Monday, December 13, 2010

The Truth About Sovereign Defaults and Bank Capital

A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. - Ralph Waldo Emerson
When historians of the future look objectively at the era preceeding this long financial crisis, they might well conclude that failure of the globalised capital system is traceable to the Basle Accords.* The unreasonable assumptions and myriad distortions introduced in this one-size-fits-all paradigm of bank capital adequacy fatally undermined the practice of independent judgement in assessing credit risk and prudential supervision of banks.

Bankers of the past had to assess the creditworthiness of a debtor or counterparty based on balance sheet, revenue potential and management reputation for competence. They husbanded their scarce capital, aware that each dollar lent remained at risk until repaid, with cash reserves proportional to the bank's assets usually 8 to 10 percent.

A primary fallacy of the Basle Accord is that OECD government debt is risk free and requires no bank reserves. Better yet, the banks can count the government debt they hold as Tier 1 capital, reserving against other debt assets. The Basle Accords assume all OECD government debt is a cash proxy, being liquid in all market conditions.

Walter Wriston's 1970s dictum that "sovereigns can't default" was disproved in the Third World Debt Crisis of the 1980s, but somehow the BIS Committee on Bank Supervision still embraced it when applied to OECD state debts.

Roughly, the risk weights of the main asset classes under Basle I were:
- zero for Zone A (OECD) government debt of all maturities and Zone B (non-OECD) government debt of less than one year;
- 20 percent for Zone A inter-bank obligations and public sector entity debt (e.g. Fannie Mae, Freddie Mac, et al.);
- 50 percent for fully secured mortgage debt;
- 100 percent for all corporate debt.

The post-Basle bank supervisors applied their prudential supervision models unthinkingly, to rubberstamp the bankers' leveraging of their balance sheets toward ever greater excess. No one bothered to ask whether Basle Accord assumptions made sense. They were the harmonised norm for prudential supervision and too deeply embedded in the fabric of international finance to adjust, except to allow more and greater leverage in Basle II. Basle II allowed the banks to offset even more risk exposure with even less capital through collateral, credit default swaps, and recognition of the validity of internal asset valuation models.

Global harmonisation of prudential supervision around the Basle Accord meant that the hobgoblin of excess leverage became systemically entrenched in all markets, in all nations. The foolish consistency of harmonised capital adequacy was adored by little minds of global bankers and central bankers worldwide.

The zero weight for OECD government debt must have appeared a harmless subsidy to OECD governments in 1988, promoting liquid government debt markets and enhancing the competitive positioning of OECD-based global banks who stood to gain most from the harmonisation of global bank regulation and capital rules.

Leveraging their balance sheets to work every dollar of capital harder became the obsessive preoccupation of two generations of bank executives once the Basle Accords were adopted. Risk management departments were less about controlling exposure to adverse credit events than about identifying deal structures which would minimise the amount of regulatory capital allocated to any exposure.

Fannie Mae, Freddie Mac, and their ilk were an early mechanism to reduce the reserves required from 50 percent on an individual mortgage to twenty percent or even zero, allowing the banks to write more and more mortgages with less and less capital. When these entities proved inadequate in the go-go 1990s, asset back securities allowed banks to get sub-prime mortgages - and thereby the capital requirement - off their books entirely, passing the risks to yield-hungry investors. With Basle II they could reduce capital even further by writing each other a daisy chain of credit default swaps for all categories of exposure. Who could have known that it would end badly?

OECD government debt is zero risk weighted and accounts for a disproportionate bulk of Tier 1 capital of major banks. A default by any OECD government will force banks and central banks to recognise that government debt has inherent risk like all other debt. This would force recognition of a positive risk weighting, and bring into question the assumption that government debt can be counted as a cash-proxy in Tier 1 reserves. The illiquidity of impaired or defaulted government debt would undermine its role as a Tier 1 reserve asset in bank capital models.

At this writing the OECD governments at risk of default are Greece, Portugal, Spain and Ireland, with other states queuing up in the wings. Already the ECB is the only buyer in the market for much of the impaired government debt.

If any OECD state were to default there would be very serious implications:
- The Basle Accord zero risk weight of government debt in Basle Accord calculations would be proved fanciful;
- The assumption of government debt as a liquid asset suitable for bank Tier 1 reserves to meet unanticipated and sudden cash demands will become unsustainable;
- Banks would be forced to recapitalise at much higher levels, forcing even sharper deleveraging and contraction of lending;
- Governments would lose the captive, uncritical investor base they have relied on to finance excess public expenditure for the past 30 years;
- Central banks could be forced to suddenly monetise even more government debt if required to meet the cash demands of a run on their undercapitalised banks.

Looked at this way, you should be able to understand why the ECB keeps repeating that there can be no Eurozone sovereign default, and why the UK and US are staunchly behind them in preserving the illusion of state solvency for all Eurozone states.

It will likely prove impossible to reform the bankers and central bankers dependent on the Basle Accords for their business models and careers. Harmonisation of global standards was supposed to make the world safer. A foolish consistency on bad policy and bad practice led instead to a world on the edge of financial implosion.

This hobgoblin haunts us all.

* Mark has questioned my spelling of Basle Accords. Being in Switzerland, there are several accepted spellings of the city's name, all of which are correct. I prefer the British/French Basle which was standard in my youth on Basle Accord documents, to the German/American Basel more common and current today.

Friday, December 10, 2010

Price Pattern

Bat Pattern

Crab Pattern

Gartley Pattern

ABCD Pattern

Ideal Butterfly Pattern

3 Drives Pattern

Thursday, December 9, 2010

The Return of London Banker?

I am back in the City that I love, at my pleasantly cluttered desk, after an adventure of nearly two years. I hope I did some good.

Looking back at what I published here and on in 2007 and 2008, I am proud of the passion and fluency I wrote with as we shared the experience of the financial crisis in its early stages. Some things I got right, some I got wrong, but that is to be expected when observing events honestly and with imperfect information as they unfold. I have not written with such passion since. I am not sure how or whether to start again.

Does anyone remember that I used to write? Does anyone care if I write again?

Let me know in the comments below.

Sunday, November 14, 2010

Systemic Risk, Contagion and Trade Finance - Back to the Bad Old Days

Back in the old days (pre-1980s), the term systemic risk did not refer to contagion of illiquidity within the financial sector alone. Back then, when the real economy was much more important than low margin, unglamorous banking, it was understood that the really scary systemic risk was the risk of contagion of illiquidity from the financial sector to the real economy of trade in real goods and real services.

If you think of it, every single non-cash commercial transaction requires the intermediation of banks on behalf of – at the very least – the buyer and the seller. If you lengthen the supply chain to producers, exporters and importers and allow for agents along the way, the chain of banks involved becomes quite long and complex.

When central bankers back in the old days argued that banks were “special” – and therefore demanded higher capital, strict limits on leverage, tight constraints on business activity, and superior integrity of management – it was because they appreciated the harm that a bank failure would have in undermining the supply chain for business in the real economy for real people causing real joblessness and real hunger if any bank along the chain should be unable to perform.

As the “specialness” of banks eroded with the decline of the real economy (and the migration globally of many of those real jobs making real goods and providing real added-value services to real people), the nature of systemic risk was adjusted to become self-referencing to the financial elite. Central bankers of the current generation only understand systemic risk as referring to contagion of illiquidity among financial institutions.

They and we all are about to learn the lessons of the past anew.

We are now starting to see the contagion effects of the current liquidity crisis feed through to the real economy. We are about to go back to the bad old days. Whether the zombie banks are kept on life support by the central banks and taxpayers of the world is highly relevant to whether the zombie bank executives pay themselves outsize bonuses and their zombie shareholders outsize dividends with taxpayer money. It appears sadly irrelevant to whether the banks perform their function of intermediating credit and commercial transactions in the real economy along the supply chain. The bailout cash and executive and shareholder priorities do not seem to reach so far.

The recent 93 percent collapse of the obscure Baltic Dry Index – an index of the cost of chartering bulk cargo vessels for goods like ore, cotton, grain or similar dry tonnage – has caused a bit of a stir among the financial cognoscenti. What is less discussed amidst the alarm is the reason for the collapse of the index – the collapse of trade credit based on the venerable letter of credit.

Letters of credit have financed trade for over 400 years. They are considered one of the more stable and secure means of finance as the cargo is secures the credit extended to import it. The letter of credit irrevocably advises an exporter and his bank that payment will be made by the importer's issuing bank if the proper documentation confirming a shipment is presented. This was seen as low risk as the issuing bank could seize and sell the cargo if its client defaulted after payment was made. Like so much else in this topsy turvy financial crisis, however, the verities of the ages have been discarded in favour of new and unpleasant realities.

The combination of the global interbank lending freeze with the collapse of the speculative, leveraged commodity price bubble have undermined both the confidence of banks in the ability of a far-flung peer bank to pay an obligation when due and confidence in the value of the dry cargo as security for the credit if liquidated on default. The result is that those with goods to export and those with goods to import, no matter how worthy and well capitalised, are left standing quayside without bank finance for trade.

Adding to the difficulties, letters of credit are so short term that they become an easy target for scaling back credit as liquidity tightens around bank operations globally. Longer term “assets” – like mortgage-back securities, CDOs and CDSs – can’t be easily renegotiated, and banks are loathe to default to one another on them because of cross-default provisions. Short term credit like trade finance can be cut with the flick of an executive wrist.

Further adding to the difficulties, many bulk cargoes are financed in dollars. Non-US banks have been progressively starved of dollar credit because US banks hoarded it as the funding crisis intensified. Recent currency swaps between central banks should be seen in this light, noting the allocation of Federal Reserve dollar liquidity to key trading partners Brazil, Mexico, South Korea and Singapore in particular.

