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File No. 70-09371
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form U-1/A
AMENDMENT NO. 1
APPLICATION-DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
COLUMBIA ENERGY GROUP
13880 Dulles Corner Lane
Herndon, Virginia 20171-4600
and its subsidiary company:
COLUMBIA INSURANCE CORPORATION, LTD.
13880 Dulles Corner Lane
Herndon, Virginia 20171-4600
- --------------------------------------------------------------------------------
(Names of company or companies filing this statement
and addresses of principal executive offices)
J. W. Trost, Vice President
Columbia Energy Group Service Corporation
13880 Dulles Corner Lane
Herndon, Virginia 20171-4600
- --------------------------------------------------------------------------------
(Name and address of agent for service)
Sharon B. Heaton, Vice President
Columbia Insurance Corporation, Ltd.
13880 Dulles Corner Lane
Herndon, Virginia 20171-4600
- --------------------------------------------------------------------------------
(Name and address of subsidiary company agent for service)
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Columbia Energy Group and Columbia Insurance Corporation, Ltd. amend and
restate Item 1 and Item 6(a) of their Application-Declaration in File No.
70-09371, in their entirety to read as follows:
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.
Columbia Energy Group(1) ("Columbia"), a Delaware Corporation, and a
holding company registered under the Public Utility Holding Company Act of 1935
(the "Act"), and its wholly-owned subsidiary captive insurance company, Columbia
Insurance Corporation, Ltd. ("CICL"), are seeking authority to expand the lines
of coverage that CICL may provide to Columbia, its associate and affiliate
companies (the "Columbia Group"). By order dated October 25, 1996, the
Commission authorized the formation and capitalization of CICL to engage in the
reinsurance of predictable losses under the automobile and general liability and
"all-risk" coverages. The Columbia Gas System, Inc., Holding Co. Act Release No.
26596 (Oct. 25, 1996) (the "Order"). The Order noted that, in the future, CICL
might seek to underwrite coverage including, but not limited to, director and
officer liability, employee attorney liability, legal malpractice for employee
attorneys, performance bonds, and various warranty programs offered to
consumers. Although the Order is silent in this regard, Columbia represented
that these programs would only be undertaken pursuant to further Commission
approval under the Act.
As will be discussed, Columbia estimates that it can significantly reduce
its cost of purchasing commercial insurance, beyond savings already achieved, by
expanding the scope of risk management activities that may be directed through
CICL Accordingly, Columbia seeks to provide additional support in the form of
equity, guarantees, letters of credit, or other forms of credit support in an
aggregate amount of up to $50 million at any one time outstanding. Columbia
further requests authority to establish additional, direct or indirect,
subsidiaries to engage in the proposed activities.
CURRENT CAPTIVE INSURANCE PROGRAM
Established as a direct subsidiary of Columbia on November 1, 1996, CICL
operates as a Bermuda-incorporated insurance company and reinsures certain
commercial insurance bought by Columbia, its subsidiaries and affiliates from
commercial insurance companies such as Aegis,
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(1) Formerly The Columbia Gas System, Inc.
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Ltd. CICL does not contract directly with other Columbia subsidiary companies.
Rather, CICL markets reinsurance to admitted commercial insurers which, in turn,
market primary insurance to companies in the Columbia system. Currently, CICL's
coverage includes automobile and general liability and "all-risk" property.
Initial funding for CICL was $3,000,000, with the first $1,000,000 in capital
contributions in exchange for CICL common stock ($25 par value) and an
additional $2,000,000 in letters of credit under Columbia's bank facility
previously approved by the Commission (See File No. 70-8627).
As a re-insurer, CICL underwrites a portion of the risk related to
Columbia's authorized and permitted businesses that is underwritten by a direct
commercial insurer (the "Primary Insurer"). In return for the assumed risk, CICL
receives a portion of the premium paid to the Primary Insurer. CICL retains only
that portion of the risk assumed from the Primary Insurer that is relatively
predictable on a basis of claim frequency and severity. CICL reinsures the more
volatile/less predictable portion of the risk with other commercial insurers.
