Allstate, AIG, Chubb, St. Paul/Travelers Ask Pa. Commissioner to Examine ACE Brandywine Sale

February 21, 2005

The law firm representing Allstate Insurance Company, American International Group Inc., Chubb & Son, and St. Paul Travelers has filed a demand, addressed to Diane Koken head of the Pennsylvania Department of Insurance (PDI), asking that the PDI closely examine the “proposed sale by ACE Limited (or its affiliates) to Randall & Quilter Investment Holdings Limited (or its affiliates) of three of its asbestos and environmental run-off subsidiaries, including the Pennsylvania-domiciled ACE American Reinsurance Company.”

On Jan. 6, ACE announced that it planned to sell its ACE American Reinsurance Company, Brandywine Reinsurance Co. (UK) Ltd. and Brandywine Reinsurance Company S.A.-N.V. to Randall & Quilter. It also said it would take $279 million in after tax reserve charges on Brandywine, and another $19 million relating to the ACE Westchester Specialty unit. Century Indemnity Company, an indirect, wholly owned subsidiary of ACE, is also involved. The sales require the approval of the Pennsylvania Insurance Department and the U.K. Financial Services Authority.

ACE acquired the companies as part of the acquisition of INA from Cigna in 1999. They subsequently were found to have large exposures to asbestos and environmental claims, and have become a liability for the ACE Group. As the lawyers for Allstate, etc. point out, one of the primary conditions for approval of the original purchase was that “Century’s subsidiaries -including ACE Re and Brandywine Subsidiaries – could not be divested, absent prior written approval of the Commissioner.”

The sale to the U.K. based Randall & Quilter, an international insurance firm, could result in diminishing the security relied on by policyholders (not to mention other insurance companies). The Allstate request asserts that, ACE’s acquisition was dependent on Century entering into a “$2.5 billion reinsurance agreement with a Berkshire Hathaway company, National Indemnity Company (‘NICO’).”

The request notes the heavy impact of asbestos and environmental claims and the necessity imposed on many companies, including ACE, to greatly increase reserves to meet potential claims. “Finally, if future changes in asbestos and environmental claim filings were to continue to require increases in reserves, ACE and Randall & Quilter have not demonstrated that Randall & Quilter will have or provide the funds to protect policyholders,” said the petition. “Of course, if the proposed transaction is not approved, there can be no question but that ACE’s affiliates will remain liable for such continuing obligations, as part of the 1999 purchase of INA.”

Further on in the petition the companies state: “In substance, ACE’s proposed transaction is an attempt to unload approximately 17 percent of Century’s asbestos and environmental run-off liabilities, liabilities that have historically been difficult to value, to paper over Century’s precarious financial condition. The result of this maneuver is the spinning off of nearly one fifth of the liabilities of the company created in 1996 from Pennsylvania control to British control, with one important difference – under the proposed transaction, the moral or legal pressure on ACE that is now available to United States regulatory authorities will not necessarily be applicable to the new entity (citations). Nothing in the 1996 Decision and Order contemplates what is being proposed – and everything about it requires the opposite. By removing these companies from under ACE’s auspices, ACE hopes to place more distance between itself and the legal obligations of its subsidiaries and to avoid the Department’s continuing scrutiny, moral pressure, and directives.”

The letter also points out that the PDI has ample grounds to withhold approval of the sale, or to impose continuing liability on ACE as a primary condition of that approval. It also questions ACE’s purpose in several financial transactions involving the subsidiaries, including the issuance of a $100 million “Preliminary” Surplus Note to Century, and its” internal commutations of Approximately $150 million of reinsurance ceded by ACE Re and Brandywine Subsidiaries.”

As a U.K. private company, Randall & Quilter, according to the petitioners, is a somewhat unknown quantity, in addition to being – theoretically at least – beyond the reach of U.S. law. Another point concludes, rather broadly, that ACE ultimately plans “to shed itself of all of the more than $5.8 Billion in run-off liabilities that it purchased in 1999.”

The petition, dated Feb. 18, concludes with a plea that Commissioner Koken carefully examine the proposed transaction before making any decision and asks for an opportunity to meet with the “Department to discuss more fully the points raised in this letter, as well as others.” It also requests the PDI to “hold full hearings to address the proposed transactions, providing the undersigned, as well as ACE and Randall & Quilter, full due process rights to present testimony and evidence, cross-examine witnesses, and respond to the Department’s concerns.”

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