Ace Up The Sleeve
Dirty Dealing By The Insurance Companies
Sightings from The Catbird Seat
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July 9, 2008
Ahead of the Bell:
Citi downgrades ACE
Forbes, Associated Press
NEW YORK - A Citi Investment Research analyst downgraded shares of ACE Ltd. Wednesday, saying the insurer's stock may fall after the company completes a move to Switzerland and is removed from major U.S. indexes.
The Cayman Islands-based property and casualty insurance and reinsurance company plans to reincorporate in Switzerland. ACE Shareholders are scheduled to vote on the move Thursday.
Analyst Joshua Shanker said that the company will probably be removed from the Russell 1000 index, and perhaps the Standard & Poor's 500, after it moves.
Shanker estimated that about 45 million shares of ACE are held by index funds, which would sell the stock if ACE is taken off those lists. He downgraded the stock to "Hold" from "Buy," and cut his price target to $58 per share from $73.
ACE has a total of 332.9 million outstanding shares, and over the last 100 days, an average of 2.3 million ACE shares have traded per day. Shanker said the stock may be volatile after the move is official.
He added that the Russell index is likely to act quickly if it chooses to delist ACE shares, while the S&P may take more time. Representatives from Russell Investments and Standard & Poor's did not immediately return calls seeking comment.
ACE shares finished at $55.64 Tuesday.
http://www.forbes.com/feeds/ap/2008/07/09/ap5196109.html
November 12, 2007
Second Act
Phyllis Berman, Forbes
Robert Clements became a legend making big money in Bermuda insurance for Marsh & McLennan. Now at age 75 he's finally amassed some nice coin for himself--partly at his former employer's expense.
During a 35-year career at Marsh & McLennan, the giant insurance services firm, Robert Clements revolutionized the Bermuda insurance industry. Two insurers he set up for Marsh, ACE Ltd. and XL Capital Ltd., later went public and now have a combined market cap of $34 billion. Clements was also key in creating another successful insurer, Mid Ocean Re. One history of Bermuda insurance calls him a "founding father."
Clements was a hired hand. He got no founder shares in ACE or XL. In 1986, the year after he pulled off his reinsurance innovations, his bonus was bumped up only $25,000. A decade later he left his job running Marsh's investment arm and a year after that left the board of directors. Although he would remain a few more years as a consultant, at age 65 he essentially was out on his own.
Clements started doing insurance deals for himself. In his seventh and eighth decades Clements launched three companies. One, Arch Capital Group, is now about to crack the world's thousand biggest by market cap. This time around his ideas made him and his family a pile that came to several hundred million dollars before substantial charitable donations.
Doing well is the best revenge. The executive who replaced him at Marsh in 1996, Jeffrey Greenberg, later became chief executive--but lost that job in 2004 when then New York Attorney General Eliot Spitzer alleged fraudulent selling practices. Marsh's shares are trading at barely half of what they were five years ago, and its short interest has risen sharply, meaning a lot of people are betting on a further fall. Of Marsh and its continuing troubles, Clements, a quiet, handsome man with piercing blue eyes who dresses casually, says cagily, "Of course, I wish them the best. But I'm hardly surprised, given the problems they have been forced to cope with."
A Chicago native, Clements went to Dartmouth. "I was never particularly ambitious," says the 75-year-old. "I was a mediocre student. When it came to my career, I was most concerned about vacations and retirement than how I was going to make a living." Clements recalls one professor telling him his real major was "poker, beer and class-cutting." Clements joined Marsh in 1960, working as a casualty broker in Canada; his dad, also a Dartmouth grad, was a manager in the firm's Chicago office.
Higher-ups spotted his talent. Clements rose through the ranks and moved to the New York corporate offices to become head of national casualty in 1975. In 1991 he became the parent company's vice chairman, in recognition of his work in the 1980s dramatically expanding the insurance market in Bermuda.
In the years after World War II the self-governing British colony had risen to prominence as a center for captive insurers. These are insurance firms created and wholly owned by a company (often U.S.) to self-insure only that company. Back home the parent company gets a tax deduction for premiums that really are transfers of assets held in reserve for future payouts. In Bermuda the reserves compound in a low-tax regime. Part of Bermuda's lure was avoidance of U.S. state-by-state bureaucracy and quick regulatory approvals. Also, Hamilton, Bermuda is just a three-hour flight from New York.
Clements' opening came in the mid-1980s when a crisis hit the market for excess (or "surplus") insurance, most notably policies underwritten by Lloyd's of London. This coverage kicks in after an underlying "primary" policy pays to its coverage limit. A string of huge claims--asbestos illnesses, hurricanes, the Bhopal gas disaster and other environmental ills, augmented by big jury awards--threatened to bankrupt some insurers. In some cases the excess insurer was being asked to pay for misdeeds that occurred before the primary insurance policy was even in effect.