CICL's status as an insurance company gives it direct access to the commercial
re-insurance market, which access would otherwise be unavailable to the Columbia
Group. No privity exists between the insured and CICL. The insured deals
exclusively with the Primary Insurer for all claims and administrative matters.
CICL's role as a captive re-insurer provides various benefits to the
Columbia Group. The relatively predictable portion of insured risk that CICL
retains would typically be the most profitable portion of an insurance policy
for the Primary Insurer. By retaining the risk associated with the most
profitable premiums within a captive insurer like CICL, over time, premium costs
may be reduced for the Columbia Group as premiums are adjusted to correspond to
actual loss experience. A captive re-insurer also avoids the regulatory costs
associated with the conduct of business in every jurisdiction in which the
Columbia Group conducts operations. A captive re-insurer may insulate its sister
companies from premium volatility over time, thus aiding in sound business
planning, and captives may continue to offer coverage for rational risks where
conventional insurance may only be available at uneconomic rates. In addition, a
captive re-insurer provides a focal point for corporate managers to manage risk
more cost effectively. Lastly, a captive re-insurer may provide economic and tax
benefits from accelerated recognition of the cost of claims that are likely to
occur but for which conventional insurance is not necessarily economical.
The typical distribution of risk, sometimes referred to as a liability
tower, among the Columbia Group insured, CICL, the Primary Insurer and
unaffiliated re-insurers is as follows: Columbia Group members retain limited
risk in the form of deductibles or self-insured retentions. CICL, as re-insurer
of the first level of risk that would otherwise be covered by the Primary
Insurer, retains the next layer of risk up to actuarialy determined limits for
individual and aggregate losses. The Primary Insurer then absorbs the next level
of risk above CICL's individual occurrence and aggregate limits, again up to
certain defined limits. Above the Primary Insurer, additional unaffiliated
re-insurers remain liable for so called "catastrophic losses" at various loss
levels up to the total policy limits.
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For general liability risks, for example, Columbia Group members remain
exposed (the "Self-Insured Retention") to losses of up to $200,000 per
occurrence. For losses above the $200,000 Self-Insured Retention, CICL's
exposure would be limited to $1.8 million per occurrence and to an aggregate
limit of $4 million. The Primary Insurer and subsequent re-insurers would cover
losses in excess of CICL's exposure limits. Should aggregate losses exceed
CICL's aggregate limit, the Primary Insurer's coverage would drop down to cover
losses that exceed the Self-Insured Retention.
Similarly, the Self-Insured Retention for all-risks property coverage
varies between $100,000 and $250,000 depending upon the type of property. CICL
would cover losses between the Self-Insured Retention and $750,000 per
occurrence and $3 million in the aggregate. As with general liability insurance,
the Primary insurer would cover losses that exceed CICL's individual occurrence
and aggregate limits(2).
As the party with the contractual relationship with the insured, the
Primary Insurer remains ultimately liable to pay the claims of the insured
without regard to the allocation of risk among the Primary Insured and the
various re-insurers each with an allocation of the liability tower. As a result,
Columbia Group members should be equally assured of coverage whether CICL
participates in the liability tower or the liability tower is composed entirely
of non-affiliated companies.
SAFEGUARDS
CICL's individual and aggregate limits are designed to ensure that CICL
retains only the more predictable, low frequency risks and that its potential
losses are capped. In the unlikely event that losses exceed aggregate limits,
third-party commercial re-insurance (i.e., "stop-loss" protection) will respond
to any claim(s) in excess of the aggregate retention, thereby ensuring that
coverage will be available to Columbia subsidiaries. The financial strength and
integrity of CICL is further bolstered by its compliance with strict Bermuda
capital to premium requirements of $1 of capital for every $5 of net premium.
CICL's financial strength and claims-paying ability is also of keen interest to
the Primary Insurer which remains liable to the insured should CICL be unable to
satisfy its share of claims. The Primary Insurer may require CICL's letter of
credit or other credit support to assure that CICL fulfills its obligations. The
self-interest of the Primary Insurer, therefore, acts as an additional check on
CICL and causes CICL to maintain appropriate capitalization and to continually
monitor the balance between the risks it assumes and the premiums it charges.
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(2) Charts illustrating the liability tower for general liability and
all-risks property coverage are included in Exhibit H.
