[Federal Register Volume 69, Number 30 (Friday, February 13, 2004)]
[Notices]
[Pages 7271-7273]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-3168]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 35-27798]


Filings Under the Public Utility Holding Company Act of 1935, as 
Amended (``Act'')

February 6, 2004.
    Notice is hereby given that the following filing(s) has/have been 
made with the Commission pursuant to provisions of the Act and rules 
promulgated under the Act. All interested persons are referred to the 
application(s) and/or declaration(s) for complete statements of the 
proposed transaction(s) summarized below. The application(s) and/or 
declaration(s) and any amendment(s) is/are available for public 
inspection through the Commission's Branch of Public Reference.
    Interested persons wishing to comment or request a hearing on the 
application(s) and/or declaration(s) should submit their views in 
writing by March 3, 2004, to the Secretary, Securities and Exchange 
Commission, Washington, DC 20549-0609, and serve a copy on the relevant 
applicant(s) and/or declarant(s) at the address(es) specified below. 
Proof of service (by affidavit or, in the case of an attorney at law, 
by certificate) should be filed with the request. Any request for 
hearing should identify specifically the issues of facts or law that 
are disputed. A person who so requests will be notified of any hearing, 
if ordered, and will receive a copy of any notice or order issued in 
the matter. After March 3, 2004, the application(s) and/or 
declaration(s), as filed or as amended, may be granted and/or permitted 
to become effective.

Cinergy Corp. (70-10188)

    Cinergy Corp. (``Cinergy'' or ``Applicant''), 139 East Fourth 
Street, Cincinnati, Ohio 45202, a registered public-utility holding 
company under the Act, has filed an application-declaration under 
sections 6(a), 7, 9(a), 10, 12(b) and 13(b) of the Act and rules 45, 
54, 90 and 91.
    Cinergy requests authorization to establish a subsidiary captive 
insurance company (``Cinergy Captive'') to engage in the business of 
insuring or reinsuring certain levels of risk for Cinergy and its 
associate companies (collectively, ``Cinergy System'' or ``System'' 
and, any constituent company, a ``System Company'').\1\ Cinergy states 
that it considers risk management a key corporate function, providing 
for protection of physical and financial assets. As such, risk 
management is one of the primary responsibilities of Cinergy Services, 
Inc. (``Service Company''), a wholly owned subsidiary of Cinergy, which 
coordinates, and will continue to coordinate, risk management through 
the Insurance and Claims Department of its Global Risk Management 
Department.\2\
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    \1\ Cinergy directly or indirectly owns all the outstanding 
common stock of five public utility companies, the most significant 
of which are PSI Energy, Inc. (``PSI''), an Indiana electric 
utility, and The Cincinnati Gas & Electric Company (``CG&E''), a 
combination Ohio electric and gas utility and holding company. PSI 
and CG&E (including the utility subsidiaries of CG&E, the most 
significant of which is The Union Light, Heat and Power Company, a 
Kentucky combination electric and gas utility) collectively provide 
electric and gas service to approximately 1.6 million retail and 
wholesale customers in parts of Indiana, Ohio and Kentucky. The 
Cinergy System also includes numerous nonutility subsidiaries 
engaged in energy-related businesses and other nonutility 
businesses.
    \2\ On an annual basis, Cinergy's System Companies spend 
approximately $15 million for commercial insurance and related 
services. Currently, System Companies maintain insurance policies 
with underlying deductibles of $1 million per event for automobile 
and general liability coverage and $2.5 million for property 
coverage. In excess of these deductibles, System Companies purchase 
commercial insurance. System Companies currently self-insure for 
workers' compensation in the States of Ohio, Indiana and Kentucky 
(i.e., carry no or only minimal commercial insurance for those 
risks). System Companies, nevertheless, from time to time, may 
choose to purchase commercial insurance in place of, or to reduce, 
the deductible or self-insurance to meet their strategic goals and 
objectives. Commercial premiums and the deductibles and self-insured 
retained risks are then allocated by the Service Company to 
subsidiaries owning a given risk, based on such factors as number of 
automobiles, payroll, revenues, total property values, product 
throughput, as well as loss history. The allocation methods used are 
designed to result in a fair and equitable apportionment of 
insurance costs to System Companies consistent with the relevant 
cost drivers.
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    Cinergy intends Cinergy Captive to underwrite a significant portion 
of the Cinergy System deductible or self-insured retained risks for 
workers' compensation, general liability, auto liability and property 
insurance coverage. In addition to this primary role of underwriting 
System retained risks, Cinergy Captive may be used to replace, or 
reduce, insurance coverage purchased on behalf of System Companies from 
traditional insurance providers for workers' compensation, general 
liability, auto liability and property risks. In this context, Cinergy 
Captive would seek to obtain equal levels of loss protection and 
coverage in the reinsurance market. Cinergy, at some future time, also 
may propose to underwrite certain additional coverage, but not without 
a further Commission order.\3\ Consequently, Cinergy requests that the 
Commission reserve jurisdiction over these potential additional 
activities, pending completion of the record. Cinergy does not intend 
to increase the risk of loss to the Cinergy System with its use of 
Cinergy Captive, but to enhance the System's risk

