While efforts were underway to sell the Companies, in whole or in part, the Deputy Receiver undertook a number of measures to reduce the operating expenses of the Companies. These measures included, among others, consolidation of offices, reduction of staff, and the downsizing and conversion of the Companies' computer systems. In addition, the Deputy Receiver instituted changes in procedures governing the Companies' adjudication of their claims.
As an additional rehabilitation effort, in October 1995, the Deputy Receiver requested proposals from third party administrators for the adjudication of the Companies' claims over the remaining term of the policies in force. Proposals in response to the administrative bid process were submitted in December 1995. The Deputy Receiver also requested bid proposals from service firms to oversee the third party administrator and to perform other administrative functions on behalf of the Deputy Receiver. Proposals from the service firms were submitted by February 1996. The goal of these administrative bid processes was to determine whether third parties could provide administrative services at a price that was lower than the Companies' projected costs over the term of the policies in force.
The Deputy Receiver evaluated all purchase and administrative proposals with the assistance of outside experts retained for this purpose. The goal of this effort was to determine whether any proposals to purchase the Companies or to administer their business would provide greater benefits to Home Owners, Member Builders, and creditors than would be achieved if no changes were made to the Companies' receivership operations. A key factor of this analysis was the need to assure that a proposed agreement would not worsen the plight of Home Owners, Member Builders, and creditors.
After extensive rounds of communication and negotiation, the Deputy Receiver concluded that none of the purchase proposals, either by themselves or in combination with others, could be reasonably anticipated to provide greater benefits for Home Owners, Member Builders, and creditors of the Companies than would likely be achieved by an orderly administration of the Companies' operations in receivership. Therefore, the Deputy Receiver did not enter into any contract to sell the Companies' business.
In March 1996, the Deputy Receiver concluded that the administrative proposals would provide greater benefits to claimants than the plan of operation then in effect for the Companies' operations. Therefore, the Deputy Receiver retained a third party administrator to adjudicate claims and perform other routine administrative tasks for the Companies, in accordance with guidelines established by the Deputy Receiver. The Deputy Receiver also retained a service firm to oversee the third party administrator and perform other administrative functions of the Companies on behalf of the Deputy Receiver.
The third party administrator and service firm act under the direction and guidance of the Deputy Receiver. Enlisting these third parties to administer the Companies' operations has enabled the Deputy Receiver to achieve additional cost savings by closing the Companies' offices, downsizing their warehouse facilities, selling unneeded furniture and equipment, terminating all employees (some of whom were subsequently hired by the third party administrator), and reducing other overhead costs.
The Deputy Receiver has not ruled out the possibility of selling the Companies or parts of their business to third parties in the future. However, he is not actively soliciting purchase proposals from third parties at this time in light of the comprehensive and costly bid process that was recently completed. Through this bid process, it was determined that the purchase proposals apparently would provide fewer benefits to Home Owners, Member Builders, and creditors than the administrative proposals selected by the Deputy Receiver.
Actions taken by the Deputy Receiver, together with a reduction in reported claims, appear to have improved the financial condition of HOWIC. Before receivership, it was concluded that the financial reports filed by HOWIC reflected reporting methodologies that did not depict its true financial condition. It appears that HOWIC was insolvent by as much as $116 million as of December 31, 1994. As of December 31, 1996, HOWIC was reported to be insolvent by approximately $53 million. This apparent improvement is a reflection of several aspects of the Companies' post-receivership operations. First, following the inception of receivership proceedings, the volume of claims presented to the Companies declined substantially. However, this decline may well be temporary. Secondly, the Deputy Receiver implemented a number of measures to expedite and reduce the costs of claims adjudication. The Deputy Receiver also devised and implemented a comprehensive plan for the reduction of operating costs. Finally, the Deputy Receiver has placed particular emphasis on collection of amounts due to the Companies from third parties.
The Deputy Receiver hopes that this favorable trend will continue in the future, but he can provide no assurance that operating results of the Companies will continue to improve. Indeed, cost saving measures taken in coming years will not likely be of the magnitude of those taken during the first two years of receivership. A number of measures previously implemented by the receivership team were one-time events that cannot be repeated.
No Guaranty Fund Coverage
The HOWIC Warranty is not backed by a state insurance guaranty association or other insolvency protection plan. The federal statute governing risk retention groups like HOWIC expressly prevents a state from including such companies in its guaranty association. Therefore, if HOWIC is ultimately unable to fulfill its contractual obligations under the HOWIC Warranty, no payments will be available from state insurance guaranty associations.
HOWIC Coverage Remains in Effect
With certain exceptions, the Deputy Receiver has not terminated the HOWIC Warranties that were issued before October 7, 1994. The insurance coverages that were in effect on that date were not canceled by reason of the receivership. Warranty claims submitted to the Companies continue to be adjudicated in accordance with the terms and conditions of the HOWIC Warranty, as that document has been interpreted by the Deputy Receiver, and the rules fnd procedures in effect for the receivership.
REPORT TO HOME OWNERS - Page 5