(b) Describe the action taken or proposed to be taken before any Commission
named in answer to Paragraph (a) of this item in connection with the proposed
transaction.
Not applicable.
Item 5. Procedure.
(a) State the date when Commission action is requested. If the date is less than
40 days from the date of the original filing, set forth the reasons for
acceleration.
It is respectfully requested that the Commission issue its notice by
January 30, 2001 and its order on or by March 15, 2001.
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(b) State (i) whether there should be a recommended decision by a hearing
officer, (ii) whether there should be a recommended decision by any other
responsible officer of the Commission, (iii) whether the Division of Investment
Management may assist in the preparation of the Commission's decision, and (iv)
whether there should be a 30-day waiting period between the issuance of the
Commission's order and the date on which it is to become effective.
The Applicants hereby (i) waive a recommended decision by a hearing
officer, (ii) waive a recommended decision by any other responsible officer of
the Commission, (iii) specify that the Division of Investment Management may
assist in the preparation of the Commission's decision, and (iv) specifies that
there should not be a 30-day waiting period between the issuance of the
Commission's order and the date on which it is to become effective.
Item 6. Exhibits and Financial Statements.
Exhibits
A AGL Resources Current Insurance Program Structure (confidential treatment
requested).
B AGL Resources Captive Insurance Company Structure: Start-Up (confidential
treatment requested).
F Opinion of Counsel (to be filed by amendment).
G Past-Tense Opinion of Counsel (to be filed by amendment).
H Proposed Form of Notice.
Financial Statements
FS-1 Financial Projections for Captive: Five Year Balance Sheets, Income
Statements and Cash Flow Statements (confidential treatment requested).
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Item 7. Information as to Environmental Effects.
(a) Describe briefly the environmental effects of the proposed transaction in
terms of the standards set forth in Section 102(2)(C) of the National
Environmental Policy Act (42 U.S.C. 4232(2)(C)). If the response to this item is
a negative statement as to the applicability of Section 102(2)(C) in connection
with the proposed transaction, also briefly state the reasons for that response.
As more fully described in Item 1, the proposed transactions relate
only to establishment of a subsidiary company and have no environmental impact
in and of themselves.
(b) State whether any other federal agency has prepared or is preparing an
environmental impact statement ("EIS") with respect to the proposed transaction.
If any other federal agency has prepared or is preparing an EIS, state which
agency or agencies and indicate the status of that EIS preparation.
No federal agency has prepared or is preparing an EIS with respect to
the proposed transaction.
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SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, the undersigned company has duly caused this Application/Declaration to
be signed on its behalf by the undersigned thereunto duly authorized.
AGL RESOURCES INC.
Date: December 29, 2000 By: /s/ Paul R. Shlanta
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Paul R. Shlanta
Senior Vice President &
General Counsel