Doodling on a notepad during a Paris-New York flight in 1984, Clements came up with the idea of creating entirely new terms that came to be known as "occurrence reported" coverage. Customers wanting excess insurance would have to purchase or self-insure large amounts of underlying primary insurance--in some cases covering the first $50 million of claims. New excess policies would cover old claims, say for groundwater contamination, if filed during the new policy period--but only to the limits of the excess coverage. Limits would be limits.
However, Clements' plan, and a similar plan for directors and officers coverage, attracted little interest from traditional insurers or, in the beginning, even from Marsh, his own employer. Marsh said he could set up the operations as long as it didn't have to put in any capital. It would, however, like to get some warrants--long-term options on shares of the new company.
In 1985 Clements persuaded 34 large U.S. companies--such as U.S. Steel, GE, Merck, Dow and Emerson Electric--to invest a total of $285 million to get ACE off the ground. Another $410 million went into XL Capital a few months later. Among the startups' positives: efficient staffing levels, pricing freedom since few competitors offered the product, no lingering claims--and new lucrative high-end products for Marsh's army of brokers.
ACE went public in 1993. Its market cap today is 69 times the money its industrial backers put in. The initial stakes in XL Capital, which went public in 1991, have grown 33-fold. "The biggest thing that has happened in the insurance business since the Chicago fire," one trade pub gushed about Clements' successes. Marsh likely collected several billion dollars from those warrants.
Clements' third company: Mid Ocean Re, a Bermuda reinsurer aimed at catastrophes like hurricanes or collapsed buildings as opposed to longer-gestation situations like asbestos contamination. This time Marsh took a 10% stake for $36 million in the 1992 founding. Clements got a sliver of equity. Marsh's stake paid off nicely when Mid Ocean was sold a few years later to, as it happened, XL Capital.
One night while at dinner with his eldest son, John, a West Coast investment banker, Robert Clements griped that his ideas were being copycatted during the long stretches it took to raise capital for a new company. "The next time you have a great idea, Dad," John said, "you should raise a fund." Replied Clements, who had spent much of his working life putting together deals for his employer, "What's a fund?"
In 1995 Clements started Arch Capital, another reinsurer with money from Marsh, other investors and himself. After he left Marsh, Marsh sold its interest. Clements then sold off Arch's book of existing business, raised $750 million from outside investors and in 2000 relaunched Arch as a public company, getting 4% of the stock as a fee. It was a good time to start a new reinsurance company, since the established ones were so fearful of potential big claims (like the resurgence of asbestos claims) that they refused to offer policies even to their best risks. In 2006 Arch had $3 billion in premiums.
Enough reinsurance. Why not move in on the primary market? Clements raised $1 billion and this year started Ironshore Ltd. The company, which has only 40 employees and works out of a small office in Hamilton, expects to offer policies insuring against storm and earthquake damage in several dozen countries, including the U.S.
In 2004 Clements, his son and two ex-Marsh presidents raised $320 million to launch Integro Corp., which brokers the sale of large, complex policies for corporations. So far, however, Integro has yet to prove itself, amid industry gossip that the expensive force of brokers it recruited--many from scandal-plagued Marsh--has yet to earn its keep. Clements says Integro is growing rapidly and wasn't supposed to make money in its first three years.
On Sept. 11, 2001 Clements, a kayaker, stroked into Long Island Sound to watch the huge black stream of smoke rising 35 miles to the southwest at the World Trade Center. (XL Capital and ACE were among the companies that had exposure to the resulting multibillion-dollar billion casualty settlement.)
The tragic event underscored the peculiar nature of insurance. "What we do is a kind of a craft," he muses. "Underwriting complex, enormous risks for the corporate world is something like a being high-wire walker."
http://www.forbes.com/part_forbes/2007/1112/127.html
April 20, 2005
Insurance Cos. Eyed By Global Watchdogs
The United States promoted the formation of the Financial Action Task Force during the 1989 G-7 Summit, motivated by the global range of the money-laundering problem and the competitive disadvantage its own anti-money-laundering regime imposed on its financial sector.
The FATF has helped develop a coordinated international response to money-laundering, which is defined as taking illicit proceeds and moving them into the legitimate economy. The FATF initially put forth 40 recommendations intended to help national governments implement effective anti-money-laundering regimes; these were first revised in 1996 and then further updated in 2003....
The FATF promotes policies at the national and international levels to combat money-laundering and terrorist-financing....