Fixing this problem shouldn't be left to the Fed. They aren't going to make it a priority. Indeed, their determination to accelerate the payment of interest on reserves and then to raise that rate to match the Fed Funds target rate indicates that the Fed are more likely to constrain trade finance liquidity rather than improve it. Furthermore, the Fed may be highly selective in its allocation of dollar liquidity abroad, prejudicing the economic prospects of a large part of the world that is either indifferent or hostile to the continuation of American dollar hegemony.

If cargo trade stops, a whole lot of supply chain disruption starts. If the ore doesn’t go to the refinery, there is no plate steel. If the plate steel doesn’t get shipped, there is nothing to fabricate into components. If there are no components, there is nothing to assemble in the factory. If the factory closes the assembly line, there are no finished goods. If there are no finished goods, there is nothing to restock the shelves of the shops. If there is nothing in the shops, the consumers don’t buy. If the consumers don’t buy, there is no Christmas.

Everyone along the supply chain should worry about their jobs. Many will lose their jobs sooner rather than later.

If cargo trade stops, the wheat doesn’t get exported. If the wheat doesn’t get exported, the mill has nothing to grind into flour. If there is no flour, the bakeries and food processors can’t produce bread and pasta and other foods. If there are no foods shipped from the bakeries and factories, there are no foods in the shops. If there are no foods in the shops, people go hungry. If people go hungry their children go hungry. When children go hungry, people riot and governments fall.

Everyone along the supply chain should worry about their children going hungry.

When that happens, everyone in governments should worry about the riots.

Controlling access to trade finance determines who loses their jobs, whose children go hungry, who riots, which governments fall. Without dedicated focus on the issue of trade finance and liquidity from those in the emerging world most interested in sustaining the growth of recent years, little progress can be expected.Trade finance is rapidly communicating the stress on bank liquidity to the real economy. It presents a systemic risk much more frightening than the collapsing value of bits of paper traded electronically in London and New York. It could collapse the employment, the well being and the political stability of most of the world’s population.

The World Trade Organisation hosted a meeting on trade credit in Washington Wednesday to highlight the rapid and accelerating deterioration in trade finance as an urgent priority for public policy.

I look at the precipitous collapse of the Baltic Dry Index and I wish them Godspeed.

Further reading:

WTP warns of trade finance ‘deteriorating’ amid financial crisis

Cost of some trade finance deals up sixfold – WTO

Shipping holed beneath the water line

Shipowners idle 20 percent of bulk vessels as rates collapse

Friday, October 8, 2010

Turbulence and Trends

A trend is a trend is a trend.

But the question is, will it bend?

Will it alter its course

through some unforeseen force

and come to a premature end?

-- Sir Alec Cairncross

I’ve had a lot of meetings this week, and very little time to reflect on fast moving events. This entry may be light on cites and hyperlinks as I’m in a bit of a rush today. It will also lack much in the way of perspective or insight as I find it impossible to distance myself just now from the swirling turbulence around me.

Here in Britain, several banks were offered partial nationalisation as an alternative to private recapitalisation. Strangely, this seems to have encouraged them to more strenuous efforts to recapitalise. The plan is now being held up as a model as it seems to force managements to confront their undercapitalisation as a problem that they can solve to their advantage or that will be solved for them to their heavy personal cost.

Iceland collapsed. It was more of a hedge fund than a country, with it’s 200,000 population supporting a massive leveraged position in financial markets via risk loving bankers and financiers. There were approximately 200,000 British depositors in accounts offered by Icelandic banks. Local authorities (municipalities) and charities were also big investors, exposed for more than £700 million. As a result, the government has frozen Icelandic-owned assets in the United Kingdom – using terrorism legislation, naturally – to provide the basis for a partial recovery of the losses likely to be incurred. This is causing more stress between the two island nations than they have known since the Cod Wars of the 1980s. Also causing tension is a rumour that Russia might bailout Iceland with $4.5 billion of credit, leading to speculation that the Russians may be eying the vacant airbase formerly used by Americans. This is problematic as Iceland is a member of NATO, and so has spurred efforts toward finding European alternatives.

Europe continues to call for collaboration while each country unilaterally defines and acts on its self-interest. That is the way it should be, and I approve heartily. I would rather not have the European Union making hasty decisions or holding such concentrated powers that it can force a uniform resolution across all member states. Either the EU builds consensus for action in the common interest, or it remains impotent. Either is preferable to too much concentration of power in Brussels.

In an attempt to shut just one stable door in a barn full of bolting horses, the Treasury has laid legislation before Parliament to reform the treatment of UK bank insolvencies and deposit insurance arrangements. Roughly described, the Financial Services Authority will decide if a bank is bust, the Bank of England will be responsible for overseeing its resolution and ensuring financial stability of the system, and the Treasury will oversee a new deposit insurance scheme that no one can currently describe but will make permanent the rise in protection to £50,000 per depositor. Despite the massive failure of Lehman, and the huge losses incurred by investors and hedge fund prime brokerage clients in London, the legislation is completely silent on the insolvencies of investment banks and broker-dealers and other institutions of systemic importance to financial markets. My fear is that the failure to address the systemic issues as a whole will be a vulnerability exploited by US banks and authorities as they try to undermine London as a financial centre, gaming the fragile global markets.

There is still a touching confidence among many in the City that the US authorities will provide the “leadership” to reinforce collapsing markets. As John Plender of the Financial Times quipped, “Gaul votes for Rome to take the strain.” This seems to me to display a total incomprehension of the way US authorities operate to externalise pain and loss to the greatest extent possible in times of crisis. Gaul, after all, was an occupied state that was militarily and economically exploited to Rome’s advantage for centuries before Rome’s collapse. Saving Gaul was never a high priority once Rome was threatened.

Elsewhere in the world, bureaucrats continue to show up at the office in the morning and check to make sure all boxes are ticked, all forms are correctly ordered, and all initiatives in progress continue their stately way forward unimpeded by global chaos. I find this comforting, although much of their efforts will ultimately prove futile and failed.

Finally, an optimistic note. I was reminded yesterday that the vast bulk of “wealth” created during the Greenspan/Bernanke bubble years accrued to the very top percentiles of population – with many in the OECD middle class and lower class either stagnating or getting poorer as they mired themselves in unsustainable debt. While opportunity and employment grew strongly in emerging countries, there too the elites gained disproportionately as income inequalities surged. The crash of global financial markets therefore will have disproportionate effect on the elites, impoverishing them to a far greater extent, although it will be felt throughout society as employment, pensions, investments and public services contract.

Once we hit bottom of this downturn, some years hence in all probability, we may experience a democratisation of wealth and opportunity like none seen since the end of World War II when education reforms and unionisation laid the groundwork for the rise of the American and OECD middle classes. Those who have lost economic and political power during the boom years, are likely to organise and retake authority within economic and political systems during the bust years. The collapse of concentrated wealth in Wall Street will spur more collaborative capital formation and investment throughout the economy. This could provide reorientation of economic progress toward more equitable, sustainable and democratic outcomes in coming generations. I hope so, it’s the only bright spot of the week.

Saturday, October 2, 2010

Financial Eugenics: The Paulson Plan for Survivor Bias

As I write this I don’t know the outcome of the attempt to ram through legislation for looting the US Treasury of $700 billion before the end of the Bush administration. I suspect that Congress will force the passage of the bill in some form because the media and political narrative on the necessity of the measure is unremitting and so horribly biased.

No alternatives will be considered.

No constraints on the unilateral executive authority of Hank Paulson will be considered.

No assurances that funds will be used to unlock credit markets or promote lending to the real economy (as opposed to the financial robber barons) will be considered.

Instead, the bill will get laden with an additional 300 pages of pork to sway the dissenters, adding to the tab imposed on the American taxpayer.

Having listened to all 42 minutes of the late night Treasury briefing of investment banks on Sunday, there is no doubt in my mind that this legislation represents the sort of federal largesse for Goldman Sachs, Morgan Stanley, Citibank and JPMorgan Chase that the Iraq war provided for Halliburton and Blackwater.

The most cynical moment in the call is when the Treasury official confirms, ”our preference would be to help the healthy banks become even healthier” rather than helping troubled banks or illiquid banks.

America is now a centrally planned economy where the Treasury will determine which firms survive and prosper through allocation of scarce capital to an undercapitalised financial sector.

Clearly what is going on here has nothing to do with kick starting the credit markets or stabilising the equity markets or restoring depositor confidence in banks. (Treasury official: “No provision in the legislation that mandates re-lending.”) What is going on here is a blatant attempt to provide government funds to a select cadre of firms (not all banks) which are chosen to be the survivors feasting off the carcasses of their less fortunate and less well-connected brethren as the downturn intensifies in the years to come.

The crash in equities will still happen. The debt deflation of the economy leading to mass commercial and consumer credit defaults will still happen. The collapse of many national, regional and local financial institutions will still happen. The bankruptcy of many municipalities and shortfalls in state budgets will still happen.

This bill is about engineering survivor bias to friends of the Bush administration so that they profit disproportionately from the collapse of these markets using the funds provided by the taxpayer via the unreviewable and unconditional authority of the Secretary of the Treasury.

The basic plan is to set up a federal money laundering operation. Bad assets come in, get laundered by the Treasury and put in a new AAA “wrapper” (as it’s termed on the call), and good assets go out, issued as Treasury guaranteed securities. Whether the final value of the legislation this week is $700 billion or $150 billion is irrelevant as long as the laundering operation can accommodate the throughput, as that number is only a cap on total extensions at any one time.

The SEC will support the plan and survivor bias by relaxing FASB 157 on mark to market accounting. If there is no agreement on what an asset is worth, it is worth whatever the firm holding it says in its Level 3 accounts or the Treasury Secretary accepts in buying it.