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BENEFITS TO THE COLUMBIA GROUP
CICL's operations to date have benefitted the Columbia Group by providing
insurance at a lower cost than would be available through Primary Insurers.
Based on the period from CICL's formation on November 1, 1996, through December
31, 1998, CICL has saved the Columbia Group approximately $3.3 million. The
savings estimate is based on the cost of coverage available in the insurance
market similar to that provided by CICL net of the cost of the CICL program(3).
For the same period, CICL also had net income of $224,000(4). CICL is not
operated to generate profits beyond what would be necessary for CICL to remain
adequately capitalized. To the extent that premiums and interest earned exceed
current claims and expenses, CICL will accumulate an appropriate reserve to
respond in years when claims and expenses exceed premiums. To the extent that
losses over the long term are lower than projected, premiums would be
appropriately reduced.
Exhibit I describes the allocation of liability and property insurance
premiums among individual Columbia Group companies. Allocations are made based
on factors generally employed by underwriters. As CICL accumulates loss
experience data on individual Columbia Group companies it will adjust the
premium allocations accordingly. Premium savings are allocated to individual
Columbia Group companies in proportion to premiums charged.
Columbia Group companies are not required to participate in Columbia's
insurance program. Columbia expects, however, that the advantages associated
with a captive re-insurance program would attract the participation of the
majority of companies in the Columbia Group.
PROPOSED EXPANSION OF CAPTIVE INSURANCE PROGRAM
Columbia and CICL propose to expand their re-insurance activities to
include all predictable risks related to the business of the Columbia Group.
Diversification among the types of risks covered should reduce the overall risk
of CICL and maximize the overall benefits to the Columbia Group. CICL, and any
to-be-formed subsidiaries, propose to participate as a re-insurer only:
- - where a Primary Insurer underwrites the risk,
- ----------
(3) CICL program costs include the sum of the incurred claims (both paid and
reserved amounts) plus expenses and less investment income.
(4) For the year ended December 31, 1998, CICL experienced a net loss of
$330,000, attributable principally to higher than expected losses under
general liability coverage. CICL had outstanding loss reserves of
$12,015,678 on December 31, 1998.
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- - for a permitted business activity engaged in by a member of the Columbia
Group,
- - where captive re-insurance would be reasonably expected to save the
Columbia Group member a portion of the risk premium it would otherwise
have paid, and
- - where the captive re-insurer can obtain, as appropriate, excess or
stop-loss coverage.
The proposed expansion could, by way of example, include workers'
compensation insurance to the extent Columbia Group members opted to participate
through CICL. Administrative fees and overhead could be reduced significantly as
compared to state-regulated insurance funds by providing this coverage with a
captive re-insurer. Warranty programs such as homeowners' gas line warranties
also typify the kinds of coverage CICL could offer to re-insure to expand its
current service. See Columbia Energy Group, Holding Co. Act Release No. 26868
(May 6, 1998) (authorizing Columbia to engage directly or indirectly in
"providing service line repair and extended warranties with respect to all of
the utility- or energy-related service lines internal and external to a
customer's premises").
To support the expansion of captive re-insurance activities, Columbia
proposes to provide additional support to CICL and the to-be-formed subsidiaries
in the form of equity, guarantees, letters of credit or other credit support in
an aggregate amount of up to $50 million at any one time outstanding. Columbia
also seeks authority to establish one or more, direct or indirect, subsidiaries
to engage in the proposed activities.
No changes would be made to CICL's current framework relating to
administrative functions, fund management, assignment of officers and directors,
letters of credit arrangements, "stop-loss" protection, and method of premium
allocations. To the extent any new subsidiaries differ operationally or
administratively from CICL, such differences will be described in future Rule 24
letters to the Commission.
BENEFITS OF EXPANDING THE CAPTIVE'S SCOPE
1) Significant reduction in the 30% to 40% overhead charge for commercial
insurers underwriting "predictable" risk.
Commercial insurers charge insurance premiums based on actuarially
projected "predictable" losses plus a 30% to 40% overhead charge.