In October 2001 the FATF expanded its remit beyond its original mandate of traditional money-laundering to cover terrorist finance, which has been describes as “reverse money-laundering,” in that it takes legitimate sources of funds and turns them toward illicit ends....
The FATF currently consists of 33 full member, including 31 countries and territories, and two regional organisations. Members are mainly drawn from advanced countries but also include the European Commission and the Gulf Cooperation Council (GCC) - Dahrain, Kuwait, Omar, Qatar, Saudi Arabia and United Arab Emirates....
The FATF has become increasingly concerned that some money-laundering activities are migrating from banks to other parts of the formal financial sector. Therefore, the FATF is currently working on a report, scheduled to appear in June, which analyzes the role of the insurance sector in money-laundering. This exercise could lead to additional recommendations concerning the “best practices” to discourage money-laundering within this sector.
However, any additional scrutiny of problematic practices in the insurance sector comes at a difficult time as, in the United States, insurance firms such as Marsh & McLennan (nyse: MMC), Ace (nyse: ACE), AIG (nyse: AIG) and Berkshire Hathaway’s (nyse: BRKA) General RE unit are facing significant scrutiny by various state and federal regulators for various transgressions, including fraud, bid-rigging and improper transactions....
The FATF remains the principal international policy-making body dedicated to coordinating efforts to counter money-laundering and shut down terrorist finance. ... Later this year, the FATF will probable extend its sectoral reach by making new recommendations covering the insurance sector....
www.forbes.com-2005/04/20/cz_0420oxan_financeaction.html
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March 16, 2005
Ace Ltd. Slammed
by 43 Subpoenas
Associated Press, Forbes
Ace Ltd., the property and casualty insurer recently implicated in a probe of insurance industry practices, on Wednesday said it received 43 subpoenas and legal inquiries regarding its involvement in bid rigging and price fixing.
The Bermuda-based company said in a filing with the Securities and Exchange Commission it received subpoenas and other inquiries from 9 state attorneys general and one from Washington, D.C. Further, insurance commissioners and other regulators from 10 states also launched some form of legal action.
In addition, Ace said the SEC and New York Attorney General Eliot Spitzer have issued subpoenas for information relating to “non-traditional or loss mitigating insurance products.” The insurer said it will continue to cooperate with such requests, and is also conducting its own internal investigation.
Ace was one of four insurers implicated, but not formally charged, in an investigation of brokerage Marsh & McLennan Co. launched in October by Spitzer. Spitzer filed a lawsuit against the nation’s largest insurance broker accusing it of bid rigging, price fixing, and demanding incentive fees from insurance companies in exchange for sending more business their way.
The internal investigation launched by Ace has resulted in the termination of two employees, on of whom already pleaded guilty to a misdemeanor. Three other employees were suspended as part of the probe, which is being led by former U.S. Attorney Mary Jo White.
ACE said Chief Executive Evan Greenberg received a $1 million salary in 2004, with a $2.7 million bonus. He is scheduled to get a raise of $25,000 this year, according to the SEC filing.
Greenberg is the son of Maurice Greenberg, who stepped down this week as CEO of American International Group Inc. Greenberg’s older brother, Jeffrey, was CEO of Marsh & McLennan before being ousted in the wake of Spitzer’s investigation.
The insurer said it has received legal inquiries from attorneys general in Connecticut, Florida, Massachusetts, Minnesota, New York, Ohio, Pennsylvania, Texas and West Virginia.
Insurance commissioners and other regulators from California, Florida, Illinois, Maryland, Michigan, Minnesota, New York, North Carolina, Pennsylvania and Texas have also contacted Ace....
< < < FLASHBACK < < <
June 2, 1998
Vesta shares take a beating
CNN Financial News
Shares of Vesta Insurance Group Inc. headed into a freefall Tuesday after trading in the company's stock resumed, plummeting more than 43% on news of reported accounting problems and the resignation of Vesta's top executive.
Trading in Vesta shares was halted yesterday on the Big Board after the company confirmed it was conducting an internal probe into accounting irregularities that could affect previously reported earnings for the past six months by up to $15.25 million.
Adding to its woes, the company said its board had accepted the resignation of President and CEO Robert Huffman. The news sent Vesta stock down sharply Tuesday. It also caused several rating organizations to place Vesta under closer scrutiny. A.M. Best Co., an agency that rates the financial health of insurance companies, placed Vesta's "A" rating "under review" with negative implications. (CNNfn)
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June 2, 1998
Hawaii insurer’s parent
pounded on Wall St.