The Federal Reserve will support the plan by relaxing the definition of “control stake” in US banks and bank holding companies to allow secretive cabals to hold through private equity and offshore hedge funds. No one knows the beneficial owners of these ill-transparent private equity investors, and so it is the ideal way to reward loyal and helpful insiders, legislators and officials – as well as cede further ownership of American assets to foreign stakeholders who would be politically unacceptable if publicly acknowledged. Many foreign creditors are irate at the losses their funds, banks and pensioners have sustained from investments in the United States, and this plan provides a secret way to buy them off and keep them lending and investing as their own economies are roiled by the deflation to come.

For the past year the survivor bias has been orchestrated from the Federal Reserve, with its extension of innovative credit facilities and selectively engineered rescues or forced mergers. That has been very useful, but that well is now dry. The Fed has no more good assets to trade for the bad assets the banks can offer. And the supply of bad assets just keeps growing as market illiquidity spreads further from the core of the mortgage backed securities market. Instability is now leading to a realistic threat that the Fed and Treasury could lose control of the deflationary process.

Part of the reason the Paulson Plan is so attractive is that it recapitalises the Fed by promoting the unwinding of repos and lending facilities which left the Fed holding toxic assets. As the repos and credit facilities gradually unwind, these toxic assets can now be taken back by the banks and exchanged for good cash. The Fed gets its balance sheet Treasuries and cash back to restore its flexibility to intervene anew.

Favoured private equity and insiders who swap US dollars for equity in the banking system will presumably be aware of the survivor bias being engineered on their behalf. Sovereign wealth funds, investment funds and private equity investors ripped off in the first round of recapitalisation may be willing to come back in once it is clear to them that the next round will benefit from official favouritism. Warren Buffett’s timely stake in Goldman Sachs is clearly linked to his confidence the Paulson Plan will benefit them disproportionately.

A factor which is probably critical but has received little discussion is that literally thousands of Bush administration apparatchiks will need jobs come January, and a fair selection of GOP House and Senate legislators and their aides too. What better way to enahance their CVs in their final months in power than to distribute $700 billion or so in pre-Christmas largesse to the most remunerative employers in the world? And what better way to ensure the corporate largesse is returned to the GOP to win back the White House and Congress in 2012 as the recession fuels public anger?

And then there is a huge arbitrage opportunity as well so that everyone makes money for years to come. According to the conference call, the pricing on offer from the Treasury will be a bit below Level 3 pricing. The toxic assets will be repackaged and resold with a new AAA wrapper, possibly priced well below what the Treasury paid, assuring a huge profit on both immediate liquidation by the banks and ultimate maturity by investors. The Fed gets its cash and Treasuries back; the banks make huge profits; the foreigners and off-shore tax avoiders get disguised ownership of the American financial system; the taxpayer gets ripped off. What’s not to love?

Think back to Fisher’s Theory of Debt Deflation in Great Depressions. Dollars become “bigger” as deflation takes hold because each dollar can buy more assets as assets deflate. That means that as these clowns crash the markets, their $700 billion of liquid cash funnelled to their friends and recycled through the Treasury laundrymat can progressively buy up the rest of the pieces on the gameboard at low discount prices. Game over with those who caused the crash and robbed the bank winning.

Deflation is going to happen – globally. Either we can use the course of deflation to shape healthy economies that will provide growth and employment and productive returns on investment in future, or we can allow deflation to further enrich those miscreants whose irresponsible policies led to the violent financial collapse we are about to experience.

There is a fundamentally healthy economy in America – somewhere underneath all the financial excess and chicanery and all the financial/oil/military/healthcare/developer corruption of local, state and federal politics. It will be a painful and slow process to kill off the metastasising cancerous growths on the economy, but if Americans achieved that, they could embrace a healthier and more productive and more prosperous future.

I would like to believe Americans expressed the courage to change over last weekend when they 25 to 1 rejected an unconstrained and unconditional bailout of Wall Street in favour of cold turkey deleveraging of the economy. I wish I could believe that it mattered in the political calculus, but the result of the House vote on the bill will tell us that.

Fight the survivor bias. It’s not your survival they’re engineering.

Monday, September 20, 2010

Florida Arrests Alleged Citizens Property Scammer

Florida Chief Financial Officer Alex Sink today announced the arrest of Aylin Hernandez, 23, of Miami, for fraudulently diverting mail and stealing payments intended for Citizens Property Insurance Corporation.

Hernandez was arrested this morning and booked into the Turner Guilford Knight Correctional Center in Miami-Dade County on charges of organized fraud and grand theft. The arrest results from an investigation by the Division of Insurance Fraud, with assistance by Citizens Property Insurance Corporations' Special Investigations Unit. If convicted, Hernandez faces up to 45 years behind bars.

"This fraudster is getting exactly what she deserves—serious jail time," said Sink, in a statement. "I am grateful for the work of my investigators and Citizens' Special Investigations Unit for working together to put her behind bars. Would-be scammers out there need to know that this kind of action will not be tolerated."

Working with investigators from Citizens Property Insurance Corporation, the Division of Insurance Fraud established that Hernandez created her own corporation named Citizens Property Insurance, Inc., and opened an account under that name at Check Cashing USA.

Using information she obtained while working as a clerk in several local insurance agencies, Hernandez sent invoices to various law offices and title companies, which were handling homeowners insurance escrow and service payments. The victims, believing their payments were going to the legitimate Citizens Property Insurance Corporation, sent eight checks totaling over $12,000, which were then cashed by Hernandez.

Monday, September 13, 2010

Departure of Insurer from Florida Points Up Fraud Problem

With a letter sent out a few weeks ago, Explorer Insurance announced that it will no longer write private automobile policies in Florida because there is too much fraud.

"The company is taking this action in light of poor ongoing business results in Florida, particularly in the area of private passenger automobile no-fault coverage, in which loss fraud has been rampant with no signs of abatement," Explorer vice president, Steve Frisina, said in the letter to Florida's Office of Insurance Regulation.

The letter said Explorer intends to send termination notices to agents who sell its coverage within a week of the Office's acceptance of its plan. Policy holders will begin receiving non-renewal notices also within one week. And, by January 2012, no Explorer policies will remain in effect.

The Office has deferred accepting Explorer's plan for the time being present, until the company can fix some of the details of its exit.

In the meantime, however, Explorer has severely restricted the number of policies its agents are allowed to write and has told agents it is no longer paying commissions as of this week, according to a Tampa agent.

"They were going to be over $100,000 in premiums for us this year," said John Guthrie, of the John Guthrie Agency, Tampa. He has had severe restrictions on the number of policies he can write for Explorer since May.

Guthrie said that fraud is a big problem that is chasing many auto insurance carriers out of the market. Last year at this time, his agency represented 16 or 17 carriers, he said. Now the agency is down to three.

"The companies are all just pulling out or they are making underwriting so restrictive that you can't get the people through the approval," he said.

In May, the National Insurance Crime Bureau released a report that said that Florida has led the nation in suspected staged auto accidents the last three years in a row. According to the report, Florida had 3,006 suspicious claims from 2007 to 2009, and that was almost twice as many as the two states with the next most suspicious claims, New York and California.

The worst place in Florida was Tampa, the report said. Previously the worst place had been Miami and South Florida. But, in 2009, there were 487 questionable claims related to staged accidents in Tampa, while there were only 258 such claims in Miami.

Guthrie said he and some of his fellow agents in Tampa's Hillsborough County have gotten so frustrated by the situation, and by the lack of government action to crack down, that they have begun collecting petition signatures from new policy and renewal clients and forwarding that petition on to the Department of Financial Services, which houses the Division of Insurance Fraud.

"They need to do something about this fraud," he said.

Jack McDermott, a spokesperson from the Office of Insurance Regulation, said that fraud was not the responsibility of his agency so they do not know much about it. But "We have heard, anecdotally, from other companies that they have been having trouble with fraud," he said.

Explorer, which is based in Santa Clarita, Calif., is a member company of the ICW Group, San Diego. Until now, it has sold automobile policies only in California and Florida.

As of the end of July, the company had 16,576, in-force policies in the private passenger automobile insurance line in Florida, with direct written premiums of $16.1 million and a loss ratio of 124.2.

Eileen Beaudette, an agent in Naples who has been an Explorer representative, said that in her area fraud and staged crashes are not a big problem and she has not had carriers stop writing. But she has been aware that it is a big problem in Tampa and on the east coast of the state.

"We've been lucky," said Beaudette, of A Auto Buyers Insurance. "We still have a lot of carriers writing."

Beaudette said that Explorer was never a very big part of her agency's business because their rates were not very good.

Monday, August 30, 2010

AIG Settlement Covers $60 Million of Ex-CEO, Ex-CFO Costs

Former longtime AIG chief Maurice ''Hank'' Greenberg and another former executive will get $60 million from the company's insurers to cover legal and other costs as part of a proposed settlement of investor lawsuits, court papers show.

The payouts to Greenberg and former Chief Financial Officer Howard Smith are in addition to $90 million that American International Group Inc.'s insurers, as previously reported, will pay directly to the company as part of the proposed settlement.

The $150 million of payouts were revealed in an Aug. 25 agreement filed in Delaware Chancery Court, and obtained Friday by Reuters.

They stem from litigation in which investors accused more than 20 onetime AIG executives and directors of poor oversight and allowing improper bonuses. The Delaware lawsuit was filed by investors on behalf of AIG.

Greenberg left AIG in March 2005 after nearly four decades at the helm.

AIG in November 2009 said it had resolved all litigation with Greenberg, and agreed to reimburse him and Smith for as much as $150 million of legal fees and expenses, according to an agreement filed with U.S. regulators.

The $60 million payout by insurers is separate from that agreement, and Greenberg and Smith represented in the earlier agreement that no one else other than the insurers was obligated to indemnify them for the relevant costs.

AIG had $200 million of insurance for directors and officers, the Delaware agreement shows. None of the sums being paid go to investors, and Greenberg and Smith are also not responsible to pay out money in connection with the agreement.