Therefore, for every $1.00 in projected loss, a commercial insurer charges
an additional $0.40 for administrative charges/overhead. In contrast, CICL
only adds the actual cost of administration, resulting in substantial
premiums savings.
2) Direct access to global reinsurers to ensure the most competitive and
cost-effective pricing for Columbia's "unpredictable" commercial insurance
exposures.
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Reinsurers are generally only accessible by commercial insurers and
brokers who charge a fee. CICL provides Columbia direct access to
reinsurance markets, avoiding the fee, and permits access to the same
group of reinsurers which many Fortune 500 companies already access. These
reinsurers, Munich RE, Zurich RE and Swiss RE, are not only among the
world's largest and most innovative insurers, they are also among the most
competitively priced.
3) Flexibility for subsidiaries to select deductibles for their business
needs and objectives.
Higher deductibles foster an increased awareness for loss prevention
programs at the subsidiary level with the likely prospect of reduced
losses in the future, as well as lower future premiums. The better the
loss experience, the lower the premium.
4) Greater control and input over the claim management process.
Under current arrangements related to coverage types beyond CICL's
authorized scope, commercial insurers determine if and when to settle
claims. Expanding the scope of the captive would place even greater
control with Columbia companies.
5) Decreased reliance on the commercial insurance market for insuring
"predictable" risk resulting in less volatility of future premiums.
Commercial insurers base premiums not only on a company's loss history,
but also on the results in the industry, subjecting companies to dramatic
changes in insurance rates from year to year. To the extent that CICL
reduces reliance on commercial insurers, the vulnerability to such changes
is lessened. The portion of insurance premiums paid to CICL would continue
to be based solely on a company's underwiting factors and loss experience,
and would not be subject to industry-driven volatility.
Approximately sixty percent of the Fortune 500 companies presently use a
captive insurance company to more effectively control and manage their
insurance costs. Columbia believes that an expansion in CICL's permissible
scope will further "level the playing field" and provide increased access
to the most competitive global insurance markets, thereby resulting in
reduced cost for insurance and related services.
6) Reduced insurance portfolio risk.
Expanding CICL's authority to re-insure other types of traditional
insurance will help to reduce CICL's portfolio risk by diversifying the
overall risk among several lines of insurance. Diversification reduces
CICL's risk by reducing overall claims volatility and maximizes the
overall benefits of the Columbia Group.
AUTHORIZATION REQUESTED
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Columbia seeks to provide additional support in the form of equity,
guarantees, letters of credit, or other forms of credit support in an aggregate
amount of up to $50 million at any one time outstanding, to expand the scope of
coverage of CICL and other to-be-formed subsidiaries to include all predictable
risks related to the businesses of the Columbia Group within the limits
discussed above. Columbia further requests authority to establish additional,
direct or indirect, subsidiaries to engage in the proposed activities.
Item 6. Exhibits and Financial Statements.
(a) Exhibits
F Opinion of Counsel (to be filed by amendment)
H Liability Tower Charts for General Liability and All-Risks
Property Insurance
I Allocation of Liability and Property Insurance Premiums Among
Columbia Group Companies
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SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, each of the undersigned companies has duly caused this
Application/Declaration to be signed on its behalf by the undersigned thereunto
duly authorized.
COLUMBIA ENERGY GROUP
Date: June 7, 1999 By: /s/ M.W. O'Donnell
------------------------------------
M.W. O'Donnell, Senior Vice President
& Chief Financial Officer
COLUMBIA INSURANCE CORPORATION, LTD.