Vesta Group, which owns Hawaiian Insurance & Guaranty,
reports 'accounting irregularities'
Honolulu Star-Bulletin
NEW YORK -- Vesta Insurance Group Inc., which owns a major Hawaii insurer, saw it shares plunge 47 percent today, a day after the parent company said "possible accounting irregularities" will force it to restate earnings for the last two quarters.
Vesta's president and chief executive officer, Robert Y. Huffman, also has resigned.
However, the company's Hawaii operation, Hawaiian Insurance & Guaranty Co., said it has not been affected by the changes at the Birmingham, Ala.-based parent.
"I expect no impact whatsoever on HIG's operations," said Pete Grimes, HIG general manager. HIG had been declared insolvent in 1992 after Hurricane Iniki losses. It was later rehabilitated by the state insurance division and was sold to Vesta in 1995 for $35 million.
Vesta's stock closed today at $27.75 on the New York Stock Exchange, down $24.94 from its Friday close of $52.69. The stock did not open for trading yesterday....
Vesta is the holding company for the property and casualty insurance subsidiaries of Torchmark Corp., also based in Birmingham.
Torchmark, Vesta's largest shareholder with 28 percent of the company's outstanding shares as of Dec. 31, declined to comment.
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July 18, 2001
VESTA INSURANCE GROUP INC (VTA) - Form 8-K
Item 2. Acquisition and Disposition of Assets.
On July 10, 2001, Vesta Fire Insurance Corporation, an Illinois corporation ("Vesta Fire") and a wholly owned subsidiary of Vesta Insurance Group, Inc. completed its acquisition of 100% of the outstanding shares of capital stock of Florida Select Insurance Holdings, Inc. for approximately $64.5 million in cash. Vesta Fire acquired the stock of FSIH from FSIH's four stockholders - Centre Solutions (Bermuda) Limited, Mynd Corporation, Orienta Point Group, L.L.C., and Kamehameha Schools Bernice Pauahi Bishop Estate.
The purchase price resulted from arms' length negotiation which took into consideration various factors, including Florida Select's book value at December 31, 2000 of approximately $31.5 million and net income for the twelve months ended December 31, 2001 of approximately $6.6 million.
Vesta funded the acquisition with the proceeds of its recently completed supplemental stock offering, which raised net proceeds of approximately $64.7 million before offering expenses.
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March 31, 2001 - December 31, 2001
Vesta Insurance Group, Inc.
Notes to Consolidated Financial Statements
(amounts in thousands except per share amounts)
Securities Litigation
Subsequent to the filing of our quarterly report on Form 10-Q for the period ended March 31, 1998 with the U.S. Securities and Exchange Commission (“SEC” or “Commission”), we commenced an internal investigation to determine the exact scope and amount of certain reductions of reserves and overstatement of premium income in our reinsurance assumed business that had been recorded in the fourth quarter of 1997 and the first quarter of 1998. This investigation concluded that inappropriate amounts had, in fact, been recorded and we determined that we should restate our previously issued 1997 financial statements and first quarter 1998 Form 10-Q. Additionally, during our internal investigation we were advised by our then outside auditors that there was an error in the accounting methodology used to recognize earned premium income in our reinsurance business. We had historically reported certain assumed reinsurance premiums as earned in the year in which the related reinsurance contracts were entered even though the terms of those contracts frequently bridged two years. We determined that reinsurance premiums should be recognized as earned over the contract period and corrected the error in our accounting methodology by restating previously issued financial statements. On June 1, 1998 and June 29, 1998, we issued press releases, which were filed with the Commission, regarding the matters addressed in this section.
We restated our previously issued financial statements for 1995, 1996, and 1997 and our first quarter 1998 Form 10-Q for the above items by issuance of a current report on Form 8-K dated August 19, 1998. These restatements resulted in a cumulative decrease to stockholders’ equity of approximately $75.2 million through March 31, 1998. Commencing in June 1998, we and several of our current and former officers and directors were named as defendants in several purported class action lawsuits filed in the United States District Court for the Northern District of Alabama. Several of our officers and directors also have been named in a derivative action lawsuit in the Circuit Court of Jefferson County, Alabama, in which Vesta is a nominal defendant. In addition, we received various inquiries and requests for information from various state departments of insurance and other regulatory authorities, including a subpoena issued to Vesta on August 24, 1998 by the 34 Commission as part of a formal, non-public order of investigation. We fully responded to such requests in 1998, and no further requests for information from Vesta have been made by the Commission.