In emailed statements, AIG said it was pleased the matter has been resolved, as did Lee Wolosky, a partner at Boies, Schiller & Flexner LLP who represents Greenberg.

A lawyer who signed the Aug. 25 agreement on behalf of Smith did not immediately return a call seeking comment.

The Delaware agreement requires approval of Vice Chancellor Leo Strine of the Delaware court. A settlement will be made final upon the dismissal of similar litigation in Manhattan federal court, the agreement shows.

Based in New York, AIG in September 2008 narrowly averted collapse after becoming overexposed to risky debt. It accepted a federal bailout that grew to $182.3 billion and left taxpayers owning a nearly 80 percent stake.

Six weeks ago, AIG agreed to pay $725 million to settle a shareholder class-action lawsuit led by Ohio Attorney General Richard Cordray, who accused it of accounting fraud and trying to manipulate its stock price.

AIG still faces shareholder class-action litigation in Manhattan federal court. Greenberg has sought to dismiss a civil fraud lawsuit by New York Attorney General Andrew Cuomo over a sham reinsurance transaction.

The case is In re: American International Group Inc Derivative Litigation, Delaware Chancery Court, No. CA 769.

Stanford Execs Deny Key Role in Alleged Fraud Cited by Lloyd's

Lawyers for Texas financier Allen Stanford and two accounting executives who worked for him sought to distance their clients Friday from the alleged financial wrongdoing insurer Lloyd's of London cites as a reason to void a policy covering their defense fees.

"Mr. Stanford was not really a hands-on guy,'' Robert Bennett, Stanford's attorney, said during closing arguments after four days of hearings in federal court. "Mr. Stanford was not at the center of anything illegal or wrong.''

The nondisclosure of a nearly $2 billion unsecured loan to Stanford, misrepresentations to investors and phony accounting are all grounds to stop paying claims under a directors and officers policy, the British insurer said.

Stanford, accounting executives Mark Kuhrt and Gilbert Lopez and Chief Investment Officer Laura Holt have sued Lloyd's of London over payment of the fees. But that policy has a money laundering exclusion, so Lloyd's must prove to U.S. District Judge Nancy Atlas in Houston that the plaintiffs committed that act.

Holt struck a deal with the insurer before the start of the hearings last Tuesday. She and the three other plaintiffs in this case are accused of participating in an alleged $7 billion Ponzi scheme centered around fraudulent certificates of deposit (CDs) issued by Stanford's offshore bank in Antigua.

"It is clear that the money collected for the CDs was criminal property as defined by the policy,'' said Barry Chasnoff, an attorney for Lloyd's. "There was no evidence offered to the contrary.''


Lawyers for Stanford and the accounting executives have placed a lot of the blame on James Davis, the former chief financial officer of Stanford International Bank Ltd. (SIB) who pleaded guilty last August to three felony counts related to the scheme.

Davis had the final sign-off on numerous financial documents from SIB, the institution the government claims is at the center of the alleged scheme, lawyers and witnesses said.

"I believe that Mr. Kuhrt and Mr. Lopez were middle-level accounting managers and it was Mr. Davis' responsibility to deal with the auditors on these issues,'' Alan Westheimer, an accountant hired by Kuhrt and Lopez as an expert witness, testified.

Stanford also relied on Davis -- his former No. 2 man at the company and former classmate from Baylor University -- as well as on the professional advice of accountants and lawyers, Bennett told the hearing.

Still, Atlas told the hearing it was clear to her that Lopez and Kuhrt "were close to the top,'' and were close to Davis.

She said she had a suspicion that Lloyd's would not be fronting legal fees to the men after the hearings.

Lloyd's has advanced as much at $6 million to pay for Stanford's attorneys, many of whom have left the case or been fired by their client.

Stanford, who is 60 and is in jail awaiting a January trial, faces one count of conspiracy to commit money laundering as part of a 21-count June 2009 indictment.

The hearings were seen as a preview of Stanford's criminal case. Many people involved in the case, including Stanford and Lopez, invoked their Fifth Amendment right and did not testify, so much evidence centered on documents that are part of the government's civil and criminal case.

The case is Laura Pendergest-Holt, R. Allen Stanford, Gilbert Lopez and Mark Kuhrt v Certain Underwriters at Lloyd's of London and Arch Specialty Insurance Co, U.S. District Court, Southern District of Texas, No. 09-3712.

Earl Now Major Hurricane, Headed Toward East Coast

Hurricane Earl has strengthened into a major Category 3 storm Monday and could arrive off the East Coast of the U.S. by the end of this week.

It is currently rocking the Caribbean's Northern Leeward Islands.

The National Hurricane Center said Earl is now the second major hurricane of the 2010 Atlantic season, with winds up to 120 miles per hour .

Hurricane warnings are in effect for Antigua, Barbuda, Montserrat, St. Kitts & Nevis, Anguilla, St. Martin and St. Barthelemy, St. Maarten, Saba and St. Eustatius, the British and the U.S. Virgin islands.

A hurricane watch is also in effect for Puerto Rico.

Hurricane Danielle has moved into the North Atlantic and is now more of a threat to Iceland than the U.S.

Monday, August 9, 2010

Florida Orders Halt to Sale of Warranty Products

Florida Insurance Commissioner Kevin McCarty today announced the Office of Insurance Regulation (Office) has issued an order to Auto Repair Warranty Inc. (ARW), Auto Repair Group LLC (ARG) and Michael R. Petruziello to Cease and Desist selling unauthorized motor vehicle service agreements in Florida.

Office investigators concluded that the aforementioned companies sold unauthorized and unlicensed motor vehicle service agreements through its website and through agreements sold by ARW. In addition, investigators concluded that the companies engaged in unfair methods of competition and unfair or deceptive acts.

Both companies are based in Ohio. Office records indicate ARW and ARG have never been authorized to sell warranty products in the State of Florida.

"Companies selling insurance products of any kind must adhere to Florida's stringent licensing process," said Insurance Commissioner Kevin McCarty. "Floridians should always verify the products they purchase are being offered by companies licensed in our state."

Monday, July 26, 2010

Obama Opposes Adding Wind Coverage to Federal Flood Insurance

The Obama Administration is again opposing a move to add wind insurance to the federal flood insurance program, as has been pushed by Rep. Gene Taylor, D.-Miss.

A statement from the Office of Management and Budget says Taylor's bill, HR 1264, would unnecessarily expand the government's role into an insurance area already served by private insurers.

"Although the Administration believes in strengthening the National Flood Insurance Program (NFIP) for the benefit of policyholders and taxpayers, the central rationale for the program – the difficulty of obtaining flood insurance through either the private market or state programs – simply does not apply to windstorm insurance in most markets," the OMB said.

OMB also said that because the legislation requires that a federal wind insurance program be actuarially sound, the insurance offered through a federal program may not be any less expensive, and could be more expensive, than what is currently offered by private insurers or by states.

"As a result, expanding NFIP to cover windstorm insurance would unnecessarily duplicate available insurance products and could 'crowd out" such products where they are offered, while offering little to no savings to the American public. At a time when the NFIP is already facing serious challenges, the Administration cannot support such an expansion."

The Obama Administration has opposed the wind insurance bill in the past as have various taxpayer, environmental and insurance groups. The measure is being reconsidered this week in Congress.

Wednesday, July 21, 2010

Private Firm WSI Cuts U.S. Hurricane Forecast to 19 Named Storms

Private weather forecaster WSI Corp cut its forecast for named storms in the 2010 Atlantic hurricane season on Tuesday, but still sees an active season with water temperatures and wind conditions conducive to violent storms.

In its latest tropical storm update, WSI called for 19 named storms, down from 20 in its June forecast, but maintained its outlook for 11 hurricanes and 5 intense hurricanes of category three or higher.

The 2010 forecast is well above the 1950-2009 averages of 10 named storms, 6 hurricanes, and 2 intense hurricanes.

"Record warm tropical Atlantic Ocean temperatures and an enabling wind shear environment should result in a very active tropical season this year,'' said Dr. Todd Crawford, WSI's chief meteorologist.

The disappearance of the El Nino event and a decrease in vertical wind shear both point to the potential for more Atlantic storms, WSI said.

A slow start to the hurricane season led to the downward revision in named storms. A pocket of dry air in the Atlantic is likely to limit development in the near term, WSI said, while August to October is expected to be a very active period.

WSI's models also indicate that the area from the Outer Banks of North Carolina northward to Maine is twice as likely as normal to experience a hurricane this year.

"Our model suggests that the threat to the Northeast coast this season is on a par with that in Florida and the Gulf coastal states,'' WSI said.

The Atlantic hurricane season runs from June 1 to Nov. 30.

In 2005, Hurricane Katrina was responsible for the deaths of around 1,500 people on the U.S. Gulf Coast and caused more than $115 billion in damages.

Katrina and Rita, which hit the same year, shut some oil refineries for months resulting in about 142 million barrels of oil product loss.

Offshore drilling in the U.S. Gulf of Mexico is responsible for roughly 30 percent of total domestic oil production and 11 percent of natural gas production, according to 2009 government figures.

Tuesday, July 20, 2010

Investor Face Uphill Battle with Liability Lawsuits Against BP

Shareholders angry about BP Plc's battered stock price are heading to the courthouse in hopes of reclaiming some of their losses, but they face an uphill battle.

Since the Deepwater Horizon oil rig exploded in April, several BP shareholders have filed lawsuits accusing the company of breaking securities laws and hiding the risks of its drilling operations. The stakes are potentially huge, with the BP's market value down as much as $100 billion since the disaster.

Some of the largest U.S. pension funds could join the battle. Already, the $132.6 billion New York State Common Retirement Fund has said it wants to be named lead plaintiff so it can direct the investor litigation.

"BP was telling the world that they are really a safe company,'' said Houston-based plaintiffs' lawyer Mark Lanier. ''What was being told to the public -- including the shareholders -- was a fraudulent facade.''

