Liberty Mutual Joins Foes of ACE Re, Brandywine Sale

April 4, 2005

Liberty Mutual Group has joined a group of insurers opposing the acquisition of ACE American Reinsurance Company by Randall & Quilter Investment Holdings Ltd.

Boston-based Liberty Mutual has requested that the Pennsylvania Insurance Department which is considering the sale hold a public hearing as part of a thorough investigation of the transactions and disapprove the application if various concerns are not resolved.

Liberty Mutual told Pennsylvania Insurance Commissioner Diane Koken that it has serious concerns that the deal would have a “significantly unfair and unreasonable effect upon policyholders and reinsurance cedants,” including Liberty Mutual, and is not in the best interest of the insurance buying public or the U.S. insurance industry.

Liberty Mutual, the nation’s sixth largest property casualty insurer, maintained that the transaction would allow a Bermuda based entity to weaken the financial position of U.S. taxpaying companies and their policyholders. Furthermore, it would establish an unfortunate precedent under which a financially strong company could walk away from potentially under funded liabilities.

In February, there was a similar appeal for scrutiny of the deal from a group of four insurers. The law firm representing Allstate Insurance Company, American International Group Inc., Chubb & Son, and St. Paul Travelers also filed a demand for Koken to closely examine the proposed sale by ACE Limited (or its affiliates) to Randall & Quilter 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 and the other insurers with concerns 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), according to the critics of the sale.

The request notes the heavy impact of asbestos and environmental claims and the need for many companies, including ACE, to greatly increase reserves to meet potential claims. If future changes in asbestos and environmental claim filings require further 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. If the proposed transaction is not approved, ACE’s affiliates would remain liable for the continuing obligations as part of the 1999 purchase of INA.

The petition characterizes the deal as an attempt by ACE 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. One result would be the spinning off of nearly one-fifth of the liabilities of the company from Pennsylvania control to British control, according to the Allstate letter.

“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 petition states.

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