In March 1999, the actions filed in the United States District Court for the Northern District of Alabama were consolidated into a single action in that district and certified as a class action. Torchmark Corporation and KPMG Peat Marwick LLP, our outside auditor at the time, were added as additional defendants in the consolidated class action. The consolidated amended complaint alleges violations of certain federal securities laws and seeks unspecified but potentially substantial damages. The court has denied all motions to dismiss and the class action is presently in discovery, with a trial date set for November 5, 2001. We are vigorously defending this litigation but there is no assurance of its outcome. The parties have conducted settlement discussions, but have not been successful in reaching any resolution. The derivative case has been stayed and placed on the administrative docket.
We have several layers of directors’ and officers’ liability insurance coverage (“D&O insurance”), the terms of which may cover all or a portion of the damages or settlement costs of the class action. These policies provide up to $100 million in D&O insurance to cover damages or settlement costs and an additional policy provides another layer of $10 million D&O insurance to cover any damages awarded by a court in these actions. Cincinnati Insurance Company (“Cincinnati”) issued the primary policy that provides the first $25 million of D&O insurance.
Federal Insurance Company (The Chubb Group of Insurance Companies) issued an excess D&O insurance policy which provides coverage for the second $25 million in losses, if necessary. The balance of the coverage is provided by a group of insurers and was purchased after the class actions comprising the consolidated class action were filed.
In September 1998, after these actions were filed, Cincinnati, which provides the primary insurance policy, filed a lawsuit in the United States District Court for the Northern District of Alabama seeking to rescind the policy and avoid the coverage. That action was dismissed for lack of subject matter jurisdiction, and we then filed an action against Cincinnati in the Circuit Court of Jefferson County, Alabama, to enforce the policy and to recover damages arising out of Cincinnati’s actions. Cincinnati filed an answer and counterclaim in that action, seeking to rescind the policy and avoid the coverage. This action is in the discovery stage and the outcome is uncertain. There is no assurance that the primary insurance coverage will ultimately be available for any damages or settlement costs incurred.
The outcome of this litigation may also materially affect the availability of the excess policy issued by The Chubb Group. The damages sought by stockholder plaintiffs in the consolidated class action, either at trial or through settlement, may be substantial. If the damages or settlement costs incurred in connection with the consolidated class action and derivative action are ultimately determined not to be covered by our D&O insurance policies for any reason, we may incur a significant and material loss which could have a material and adverse impact on our financial condition and results of operation....
Indemnification Agreements and Liability Insurance
Pursuant to Delaware law and our Bylaws, we are obligated to indemnify our current and former officers and directors for certain liabilities arising from their employment with or services to Vesta, provided that their conduct complied with certain requirements. Pursuant to these obligations, we have agreed to advance costs of defense and other expenses on behalf of certain current and former officers and directors, subject to an undertaking from such individuals to repay any amounts advanced in the event a court determines that they are not entitled to indemnification.
As discussed above, we corrected our accounting for assumed reinsurance business through restatement of our previously issued financial statements. Similar corrections were made on a statutory accounting basis by recording cumulative adjustments in Vesta Fire’s 1997 statutory financial statements....
NRMA Insurance, Ltd. (“NRMA”), one of the participants in the 20% whole account quota share treaty, filed a lawsuit in the United States District Court for the Northern District of Alabama contesting our billings. NRMA sought rescission of the treaty and a temporary restraining order preventing us from drawing down approximately $34.5 million of collateral. We filed a demand for arbitration as provided for in the treaty and also filed a motion to compel arbitration which was granted in the United States District Court action. Vesta has entered into a $25 million letter of credit in favor of NRMA to fund any amounts NRMA may recover as a result of the arbitration. We filed for arbitration against the other two participants in the treaty and all of these arbitrations are in their early stages. While management believes its interpretation of the treaty’s terms and computations based thereon are correct, these matters are in their early stages and their ultimate outcome cannot be determined at this time.
During 1999, F&G Re (on behalf of USF&G), filed for arbitration under two aggregate stop loss reinsurance treaties whereby F&G Re assumed certain risk from us. F&G Re is seeking to rescind the treaties and avoid its obligation. Under the terms of the two treaties, we believe we will be entitled to recoveries of approximately $28.2 million as losses mature from prior accident years. Vesta has recorded a reinsurance recoverable of approximately $28.2 million as of March 31, 2001 and December 31, 2000 related to these two treaties. This arbitration is in its early stage and the ultimate outcome cannot be determined at this time.
A dispute has also arisen with CIGNA Property and Casualty Insurance Company (“CIGNA”) (now ACE USA) under a personal lines insurance quota share reinsurance agreement, whereby we assumed certain risks from CIGNA. During September 2000, CIGNA filed for arbitration under the reinsurance agreement, seeking payment of the balances that CIGNA claims are due under the terms of the treaty. In addition, during the fourth quarter, the treaty was terminated on a cut-off basis. Vesta is seeking recoupment of all improper claims payments and excessive expense allocations and charges from CIGNA. This arbitration is in its early stages and the ultimate outcome cannot be determined at this time.