Lanier said he might get involved as an attorney for plaintiffs in the proposed shareholder class-action litigation. He said he already was preparing to file a lawsuit on behalf of former BP workers who hold company stock in their retirement plans.

But experts say investors will probably have a tough road ahead in court, since it could be hard for them to unearth any evidence about the company's disclosures on its safety procedures that rises to the level of securities fraud.

"It's entirely possible that (BP) made statements and honestly believed them and they were dead wrong,'' said James Cox, a professor at Duke University Law School. "That's not a basis for liability under securities law.''

A spokeswoman said BP does not comment on legal actions.

Securities litigation represents only a small segment of the more than 300 total lawsuits brought against BP so far. A federal judicial panel is scheduled to meet on July 29 in Boise, Idaho, to consider how to consolidate the various cases.

Shareholder lawsuits must be certified as class-actions by a court before investors can sue collectively. Typically, about one-third of shareholder lawsuits are thrown out, and two-thirds settle. They rarely go to trial.

Cox said shareholders would be lucky to get a settlement of $10 million to $20 million, which would be a pittance divided among the large number of affected investors.

That would be a far cry from the biggest recoveries in class-action litigation, the $6 billion to $7 billion awarded in the cases of WorldCom Inc. and Enron Corp.

Those cases differed from BP in that they stemmed from financial fraud, such as claiming phantom profits, rather than potential misrepresentations about safety. Enron and WorldCom also sold lots of securities in the period covered by the case, and plaintiffs were able to target third parties such as banks and underwriters.

BP investors do have a potentially powerful ally: the U.S. government. U.S. investigations could do the heavy lifting for plaintiffs, possibly using broad subpoena powers to turn up damning evidence.

The U.S. Departments of the Interior and Homeland Security are jointly investigating the rig disaster, and congressional committees are as well. The U.S. Department of Justice has also said it would open civil and criminal probes.

"You want a smoking gun,'' said Adam Savett, director of securities class actions at the Claims Compensation Bureau in Conshohocken, Pennsylvania. "A document that goes to the board room and says: 'We're not living up to industry standards, and we're not safe, and on and on.'''

But even that type of evidence might not be enough to prove securities fraud, said Jill Fisch, a professor at the University of Pennsylvania Law School in Philadelphia.

Shareholders may have little recourse unless documents show that top management knew, for example, that the company was violating specific safety regulations while publicly stating it was exceeding them and that those rules were critical to their business.

BP has already scored one victory. The U.S. Supreme Court's recent ruling in an unrelated case involving National Australia Bank essentially limited BP's liability in the United States to losses suffered by U.S. shareholders.

By excluding foreign holders of BP shares, the universe of potential plaintiffs could be cut by as much as 80 percent, said University of Michigan Law School professor Adam Pritchard.

For BP, whose spill-related legal woes are expected to drag on for years, the stockholder lawsuits may end up being a relatively minor problem, said Savett, of the Claims Compensation Bureau.

"They have a public relations nightmare,'' he said, "but I don't think they have a securities litigation nightmare.''

Monday, July 19, 2010

AIG to Pay $725M to Settle Securities Fraud Lawsuit

American International Group Inc. agreed to pay $725 million to settle a long-running securities fraud lawsuit led by three Ohio public pension funds, in one of the largest class action settlements in U.S. history.

AIG, which is nearly 80 percent owned by the U.S. government, would pay $175 million within 10 days of preliminary court approval of the settlement with a class of AIG shareholders.

The company may fund the remaining $550 million through a stock offering or other means, including cash, when it decides it is commercially reasonable to make such an offering.

The litigation, which began in October 2004, involved allegations that AIG engaged in accounting fraud, bid-rigging and stock price manipulation, said Ohio Attorney General Richard Cordray, who represented the Ohio funds.

The settlement resolves allegations of AIG's wide-ranging fraud from October 1999 to April 2005 and brings the expected recovery for AIG shareholders to about $1 billion, Cordray said.

AIG, which was bailed out in September 2008 from near-collapse with a $182.3 billion taxpayer-funded rescue package, said it was "pleased to have resolved this matter."

"This settlement ends a long-standing lawsuit, allowing AIG to continue to focus its efforts on paying back taxpayers and restoring the value of our franchise for the benefit of all our stakeholders," spokesman Mark Herr said.

The class action suit in Manhattan federal court was led by the Ohio Public Employees Retirement System, the State Teachers Retirement System of Ohio and the Ohio Police and Fire Pension Fund.

As part of the overall case, the Ohio funds previously announced a $72 million settlement with General Reinsurance Corp, a $97.5 million settlement with PricewaterhouseCoopers LLP and a $115 million settlement with former AIG Chief Executive Maurice "Hank" Greenberg, other AIG executives and related corporate entities.

Cordray said together this was the tenth-largest securities class action settlement in U.S. history.

It comes a day after the U.S. Securities and Exchange Commission reached a $550 million settlement in a case against Goldman Sachs Group Inc.

That case stemmed from Goldman's marketing and packaging of a collateralized debt obligation that turned toxic during the financial crisis

Monday, July 12, 2010

LWCC Reducing Overall Rates by 4.1%

Louisiana Workers' Compensation Corporation (LWCC) announced tthat it will implement an overall rate reduction of 4.1 percent beginning Oct. 1, 2010.

This marks the sixth consecutive year that LWCC has reduced overall rates, and it comes on the heels of returning a $15 million dividend to qualifying policyholders for 2009. Once this year's rate decrease takes effect, LWCC will have reduced overall rates by more than 55 percent since its first year of operation in 1992.

The most significant reduction this year will be for policyholders in LWCC's Small Accounts Program tier that pay an annual premium of $5,000 and under. These policyholders will receive an overall 15.3 percent rate decrease, reflecting LWCC's ongoing commitment to lowering rates for small businesses through increased automation and other efficiencies achieved over the past two years.

The 15.3 percent reduction is an average for policyholders participating in the Small Accounts Program, so not all policyholders in this category will experience a decrease of that size.

More than 9,000 policyholders participate in the Small Accounts Program, according to LWCC President and CEO Kristin W. Wall.

Including its $15 million dividend returned to policyholders for 2009, LWCC has paid $136 million in dividends to policyholders over the past seven years.

Obama Administration Asks Health Insurers to Embrace Reforms Now

U.S. Health Secretary Kathleen Sebelius, who has bashed insurers over rate increases, is seeking their help in making medical coverage accessible for more patients in the years before major reforms take effect.

Sebelius, in an interview with Reuters, said she is pushing companies to help people gain insurance in the gap between now and 2014. That is when the healthcare law President Barack Obama signed in March mandates extensive changes.

Sebelius struck a cooperative tone after publicly chastising insurers for high rate hikes and after repeatedly calling them to the White House for highly publicized talks.

A more congenial relationship with insurers could help keep the major overhaul of the healthcare system on track and loosen strained relations between Democrats and big business ahead of the November midterm elections.

The goal in the next few years is to "stabilize the private sector to not only encourage those who have insurance today to keep it, but to hopefully bring additional folks back into the market,'' Sebelius said earlier this week. She talked with Reuters after speaking at a discussion on drug development.

Health insurers, which include WellPoint Inc., UnitedHealth Group Inc., Cigna Corp. and Aetna Inc., fought the healthcare law, which hits the industry with tighter regulation, higher taxes and caps on profits.

Now, the Obama administration is promising to keep a close eye on rates but also seeking to work with insurers to make the law successful.

Sebelius, a former insurance commissioner and governor of Kansas, said her approach is gaining traction.

She said one insurer recently reached out to small businesses and signed up 500 new customers from companies that had not been aware they were eligible for tax credits.

"That's exactly the kind of strategy I'm hoping will take hold,'' she said.

Sebelius said she has argued to insurers in recent weeks that practices that shut out patients or businesses with high rates are harmful to consumers as well as the companies.

"Some of those strategies I think are not particularly good business models. If they lose more and more market share as we move toward 2014, it's not really good for them,'' she said.

Roughly 46 million people in the United States lacked health insurance in 2008, according to the U.S. Census Bureau. Experts say many have lost coverage since then in the economic recession.

The new healthcare law includes measures aimed at "stopping the erosion of the private market'' before 2014, Sebelius said.

Employers can get financial help to keep early retirees covered, and small businesses can receive tax credits to defray insurance costs, she said. People denied coverage for serious medical problems can enroll in high-risk insurance pools set up as a temporary option.

Broader changes in 2014 are expected to extend coverage to more than 30 million Americans.

In past months Sebelius attacked big premium increases, and Obama warned companies not to impose unjustifiable rate hikes, adding to friction between the administration and industry.

Sebelius said she now hopes insurers will work with the administration. "I'm optimistic there is a real potential to do some important work over the next couple years in a collaborative fashion,'' she said.

Insurers said despite past opposition they are now committed to making the healthcare law successful.

"We are totally focused on implementation and making the legislation work,'' Karen Ignagni, head of the industry group America's Health Insurance Plans, told reporters.

Companies are aiming to boost coverage during the transition period but are pressing for more efforts to control rising medical costs that push premiums higher, said Robert Zirkelbach, a spokesman for the industry group.

State insurance commissioners also are advocating a gradual shift to a requirement that companies spend more of each dollar in premiums for the benefit of patients, he said. Otherwise, they worry insurers will leave the individual market.

"It's important that new requirements be structured in a way that doesn't cause significant disruption for people purchasing coverage on their own, particularly in the years leading up to 2014,'' Zirkelbach said.

Thursday, July 1, 2010

Hurricane Alex Weakens to Tropical Storm

Hurricane Alex weakened to a tropical storm Thursday as it moved further inland over northeastern Mexico, dumping heavy rains that flooded cities but sparing U.S. oil facilities near its path.