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management processes, while attempting to save costs.
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    \3\ Cinergy Captive may propose to underwrite the following 
additional coverages: transmission and distribution line coverage; 
construction-related insurance for contractors working on projects 
for System Companies; performance and construction bonds; employee 
benefits; legal malpractice for employee attorneys; directors and 
officers fiduciary liability; weather risk; and credit risk or 
reinsurance of certain customer warranty programs.
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    Cinergy states that, in today's insurance market, traditional 
insurance programs are relatively expensive to maintain, largely due to 
the costs of doing business with a ``full service'' traditional 
insurer. Underlying the traditional insurance programs is a robust 
reinsurance market that is available, generally speaking, only to 
insurance companies. By eliminating the traditional insurance company 
``middleman'' for selected transactions and coverage, Cinergy seeks to 
take advantage of opportunities for savings, it believes exist for 
those companies that are able to deal directly in the reinsurance 
market. Cinergy further notes that many Fortune 500 companies presently 
utilize a captive insurance company to control and manage their 
insurance costs more effectively.
    Cinergy believes that its proposed comprehensive insurance program-
-blending traditional commercial insurance, management of retained 
risks through the Cinergy Captive and direct access to the wholesale 
reinsurance markets--is the best way for it to maximize cost 
effectiveness, minimize risk exposure and provide each System Company 
with the flexibility to meet its strategic goals and objectives. 
Cinergy proposes to establish Cinergy Captive as a wholly owned, direct 
subsidiary organized under Vermont law and licensed to operate as an 
insurance company in the State of Vermont.\4\
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    \4\ Vermont is the largest, most established domestic domicile 
for captive insurance companies (``captives'') and has had stable 
and consistent growth of licensed captives over the past 20 years. 
Applicant states that the Vermont Department of Banking, Insurance, 
Securities and Health Care Administration has a strong, experienced 
regulatory staff focused on maintaining captive solvency.
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    Cinergy intends to establish Cinergy Captive with an aggregate 
initial capitalization of approximately $12.5 million, comprised of (i) 
$2.5 million to be supplied by Cinergy as an equity contribution and 
(ii) approximately $10 million in 2004 premiums from participating 
System Companies (representing the value of the total loss expected by 
all System Companies for 2004 expected events).\5\ Funding of the 
approximately $10 million in 2004 premiums will be paid in cash by the 
participating System Companies based on their allocated shares.\6\
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    \5\ Premiums for the first year were actuarially determined to 
equal the aggregate losses for System Companies plus administrative 
expenses. Ultimate first year losses are estimated to be 
approximately $9.5 million, an amount Applicant expects will be paid 
over a seven-year period. Applicant states that this $10 million 
estimate (the 2004 premiums for the System Companies) was determined 
based on the following analysis. Initially, the captive will assume 
the risk from System Companies for losses between zero and $1 
million for workers' compensation, general liability and automobile 
liability. In addition, the captive will assume the property risks 
in excess of a $1 million deductible up to $2.5 million. The captive 
will attempt to purchase reinsurance in excess of $1 million for 
workers' compensation and aggregate ``stop loss'' coverage, to limit 
the overall risks assumed by the captive for all liability 
coverages.
    \6\ All funds will be deposited with Cinergy Captive's bank and 
invested in securities exempt under rule 40. Beyond its initial 
capitalization and funding of the captive, Cinergy will provide any 
subsequently required capital contributions through additional 
equity and or debt purchases exempt under rule 52 or 45, letters of 
credit or other forms of credit support. If payment is required 
under a letter of credit, Cinergy will reimburse the bank providing 
such letter of credit and the amount paid will be treated as a 
capital contribution to the captive.
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    Cinergy Captive will initially focus on providing four major 
coverages to System Companies: (1) Workers' compensation, (2) general 
liability, (3) automobile liability and (4) property (including 
terrorism, as defined under the Terrorism Risk Insurance Act of 2002). 
Cinergy Captive will not provide these coverages to any company or 
person other than System Companies. Specifically, Cinergy Captive is 
expected to underwrite, or assume the risk of, a significant portion of 
the deductible or self-insured retained risk currently maintained by 
System Companies for these coverages. Cinergy Captive will attempt to 
reinsure a portion of these risks in the reinsurance market. As 
previously discussed, Cinergy Captive may also seek to replace, or 
reduce, insurance coverages of System Companies obtained from 
traditional commercial insurers in the areas of general liability, 
automobile liability, property and possibly workers' compensation. In 
this event, the captive will seek to obtain equal levels of loss 
protection and coverage in the reinsurance market.
    An unaffiliated Vermont management company will be retained to 
provide management and administrative services, as is the case with 
most captives.\7\ Cinergy Captive will allocate premiums and nominal 
operating costs to System Companies using the same methods currently 
used for allocation of the costs of commercial insurance premiums.\8\ 
The allocation methods are designed to result in a fair and equitable 
apportionment of insurance costs to System Companies congruent with the 
relevant cost drivers.\9\
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    \7\ Administrative functions will be directed by the Service 
Company through the Vermont management company and will include: (1) 
Accounting and reporting activities; (2) legal, actuarial, banking 
and audit services; (3) negotiating reinsurance contracts, policy 
terms and conditions; (4) invoicing and making payments; and (5) 
managing regulatory affairs. All goods and services provided by the 
Service Company to the captive will be provided in accordance with 
the Commission-approved service agreement for nonutility associate 
companies and the captive's costs will be recovered in the premiums 
paid by the respective System Companies.
    \8\ See note 2 above.
    \9\ For example, automobile liability insurance costs will be 
allocated to System Companies in proportion to the number of 
vehicles operated by each company (or a similar approximation of 
risk exposure). Allocation to the System Companies for workers' 
compensation insurance rates will be based on payroll and job 
classifications. General liability rates will be allocated to the 
System Companies based on projected revenues to determine a base 
premium, audited and adjusted at year-end. Property insurance rates 
will be allocated by the total property values of the System 
Companies.
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    The Service Company's Insurance and Claims Department will continue 
to give each System Company a choice of deductibles. Premiums payable 
to Cinergy Captive will be based on the level of deductibles chosen, as 
well as the allocation methods (number of vehicles, payroll, revenues, 
etc.). Consideration will also be given to the subsidiary's own prior 
loss experience, so that a subsidiary with a historically lower loss 
experience would be rewarded with lower premiums. Cinergy notes that, 
under the current program, a commercial insurance premium increase 
caused by a significant loss or a higher frequency of losses may have 
been allocated on a basis that did not take the cause of the loss or 
frequency of loss into account. Under the new program, the source of 
the loss or the subsidiary's loss history will also be used as a basis 
for allocation.
    To the extent Cinergy Captive obtains insurance at a lower cost 
than could be obtained through traditional insurers, the savings in the 
premiums could flow through ratably to System Companies, using the 
allocation method for premiums. Good loss prevention would be 
encouraged, and with lower administrative costs and the expected 
efficiency of the new program, overall premiums are expected to be 
lower.
    Cinergy Captive will analyze the commercial insurance bought by 
System Companies and coordinate coverage to minimize the risk of loss 
to the System. An actuarial analysis will be performed to determine the 
proper premiums, consistent with methods used to determine the retained 
risk premium. Cinergy Captive will apply stringent credit standards to 
all reinsurance counterparties, as Cinergy currently does with its 
insurance providers.
    Cinergy states that its captive will not be operated to generate 
profits beyond those necessary to maintain adequate reserves. To the 
extent that premiums and interest earned exceed current