If the amounts recoverable under the relevant treaties are ultimately determined to be materially less than the amounts that we have reported as recoverable, we may incur a significant, material, and adverse impact on our financial condition and results of operations.
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August 21, 2000
Vesta Creates Office of the Chairman
Insurance Journal
Vesta Insurance Group, Inc. announced today that the company has created an Office of the Chairman and promoted William Perry Cronin to the position of Senior Vice President, Chief Financial Officer and Treasurer of Vesta Insurance Group.
Mr. Cronin was previously Senior Vice President, Controller and Treasurer of Vesta Insurance Group. The newly created Office of the Chairman will be charged with setting and executing the strategic direction of the Company and will include the Chairman, James E. Tait and the President, Norman W. Gayle, III.
"Perry's promotion is an acknowledgement of his instrumental role in the success of Vesta's turnaround," said Norman W. Gayle, President of Vesta Insurance Group....
Cronin has served Vesta Insurance Group in an executive capacity since January 1999, and has been responsible for all accounting and financial operations at the subsidiary level, as well as Securities and Exchange Commission reporting for Vesta Insurance Group.
Cronin moves into his new role with seventeen years of finance experience. Prior to joining Vesta, he worked at several accounting firms, including Ernst and Young L.L.P. and Coopers and Lybrand.
Hopson B. Nance joins Vesta Insurance Group as Vice President and Controller.
Nance previously worked for PricewaterhouseCoopers....
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October 22, 2002
CFO Resigns Over Alleged Conflict
by Stephen Taub, CFO.com
Vesta Insurance Group, Inc. said Monday Chief Financial Officer, W. Perry Cronin resigned, effective immediately.
Hopson B. Nance, vice president and controller, has been named Interim Chief Financial Officer. Nance, who had formerly worked at PricewaterhouseCoopers, joined Vesta in July 2000.
"These relationships do not impact the accuracy of our financial statements and we intend to certify our financial statements for the third quarter," said Norman W. Gayle III, President and CEO.
He added the company is looking to name a permanent CFO by the end of the year....
> > > FAST FORWARD > > >
January 8, 2005
ST. PAUL LINKED TO MARSH FRAUDS
By Diane Levick, The Hartford Courant
The St. Paul Cos. - now part of The St. Paul Travelers Cos. - was among the insurers that benefited from alleged bid-rigging by broker Marsh Inc., the New York attorney general’s office said.
A court document released Thursday on the guilty plea of a Marsh senior vice president draws St. Paul Travelers into the controversy, but does not make clear whether the insurer intentionally participated in any wrongdoing....
Robert Stearns, an executive in Marsh’s excess casualty business, pleaded guilty in a New York court Thursday to the felony of scheming to defraud in the first degree. It was the sixth guilty plea in a far-reaching probe of the insurance industry by New York Attorney General Eliot Spitzer.
Stearns asked various insurers to submit bids that were less favorable than others, so Marsh could steer business to maximize its profits and protect incumbent insurers on certain accounts that were up for renewal, the felony complaint says.
The sham bids were sometimes called “B Quotes” or simply “B”.
In one example in March 2003, Stearns asked a Marsh broker in an e-mail to get a B quote from insurer Zurich on an account that would be renewing insurance with St. Paul, the complaint says. Stearns suggested “325,000 should work” because St. Paul’s price was $270,000, the complaint says.
Later that day, Stearns repeated the request, and the next day, a Zurich underwriter provided a $360,000 quote to Marsh, the document says.
In another March 2003 example, Stearns was asked by another Marsh executive to get B quotes on an account that was up for renewal with American International Group. “Further e-mails reflect that Zurich, ACE, and St. Paul subsequently offered losing quotes on this account,” the complaint states.
The document does not say whether St. Paul knew its quote for the account would be used in bid-rigging.
However, a Marsh broker’s e-mail that was cited in the document strongly implies he considered the B quotes laughable, as the broker told an ACE underwriter: “need a B for [expletive] and giggles.”
The client renewed insurance with American International Group.
St. Paul Travelers was not named in Spitzer’s bid-rigging lawsuit against Marsh in October, though the suit implicated several insurers including The Hartford Financial Services Group Inc. without naming them defendants.
However, Spitzer’s office has subpoenaed information from St. Paul and dozens of other companies.
Meanwhile Friday, Spitzer said he expects the guilty pleas he has gotten so far will lead to more charges.
“We are laying the foundation with these criminal cases that permit us to make criminal cases and bring criminal actions against those more senior within the companies,” Spitzer said after a state assemble hearing in New York, according to Bloomberg News.