Rain from the first named storm of the 2010 Atlantic season flooded about 80 percent of the port city of Matamoros, sent uprooted trees crashing down on parked cars and forced thousands to flee low-lying fishing villages. Inland in the industrial city of Monterrey, at least two people were killed by Alex's rains, which washed away cars, bridges and some houses and turned dry desert beds into turbulent rivers.

"The damage is enormous, a river burst its banks and we have people trapped on the roofs of their houses,'' said mayor Martin Zamarripa of the town of Hualahuises outside Monterrey.

Alex made landfall as a Category 2 Hurricane on the Tamaulipas coast around 9 p.m. Wednesday . U.S. oil installations have not been hit by the storm, which formed near the Yucatan peninsula Saturday, but some companies cut back production and evacuated staff.

As of Wednesday, oil companies had shut down production of more than 421,000 barrels per day, about a quarter of the Gulf's output, as a precaution.

They have also shut 919 million cubic feet per day of gas output, some 14 percent of the Gulf's total.

BP Plc said Thursday its Gulf oil and gas output was back to normal, although the passage of Alex slowed oil clean-up and containment efforts at its leaking deep-sea well off the Louisiana coast.

The Louisiana Offshore Oil Port, the nation's only deepwater oil supertanker unloading terminal, hopes to resume operations by late Thursday, a spokeswoman said.

Alex, which is expected to dissipate over Mexico's central mountain ranges over night, had maximum sustained winds of 50 mph and was located about 150 miles east of Zacatecas in central Mexico.

Across the border in Brownsville, Texas, at least three tornadoes swept through the area, tossing over tractor-trailers although no major damage was reported. "Isolated tornadoes are possible over portions of extreme southern Texas today,'' the U.S. National Hurricane Center said. Alex was the first and strongest Category 2 hurricane to occur in June since 1966.

Mexican marines evacuated thousands of people from fishing communities along the Gulf coast and into shelters, but some refused to leave their homes even as water ran in under doors.

However, local authorities will remain on high alert in case of rainfall as high as 20 inches. Alex killed a dozen people in Central America over the weekend.

Monday, June 28, 2010

Goodyear Tire, Mississippi Families Settle Over 2000 Accident

Goodyear Tire and Rubber Co. and the families of three men involved in a 2000 accident in which one of them died have settled a lawsuit.

The Mississippi Supreme Court last week dismissed the lawsuit. The court noted its order that both sides sought the dismissal because a settlement had been reached.

The young men's families -- and a Copiah County jury -- blamed the accident on a faulty tire on the Chevrolet Camaro rather than excessive speed and the beer the men had been drinking.

The state Court of Appeals agreed last April and upheld a $2.1 million verdict against Goodyear and Big 10 Tire Co.

Goodyear and Big 10 appealed.

Supreme Court Strikes Down Sarbanes-Oxley Accounting Board

The Supreme Court Monday struck down part of a 2002 law that created a national board that polices auditors of public companies, ruling that it violated the constitutional requirement on the separation of powers among the branches of government.

The high court's ruling on the Public Company Accounting Oversight Board (PCAOB) could put pressure on Congress to revisit the Sarbanes-Oxley corporate reform law, opening it up for potential changes in the reporting duties of companies.

The court's mixed ruling held that the board violated the the U.S. Constitution's separation of powers principle, but also held that the law does not violate the Constitution's appointments clause.

At stake in the case was how corporate America is audited and a key provision of the Sarbanes-Oxley corporate reform law adopted in response to the Enron and WorldCom accounting scandals early in the decade.

The ruling was a victory for the Free Enterprise Fund and a small Nevada accounting firm, which argued that the law unconstitutionally stripped the president of power to appoint or remove board members or to supervise their activities.

Board members are appointed by the U.S. Securities and Exchange Commission and can only be removed by the SEC for cause. The board, set up as a quasi-private agency, has the power to impose rules and to inspect and fine accounting firms.

The board is funded through fees it collects from public companies. It inspects thousands of auditors, including the Big Four accounting firms: Ernst & Young LLP, KPMG , PricewaterhouseCoopers and Deloitte & Touche LLP.

The Free Enterprise Fund and the accounting firm sued in 2006. A federal judge and a U.S. appeals court rejected the challenge.

The Supreme Court's majority opinion said the limits on the removal of board members violated the separation of powers requirement.

But the court also held that the unconstitutional provisions can be separated from the rest of the law.

Monday, June 21, 2010

After Profitable 2009, Reinsurers Face Pricing Pressure from Primary Insurers

A softening casualty market, strong company earnings, and a quiet catastrophe season resulted in the reinsurance industry enjoying, in 2009, one of its most profitable underwriting years in nearly a decade.

Today, reinsurers must continue to push-back on multi-year deals and reject raw coverage despite pricing pressure by primary insurers, according to a panel of senior reinsurance executives who spoke before the Casualty Actuarial Society (CAS) Seminar on Reinsurance.

George Venuto, executive vice president, Willis Reinsurance, noted that there is a distinct difference in how primary business and excess casualty business is being viewed. "Trying to please primary casualty insurers is probably the most difficult thing to do right now," he said. "On the property side, we are continuing to see rate pressure. The model changes have created a visual downward pressure on pricing," he said, adding, "It is not the best pricing environment on the insurance and reinsurance side."

Venuto said that terms and conditions were softening somewhat and there was an increase in loss trends. "Capacity is available for all lines, in particular property and casualty. You can get it placed."

Damien Magarelli, director, Standard & Poor's, said that his firm has not seen a change in terms and conditions. "Multi-year policies are very few and far between, and there have not been a lot of changes in profit commissions," he said. "After Hurricane Katrina, there were 30 to 40 percent price increases for some property lines; renewal rates in 2010 have exhibited declines from 0 to 10 percent. Additional capacity has contributed to declining prices," he said.

Magarelli noted that 2010 has so far been active with disasters. "The Chilean earthquake was a large event but much smaller than Northridge, with losses expected in the $8 to $10 billion range," he said. "But that won't be a catalyst to drive rate increases globally. Floods and storms in the northeast will not change the pricing cycle. If you have a regional carrier, their earnings will be affected, but not dramatic enough of an impact for a new pricing cycle."

According to Magarelli, the Gulf oil spill is about a $1.5 billion insured property loss and while there may be litigation in terms of the debris cleanup, this is "not expected to be a significant insurance industry event, in our view."

Venuto agreed and said he didn't see that any of these events had enough impact to suck capacity out of the market because it is an overcapitalized industry. "I don't see these events being enough to change anything dramatically."

Magarelli said that these catastrophe events have reduced the margin reinsurers had going into hurricane season, but it's not outside the normal budget. "At this point in time, cat losses were low last year, but there were losses in the Midwest, which impacted a different group of regional companies. This year it is affecting more Northeast regional companies."

"It's not so much where we are, but where we are going," said Magarelli regarding where the industry is in the cycle. "Frequency has been declining for a number of lines for many years. That has propelled earnings to a greater degree," he said.

"Severity is increasing; we see frequency now turning flat; buying habits have changed," he said. "You may see a larger pick up of loss costs trends. It's an issue for us," he said. "If there is an acceleration of loss cost trends, then you may see a dramatic increase in losses and reduced earnings."

Venuto thought that the industry may have a loss ratio environment similar to that of 1995. "We are getting close to where there's not much rate left to give back," he said. "Frequency has been flattish. The impact of the economy on what's happening, chasing fewer exposure dollars, will have a dampening affect."

Venuto said that there are more fail-safes today than in the late1990s. "It's not just actuaries looking at it; now everybody gives you a price monitor. We really see where trends have been. Terms and conditions have held and that was the monster under the bed in the late '90s. We'll come out of this soft market better than the last one mainly because actuaries are more involved than they were in the past."

"The difference between the late '90s versus now is the reinsurance appetite for risk," added Magarelli. "Most direct reinsurance companies in the '90s opened up a lot of capacity that companies were allowed to write against. There's more discipline now, better tools. Also a fundamental change -- reinsurance companies are more restrictive in terms of capacity. We're still going to have cycles, but we may not have as many peaks and valleys as we did in the past."

"Clearly there have been external influences that have reinforced the focus and improved the testing of setting reserves," said Magarelli. "Some companies still think there are rate declines that can be had; others think rates should go up. Our view is that reserves are adequate, but we still think companies are living off the 2002-2005 accident years."

Venuto said that the rules have changed to some extent and that there is more discipline. "Claims are settling quicker. There is definitely a movement on the claims side of best practices, driven by actuaries, underwriters and claims adjusters. Reserving and claims practices have improved dramatically."

Venuto said that pricing actuaries are the "gatekeepers to get something placed in this business." He advised actuaries to be more visible with clients. "The way you're going to outperform your peers is to know how a company works. Get out there with your underwriters; get to know your clients and how they view risk," he said.

Wednesday, June 16, 2010

Federal Judge Approves $72M Insurance Settlement with The Hartford

A federal judge has given preliminary approval to a settlement under which The Hartford Financial Services Group Inc. will pay $72.5 million to more than 21,000 people nationwide who alleged the insurer engaged in fraud in settling their injury claims.

U.S. District Court Judge Janet C. Hall approved the agreement last week in Bridgeport to resolve the class action lawsuit. It was announced Monday by attorneys for those who sued.

The plaintiffs alleged The Hartford engaged in fraudulent settlement practices by deducting up to 15 percent of the value of their settlements in undisclosed annuity costs.

"It's a great settlement because people who have been victimized by corporate fraud are getting reimbursed,'' said David Golub, one of the attorneys for the plaintiffs.

The Hartford said the claimants received the promised amounts they were due. It said the company settled to avoid the uncertainty and cost of continued litigation.

The company did not admit to fraud as part of the settlement. Company officials said it disclosed the settlement in its first quarter earnings report.

Its shares rose 91 cents, or 3.8 percent, to $24.92 in midday trading.