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claims and expenses, an appropriate reserve will be accumulated to 
respond in years when claims and expenses exceed premiums. Furthermore, 
to the extent losses over the long term are lower than projected, 
Cinergy Captive could correspondingly lower premiums, reducing the 
System Companies' premium expenses. In addition, if losses are lower 
than predicted, the captive may be able to reduce the amount of its 
reserves and return excess capital to the System Companies.
    Cinergy states that, based on actuarial models with a high 
confidence factor, it is expected that the captive would not experience 
losses in excess of approximately $10 million in the first year of 
operation. In the unlikely event of losses exceeding this amount, not 
covered by outside insurance and accumulated claim reserves, additional 
capital from Cinergy would be needed. Commercial insurance will 
continue to respond to any claims in excess of the retained risks to 
ensure coverage will be available to the Cinergy System. Finally, to 
assure its financial strength and integrity (it must comply with strict 
Vermont capital-to-premium requirements of approximately $1 of capital 
for every $5 of net premium), Cinergy Captive will attempt to purchase 
aggregate ``stop loss'' protection from a commercial insurer.
    The benefits to be obtained from the use of a captive insurance 
subsidiary are, in sum: (1) Reduced System exposure to retained risks 
and enhanced risk management control; (2) reduced overhead charges for 
commercial insurance underwriting; (3) direct access to global 
reinsurers; (4) continued choice of deductibles; (5) greater control 
and input over the claims management process; and (6) less reliance on 
the commercial insurance market resulting in less volatility of future 
premiums.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-3168 Filed 2-12-04; 8:45 am]
BILLING CODE 8010-01-P