In addition to Stearns, guilty pleas have come from two executives at AIG, two from Zurich American Insurance Co. and one from ACE.
In another development, Marsh & McLennan Cos. Inc. said Friday it has named E. Scott Gilbert to the new post of senior vice president and chief compliance officer effective Jan. 24. He was chief compliance counsel for the General Electric Co.
For more, GO TO > > > Claims By Harmon; Claims By Harmon: The St. Paul Travelers
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January 5, 2005
Legal Reform: The High Costs of Lawsuit Abuse
Presidential Action
► President Bush on January 5, 2005, highlighted the need for common-sense medical liability reform to protect patients, to stop the sky-rocketing costs associated with frivolous lawsuits, to make health care more affordable and accessible for all Americans, and to keep necessary services in communities that need them most....
► The President also stressed the need for class action lawsuit reform and asbestos litigation reform, and he urged Congress to enact proposed reforms. Class action lawsuits are an important part of the U.S. legal system. However when the ability to bring a class action lawsuit is abused, it truly harms injured parties and undermines the American judicial system. The growing problem of asbestos litigation is similarly hurting workers, bankrupting businesses, and delaying relief for the truly sick claimants....
► Aiding Asbestos Victims with a Fair System and Long-Term Solution
Victims of asbestos-related diseases deserve a fair system and a long-term solution. The current system may leave little or no funds to pay current and future asbestos victims; is costly to administer (future transaction costs are estimated at between $145 and $210 billion); will impose large, indirect costs on the economy; and has driven exposed defendants, including small businesses, into bankruptcy. Asbestos, as the longest-running mass tort litigation in U.S. history, has led to the bankruptcies of at least 74 companies....
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One day later...
January 6, 2005
ACE UNVEILS ASBESTOS CHARGE, ‘05 FORECAST
By Alistair Barr, CBS Marketwatch
Ace Ltd., one of the largest U.S. property and casualty insurers, boosted its asbestos reserves and gave a 2005 forecast that disappointed some analysts.
The Bermuda-based firm said late Wednesday that it will take a $298 million, or $1.05 per share, after-tax charge in its fiscal fourth quarter to strengthen its asbestos, environmental and other runoff reserves....
“Ace’s news is bad, but not horrible,” Paul Newsome, an analyst at A.G. Edwards said in a note to clients.
After initially dipping, Ace shares climbed 54 cents, or 1.3 percent, to $42.73 in morning trading Thursday.
The asbestos charge was about $100 million higher than Newsome expected. However, the analyst said that the charge is manageable and means the firm will have made a profit in the fourth quarter of 2004.
Ace also announce that is has agreed to sell three asbestos-related units - Ace American Reinsurance Co., Brandywine Reinsurance Co. Ltd, and Brandywine Reinsurance Co., S.A.-N.V. - to international insurance firm Randall & Quiter Investment Holdings Ltd. The move will reduce the amount of capital the firm has to put aside to cover future liabilities....
Jay Gelb, an analyst at Prudential Equity Group, calculated that Ace’s new forecasts suggest 2005 earnings of $4.95 to $5.75 per share....
Head of U.S. unit replaced
Ace also said late Wednesday that Susan Rivera, chief executive of its U.S.-based property and casualty retail brokerage division Ace USA, resigned. Brian Dowd replaces her.
According to a Wall Street Journal report in October, Rivera and another Ace executive Geoffrey Gregory knew about potentially anti-competitive practices months before New York Attorney General Eliot Spitzer accused the firm and other insurers and brokers of bid-rigging.
“Ace cleaned the house,” Newsome said. “We consider the loss of Ms. Rivera a loss to Ace, as we believed her to be a very able executive.”
Topping off asbestos reserves...
Based on studies by the company, an independent actuary and the Pennsylvania Department of Insurance, Ace had been expected to unveil an after-tax charge of about $500 million to bolster its current $2.7 billion of asbestos reserves, Prudential Equity’s Gelb estimated Wednesday....
A.M. Best reckons U.S. property and casualty insurers had $14 billion worth of unfunded asbestos liabilities at the end of 2003. The insurance rating agency expects the industry to ultimately lose $65 billion from asbestos claims.
Ace inherited most of the asbestos liabilities from its 1999 acquisition of Cigna’s property and casualty business.
In a move approved by the Pennsylvania Insurance Commissioner in 1995, Cigna chopped its P&C operations into two companies: one that kept accepting new policies and another, Brandywine, which housed most of its asbestos liabilities and didn’t write new business.
Most of the cash and investments held by Brandywine to pay asbestos claims have been used up, according to A.G. Edward’s Newsome.