The 21,000 people were due payments for claims dating to 1997 involving car accidents, workers compensation and other injuries. They are expected to receive an average of about $3,300 each as a result of the settlement.

At issue were structured settlements in which payments are made over time rather than in a lump sum paid at the time of settlement. Such settlement payments are typically funded with annuities.

The lawsuit alleged The Hartford developed a scheme in which its property and casualty companies purchased the annuities from its life insurance subsidiary, which then paid a kickback to the property and casualty companies. The lawsuit accused the company of violating a racketeering law.

The Hartford retained about 15 percent of the value of the structured settlements to cover profits, taxes and costs, according to the lawsuit.

The settlement, expected to receive final approval in September, came after extensive mediation and five years of litigation in which Hall certified a nationwide class action and an appeals court rejected the company's challenge to class certification last year. The trial was scheduled to start in September.

Tuesday, June 15, 2010

Lawyer for Alleged Ponzi Schemer Stanford Accused of Insurance Fraud

The judge handling the criminal case against accused Ponzi schemer Allen Stanford is allowing parties to review documents related to allegations that the Texas financier's lawyers engaged in insurance fraud.

An order released Monday by U.S. District Judge David Hittner in Houston adds a twist to a case in which Stanford has cycled through many lawyers, prompting three co-defendants to ask that their trials be severed because the case has become a ''circus.''

Stanford was arrested in June 2009 and accused of running a $7 billion Ponzi scheme focused on his Stanford Financial Group's fraudulent sale of certificates of deposit issued by his Antigua bank. A January 2011 trial is expected.

Hittner's order relates to a separate insurance coverage dispute that Stanford and underwriters at Lloyd's of London and Arch Specialty Insurance Co. are litigating in the same court. The order lets the underwriters review documents filed under seal.

According to court papers, the underwriters learned that Michael Essmyer, who is Stanford's co-counsel in the criminal case, alleged that lead counsel Robert Bennett and his Bennett-Nguyen Joint Venture "may have engaged in insurance fraud'' in submitting a fee application.

Bennett denied engaging in insurance fraud, according to the papers, which were signed by him, Essmyer and a lawyer for the insurers.

It follows the June 9 request by Laura Pendergest-Holt, a former Stanford Financial chief investment officer, to sever her trial.

She said the "egregious and circus-like conduct'' by Stanford and his lawyers jeopardizes her right to a fair trial.

Former Stanford accounting executives Mark Kuhrt and Gilbert Lopez joined her motion, which uses the word "circus'' nine times and said the potential prejudice created by Stanford could prove "toxic.''

Bennett Monday declined to comment.

Earlier this month, Hittner rejected Essmyer's attempt to withdraw from the case after Stanford had fired him, and amid ''irreconcilable differences'' with Bennett over litigation strategy, but directed that Bennett serve as lead counsel.

Bennett is a Houston-based lawyer, not the prominent Washington, D.C., lawyer with the same name.

The case is U.S. v. Stanford, U.S. District Court, Southern District of Texas, No. 09-cr-00342.

Thursday, June 10, 2010

24 South Florida firms closed for lack of workers' compensation

A two-day sting has led to the closure of 70 Florida businesses -- including 24 in South Florida -- because of violations of the state's workers' compensation laws.

Random site visits by the state Department of Financial Services found the companies failed to provide workers' compensation insurance for their employees.

State law says construction-related companies must have workers' compensation coverage if they have one or more employee, including the owner. Other businesses must have the coverage if they employ four or more employees, excluding business owners.

More than 360 liens have been filed against delinquent employers since late 2009, totaling $13.7 million.

The companies caught without the right coverage or coverage violations were issued stop-work orders, which require businesses to shut down until proper coverage is obtained and a penalty is paid.

The South Florida firms include:

In Broward, BP Paving Inc., D&D Construction Group, Ideal Roofing Systems.

In Miami-Dade, Aldo's Pool, Americans Builders and Construction, Dianza Commercial Dry Wall System, Authentic Construction, Professional Carpentry USA, GA Stone, No Drip Plumbing, JJJ Finishing Master, Built Top Building Services, Superior Wood Floor, Unlimited Ceiling Corp., Reinolds H. Castro Inc., Laura's Management, J.R.F. Florida Painting Corp., ABC Seamless Rain Gutters, Jose Ber Tile, Zepol, Allen R. Greenwald, Mercado Enterprise, Articpolo Inc., Enloe Carpentry.

And the Best, Worst States for Tort Liability Costs Are...

Alaska, Hawaii and North Carolina get thumbs up while New Jersey, New York and Florida get thumbs down for their tort liability costs in the latest ranking by a free-market think tank.

The states with the worst performance had the highest monetary tort losses and tort litigation risks, meaning they had more costly and riskier business climates due to larger plaintiff awards, larger plaintiff settlements, more lawsuits, or some combination of the three, according to the researchers.

The Pacific Research Institute (PRI), a non-profit free-market organization based in San Francisco, and the Manufacturers Alliance (MAPI), a public policy and economic research organization for manufacturers based in Arlington, Va., today released their 201o U.S. Tort Liability Index, a measure of which states impose the highest and lowest tort costs and risks.

States were also ranked according to their tort rules and reforms on the books to reduce lawsuit abuse and contain tort costs and risks, such as award caps, venue reforms to stop "litigation tourism," or judicial-selection reforms to hinder the types of abuses engaged in by the likes of now imprisoned "Kings of Tort" Dickie Scruggs and Paul Minor. The Index found that, in the wake of its comprehensive lawsuit reforms enacted in 2009, Oklahoma now has the best tort rules on the books, followed by its neighboring state of Texas.

The Index, now in its third edition, was authored by Lawrence J. McQuillan, Ph.D., director of Business and Economic Studies, and Hovannes Abramyan, M.A., adjunct public policy fellow.

"Direct tort costs account for almost 2 percent of GDP in the United States—that's the highest in the world," said McQuillan. "These high costs impact American businesses when firms have to divert revenue to fight lawsuits. But all of us ultimately shoulder the burden through higher prices and insurance premiums, lower wages, restricted access to health care, less innovation, and higher taxes to pay for court costs."

"If lawmakers want to put people back to work, without costing taxpayers another penny for so-called 'stimulus', they should enact needed lawsuit reform," added Abramyan. "Job growth was 57 percent greater in the 10 states with the best tort climates than in the 10 states with the worst tort climates."

The Best and Worst Tort Climates

The Best

3.North Carolina
4.South Dakota
5.North Dakota

The Worst

1.New Jersey
2.New York
10. California

Saints, Sinners, Suckers, and Salvageables

The Index sorts states into four groups based on their ranking for outputs (tort costs and tort litigation risks) and inputs (tort rules and reforms on the books).

Saints: States that have relatively low tort costs and/or low tort litigation risks and relatively strong tort rules on the books.

Sinners: States that have relatively high tort costs and/or high tort litigation risks and relatively weak tort rules on the books.

Suckers: States that have weak tort rules on the books because they currently have relatively low tort costs and/or low tort litigation risks.

Salvageables: States that have moderate to high relative tort costs and/or tort litigation risks, yet have moderate to strong tort rules, usually as a result of recent reforms.

"Only five states made 'Saint' status, whereas 20 states were labeled 'Sinners'," said McQuillan. "This signals a dire need for further reform in many states. The goals of our tort system are to efficiently deter harmful events and fully compensate true victims, not to line the pockets of system abusers."

Tuesday, June 8, 2010

Bank of America U.S. Workers Sue for Overtime

Workers for Bank of America Corp, one of the nation's largest employers, have sued the company for allegedly failing to pay overtime and other wages.

The lawsuit filed Friday in federal court in Kansas City, Kansas, consolidates 12 lawsuits filed on behalf of employees in California, Florida, Kansas, Texas and Washington.

It seeks nationwide class-action status on behalf of employees at Bank of America retail branches and call centers over the past three years.

George Hanson, a lawyer for the plaintiffs, said the case could eventually cover more than 180,000 workers, based on information provided by the bank. That could lead to a recovery in the "hundreds of millions: of dollars, assuming a typical employee was deprived of $1,000 to $2,000 in pay, he said.

According to the 44-page complaint, the largest U.S. bank by assets requires employees to work in excess of eight hours a day or 40 hours a week, yet fails to pay them both for overtime and for all straight time worked.

The complaint also accuses Bank of America of requiring employees to work during unpaid breaks, failing to provide meal and rest breaks, and failing to timely pay terminated employees for earned wages and accrued vacation time.

"Bank of America enjoys millions of dollars in ill-gained profits at the expense of its hourly employees," violating either the federal Fair Labor Standards Act or various state labor laws, the complaint said.

Shirley Norton, a Bank of America spokeswoman, said the Charlotte, North Carolina-based bank would defend against the lawsuit, and had comprehensive policies and training to ensure compliance with all federal and state wage and hour laws.

Bank of America as of March 31 employed 283,914 people worldwide, and operated 5,939 U.S. branches.

The federal Judicial Panel on Multidistrict Litigation in April had directed that the 12 original cases be combined.

The lawsuit seeks class-action status, a halt to the alleged illegal conduct, compensatory and punitive damages and other remedies.

The case is In re: Bank of America Wage and Hour Employment Practices Litigation, U.S. District Court, District of Kansas, No. 10-md-2138.

Wednesday, June 2, 2010

Top 10 Hurricane Year Possible, AccuWeather Forecaster Says

This year could be a top 10 hurricane year, according to Joe Bastardi,’s chief meteorologist and hurricane forecaster.

Last week, the National Oceanic and Atmospheric Administration issued its annual hurricane forecast.

AccuWeather compared Mr. Bastadi’s hurricane prediction to NOAA’s and noted while there are similarities, Mr. Bastadi’s prediction gives a narrower range than NOAA’s.