Date: June 7, 1999 By: /s/ S.B. Heaton
------------------------------------
S.B. Heaton, Vice President
-8-
<PAGE> 1
EXHIBIT H
CICL - Retained Risk
General Liability -- 1998/99
800
|--------------------------------------------|
| |
| ACE / XL |
| 290 |
| |
|--------------------------------------------|
L 510 | |
i | EIM |
m | 100 |
i | |
t |--------------------------------------------|
s | |
410 | London |
| 325 |
m | |
i |--------------------------------------------|
l 85 | |
l | AIG |
i | 50 |
o |--------------------------------------------|
n 35 | AEGIS |
s | 35 |
|--------------------------------------------|
$ | CICL - Difference between S.I.R. and 2 |
2 | 4.00 Aggregate |
|--------------------------------------------|
| S.I.R. .200 |
|--------------------------------------------|
S.I.R. - Self Insured Retention
May 12, 1999 Columbia Energy Group
<PAGE> 2
CICL - Retained Risk
All Risks Property - 1998|99
<TABLE>
<CAPTION>
<S> <C> <C> <C>
600
|---------------------------------|
| |
| |
| |
L | |
i | Onshore Combined |
m | Various Underwriters |
i | 599.25 |
t | |
s 300 | |
| |-----------------|
| | |
m | | |
i | | Offshore |
l | | Various |
l | | 299.25 |
i | | |
o .750 | | |
n (for interest) | | |
s |---------------------------------------------------|
| |
$ | CICL - Difference between S.I.R. and .750 |
| 3.00 Aggregate |
| | / Primary Insurer
| | \ (Hartford Steam Boiler)
|----------------------------------| |
| |----------------|
| .250 | .100 All Other | - S.I.R. - Self Insured Retention
| Compressors HP 1,000+ | |
| | |
|----------------------------------|----------------|
</TABLE>
May 12, 1999 Columbia Energy Group
<PAGE> 1
EXHIBIT I
COLUMBIA ENERGY GROUP
Premium Allocations used for 98-99 period
Based on data valued as of Year End 12/31/97
<TABLE>
<CAPTION>
% FOR EXCESS
COMPANY LIABILITY PREMIUM
- --------------------------------------------------------------------------------
<S> <C>
CKY - Columbia Gas of Kentucky, Inc. 3.44%
CMD - Columbia Gas of Maryland, Inc. 0.84%
COH - Columbia Gas of Ohio, Inc. 30.82%
CPA - Columbia Gas of Pennsylvania, Inc. 9.31%
CGV - Columbia Gas of Virginia, Inc. 4.53%
TCO - Columbia Gas Transmission Corp. 17.56%
CGT - Columbia Gulf Transmission Co. 8.23%
CNR - Columbia Natural Resources, Inc. 1.92%
CES - Columbia Energy Services Corp. 18.18%
CLG - Columbia LNG Corporation 0.14%
CEC - Columbia Electric Corporation 0.14%
CPC - Columbia Propane Corporation 3.14%
SC - Columbia Energy Group Service Corp. 1.46%
CG - Columbia Energy Group 0.10%
CNS - Columbia Network Services 0.10%
CSP - Columbia Service Partners 0.10%
AE - Atlantic Energy 0.00%
CAT - Columbia Atlantic Trading Corp. 0.00%
TCC - Columbia Transmission
Communications Corporation 0.00%
------
TOTAL 100.00%
</TABLE>
<PAGE> 2
COLUMBIA ENERGY GROUP
Premium Allocations used for 98-99 period
Based on data valued as of Year End 12/31/97
<TABLE>
<CAPTION>
% FOR ALL RISK
COMPANY PROPERTY PREMIUM
- --------------------------------------------------------------------------------
<S> <C>
CKY - Columbia Gas of Kentucky, Inc. 0.23%
CMD - Columbia Gas of Maryland, Inc. 0.08%
COH - Columbia Gas of Ohio, Inc. 3.78%
CPA - Columbia Gas of Pennsylvania, Inc. 1.74%
CGV - Columbia Gas of Virginia, Inc. 0.67%
TCO - Columbia Gas Transmission Corp. 65.93%
CGT - Columbia Gulf Transmission Co. 16.90%
CNR - Columbia Natural Resources, Inc. 0.01%
CES - Columbia Energy Services Corp. 0.01%
CLG - Columbia LNG Corporation 8.28%
CEC - Columbia Electric Corporation 0.00%
CPC - Columbia Propane Corporation 0.33%
SC - Columbia Energy Group Service Corp. 1.49%
CG - Columbia Energy Group 0.00%
CNS - Columbia Network Services 0.00%
CSP - Columbia Service Partners 0.00%
AE - Atlantic Energy 0.55%
CAT - Columbia Atlantic Trading Corp. 0.00%
TCC - Columbia Transmission
Communications Corporation 0.00%
------
TOTAL 100.00%
</TABLE>