NOAA forecasts an “active to extremely active” year, while Mr. Bastardi said 2010 could be a “top 10 year” in terms of storm frequency and strength, adding that the Atlantic basin looks “textbook” for a major season.

“2010 will be above average,” said Mr. Bastardi in a statement. “And worst case scenario, it may be in the top 5 to 10 percent as far as impact to land areas in the western hemisphere.”

NOAA predicted a 70 percent chance of 14-23 named storms.

Mr. Bastardi narrowed the range to a projected a total of 16-18 named storms, with 15 reaching the western Atlantic, and at least six storms impacting the United States coastline, with a worst-case scenario of up to 10.

He said he believes more storms will threaten the land areas of North America and adjacent islands.

NOAA predicted there will between 8-12 storms that reach hurricane status, while Mr. Bastardi sees 10-11 storms becoming hurricanes this season.

As for major hurricanes—Category 3 and higher—NOAA forecasts between three and seven.

Mr. Bastardi said he expects five.

The Gulf of Mexico and the Caribbean will be of special concern this hurricane season, as both the Gulf oil spill area and Haiti will be vulnerable to storm impact, Mr. Bastardi said.

He added that in the heart of the season, there will be a “congregation of tracks,” or a concentrated area where many of the storm tracks will pass through. This area is centered near Puerto Rico to near the Southeast U.S. coastline.

The peak time for hurricane season, which runs from June 1 to Nov. 30, is considered to be September

Tuesday, June 1, 2010

Citizens Says Losses Rose 34 Percent Over Previous Year

May 28--Citizens Property Insurance Corp. reported that losses rose 34 percent over a year ago, due largely to sinkhole claims from both residential and commercial policyholders. The state-run insurer of last resort posted net income of $191.3 million for the year ended March 31, down 41 percent. Citizens saw a 1 percent rise in the number of policyholders last year, to 1,051,373, but expects that number to grow with the recent liquidation of two private insurers, Magnolia and Northern Capital Insurance.

Future Trend: Fighting Fraud and Abuse with "Transparency"

The following article is from Elizabeth Hogue, Esq,( an attorney who specializes in Medicare/Medicaid/Home Care. In any case, the issue of public disclosure of gifts is always a hot button for agencies and the article below goes into some detail on what is/is not allowable.

Physicians routinely expect or perhaps demand gifts from home health agencies, private duty agencies, home medical equipment (HME) companies, and hospices to which they make referrals.

Generally, the rules governing such gifts are as follows:

- No cash

- No cash equivalents, including gift cards and gift certificates

- Non-cash items of nominal value are permitted, so long as the value of such items does not exceed approximately $350.00 per calendar year.

- Non-cash items of nominal value given cannot induce referrals.

The stakes are high if providers were to violate these rules. Providers on “both sides of the fence” may be suspended or excluded from participation in federal and state health care programs. They may be required to pay large civil money penalties or fines. Providers may also lose their licenses or go to jail. Many providers, however, have heard stories about their competitors who do not comply with these rules.

Regulators are now adding something new to their “arsenals:” providers and physicians may be required to publicly disclose all of the gifts they give and receive. The rationale behind this requirement is that “transparency” may discourage providers and physicians from violating the law. Regulators expect that public disclosures will make criminal behavior more difficult to conduct and easier to detect. They also anticipate that disclosures may serve as deterrents for violators.

As part of settlements of alleged violations of the above rules, for example, regulators require a growing number of providers and manufacturers to post publicly all of the payments they have made to doctors. Corporate Integrity Agreements (CIA’s) entered into between alleged violators and the Office of Inspector General (OIG) of the U.S. Department of Health and Human Services may also require such disclosures.

In Gardiner Harris’ article entitled Prosecutors Plan Crackdown on Doctors Who Accept Kickbacks, which appeared in the New York Times on March 4, 2009, Dr. David Rothman, President of the Institute on Medicine at Columbia University was quoted as saying: “The rules of the game have changed…You’ve got to presume that anything you take from a …company is going to be on a Web Site. Your colleagues will know; your patients will know. That’s going to stop a lot of doctors from pocketing their gifts and funds.” Doctors whose financial arrangements have already been made public are horrified.

For example, the above article describes Dr. Richard Grimm, a physician in Minnesota engaged in substantial amounts of research, who served on a government-sponsored panel that creates guidelines about when to prescribe medication for blood pressure. State records revealed that Dr. Grimm received payments of approximately $800,000 from drug companies over a period of eight years. Invitations to serve on such panels then dried up.

Undoubtedly, providers who are “bad actors” will continue to flout the rules. The proverbial handwriting, however, is on the wall. The game has changed and will continue to do so.

Flood Insurance Program to Expire Again May 31

For the fourth time in the past year, the nation's flood insurance program will lapse because Congress has not voted to reauthorize it.

That's the latest on Capitol Hill, according to property/casualty lobbyists and other sources.

As a result, the National Flood Insurance Program will lapse at 12:01 a.m., June 1, the first day of the hurricane season.

According to the American Insurance Association, the House of Representatives was expected to strip the flood insurance provision from a larger bill dealing with unemployment benefits, Medicare payments to doctors and tax breaks that has been stalled by partisan fighting. The plan was to then conduct votes on extensions for the NFIP and other programs prior to adjourning for the Memorial Day recess.

However, according to AIA, Senate Majority Leader Harry Reid, D-Nev., announced last night that the Senate will not consider the legislation to extend the insurance and other programs until the week of June 7.

Dow Jones Newswire and The Washington blog, The Hill, reported that Democrats might make an offer to extend the NFIP and other programs for 14 days but that Republicans would only go along if stimulus finds were used to pay for it, something Democrats have opposed in the past and are expected to again.

The stalemate means the Senate will adjourn for the Memorial Day recess without taking action needed to extend the NFIP.

"This is now the fourth time Congress will have let this program lapse and it's beginning to feel like Groundhog's Day. The country has seen record flooding this spring. Congress needs to pass a long-term extension because homeowners living in flood prone regions of the country don't have anywhere to turn should another major flood occur during this Congressional recess," said Blain Rethmeier, spokesman for the American Insurance Association.

NFIP has previously issued a memo with guidelines for operations during a hiatus. During its suspension, agents will not be able to issue any new or renewal flood insurance policies or increase limits on any existing policies. The hiatus will not affect claims paying. The program insures more than 5 million properties

Congress has been working on longer-term legislation to authorize NFIP for up to five years, which would be welcomed by the insurance industry

Friday, May 28, 2010

Threat of Active Atlantic Hurricane Season Growing, Says U.S. Forecaster

The threat of an above-average 2010 Atlantic hurricane season has heightened over the past month and it now promises to be "a hell of a year,'' a leading U.S. forecaster said Wednesday.

William Gray, the hurricane forecast pioneer who founded Colorado State University's respected storm research team, said CSU would ramp up its predictions for the 2010 season in a report due out on June 2.

"The numbers are going to go up quite high,'' Gray said. ''This looks like a hell of a year.''
A higher forecast raises the prospect the vulnerable U.S. Gulf Coast may see a repeat of the 2005 season when a record 28 storms formed, which killed nearly 4,000 people and caused an estimated $130 billion in total damages.

The list included hurricanes Katrina, which devastated New Orleans, Rita which plowed into southern Louisiana, and Wilma, the most intense storm recorded in the Atlantic basin with peak winds of 185 miles per hour (295 kph).

Gray, who spoke on the sidelines of a regional hurricane conference, declined to specify the number of storms CSU will forecast in its outlook next week.

In its previous forecast, released on April 7, CSU had projected the season would produce an above-average eight hurricanes, four of which could be major.

In 2005, there were seven major hurricanes.

In its April 7 forecast, CSU also said the six-month season beginning on June 1 would likely produce 15 named tropical storms. An average Atlantic season has about 10 tropical storms, of which six become hurricanes.

Major hurricanes pack powerful sustained winds of at least 111 miles per hour .

Gray and Phil Klotzbach, lead forecaster with the Colorado State team, both told Reuters that forecast models showing a recent shift in wind patterns and warm tropical Atlantic waters had reinforced the likelihood that a busy hurricane season was on its way.

They referred specifically to reduced wind shear probabilities due to the dissipation of the El Nino weather phenomenon over the Pacific Ocean.

"El Nino died pretty quickly over the past couple of months,'' Klotzbach said.

An El Nino would normally allow wind sheer to seep into the Atlantic, disrupting storm formation and pushing embryonic hurricanes out to sea far from the oil-rig rich Gulf and the U.S. mainland.

Wind shear -- caused by a clash between prevailing upper-levels winds out of the west and lower-level easterly winds out of Africa -- can tear apart hurricanes or break up their circulation.

"Everything is setting up as a very active season,'' Gray said.


Both Gray and Klotzbach said there were too many uncertainties about the Gulf of Mexico oil spill to make any predictions about how it might come into play in the upcoming storm season.

But they were dismissive of claims the oil slick could keep storms from gathering strength and said a powerful cyclone, particularly if it comes out of the western portion of the Gulf, could propel large quantities of oil ashore in the northern Gulf.

"The counter-clockwise circulation could push oil inland, into the inland waterways, and cause a lot of problems,'' Klotzbach said.

Federal Emergency Management Agency director Craig Fugate, who spoke at the same hurricane conference in Fort Lauderdale on Wednesday, seemed exasperated by public attention to the oil spill as another potentially deadly hurricane season looms over the Caribbean and the U.S. Atlantic seaboard.

"It concerns me that we're talking about the oil spill and we're not talking about hurricane season,'' Fugate told reporters.

"Given the vulnerability of many of our coastal communities to a major landfalling hurricane, a failure to prepare for that will negate any of the work that's been done to deal with the impacts of the oil spill,'' he said.

"Yes there's an oil spill, yes it's devastating, and yes it has significant impacts to our coastline, to our tourism and to the environment. But do not confuse that with the deadly power of a major hurricane.'' he said.