When Ace acquired the Cigna business, it bought $2.5 billion worth of reinsurance coverage from Berkshire Hathaway subsidiary National Indemnity.
That protection was exhausted when Ace took about $2 billion in asbestos charges in 2002.
Before Thursday, claims had eaten up more than half of a $800 million reinsurance contract between Brandywine and parent Ace USA - a requirement of regulators in Pennsylvania.
That left about $344 million of protection before Ace would have to decide whether to pump more money into Brandywine, something the firm’s management has repeatedly said it wouldn’t do, Newsome wrote in a note to clients Wednesday.
The charges announced late Wednesday meant Ace exceeded this internal reinsurance coverage and ended up having to pump $100 million of new capital into Brandywine, Newsome explained Thursday....
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April 25, 2003
Tort Deform
How big business turned the Texas House into a puppet show. And can we cut the strings?
Payoff is a Bitch
By Jessica Chapman and Dave Mann, The Texas Observer
During the lengthy House floor debate on the omnibus civil justice legislation last month, Democrats referred to the House gallery - where the three amigos of tort reform, Dick Weekley, Leo Linbeck, and Dick Trabulsi were perched (along with the Speaker’s wife) - as the “owner’s box.”
It struck many at the Capitol as an accurate assessment of who really ran the Texas House while it passed House Bill 4 and its companion constitutional amendment, House Bill 3. Together, the two bills will cap non-economic jury awards in medical malpractice suits at $250,000, pave the way for future caps, and impose a host of other restrictions on civil liability cases.
The folks in the owner’s box represent Texans for Lawsuit Reform (TLR) and its top donors. They helped engineer the Republican takeover of the House last fall that handed Rep. Tom Craddick (R-Midland) his long-sought speakership. In return, Craddick and the House leadership went to extraordinary lengths to pass the tort reformers’ dream leadership package almost untouched.
As the three founders of Texans for Lawsuit Reform watched from the gallery, Craddick overruled one point of order after another, and 88 Republicans robotically scuttled nearly 70 Democratic amendments in an impressive display of legislative force and heavy-handed politics. The true beneficiaries of all this legislative turmoil will be TLR and its supporters, not coincidentally, the very people who wrote the bill, and the heaviest hitters in some of the state’s most lawsuit-prone industries.
Beginning with the 1996 elections, the Houston-based TLR PAC spent millions in highly organized attempts to overthrow former Speaker Pete Laney (D-Hale Center) and install Craddick. In 2002, it finally succeeded, joining with Tom DeLay-spawned Texans for a Republican Majority and the Texas Association of Business to help elect 27 Republican freshmen....
Buying the Texas House didn’t come cheap, unless one factors in future business savings. According to campaign contribution records, TLR’s political action committee gave more than $1.8 million to candidates in 2002. Its top donors separately contributed several million more....
A number of major corporations as well stand to benefit directly from provisions of HB 4 and its constitutional amendment HJR 3. The most blatant example is the so-called “Dick Cheney” amendment, which would make it easier for companies to elude asbestos lawsuits.
The amendment, a collaboration between Rep. Will Harnett (R-Dallas) and Rep. Joe Nixon (R-Houston), seems drafted specifically for Cheney’s former employer, Houston-based Halliburton.
One of Halliburton’s main subsidiaries, Dresser Industries, has already paid millions in asbestos liability it absorbed from a company it bought in 1967. The Cheney amendment would limit successor liability so that the maximum Halliburton and Dresser would be forced the pay in asbestos claims would equal the value of the company Dresser bought back in 1967. Dresser has already paid that amount in settlements, effectively ending its asbestos liability.
Last November, Halliburton indicated it was ready to settle nearly 300,000 current and future asbestos suits for a payout of $4 billion. But a month later, Halliburton backed away from the settlement offer.
Plaintiffs’ attorneys believe the company is awaiting the outcome of tort reform at the Lege. If the Chaney amendment is enacted, Halliburton wouldn’t have to pay the $4 billion settlement, or any other asbestos damages, and victims would be flat out of luck.
Honeywell is another company with significant asbestos liability and likely to save billions from HB4. Many of these companies purchased smaller firms on the cheap, discounted because of liability concerns.
Now, if that liability is lifted, the buyers will reap a major windfall....
www.texasobserver.org/showArticle.asp?ArticleID=1329
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January 21, 2005
Connecticut AG Sues Marsh, Ace Financial in
Broker Commission Case
Connecticut Attorney General Richard Blumenthal on Friday sued insurance broker Marsh & McLennan Inc., and insurance provider ACE Financial Solutions Inc., for a scheme in which ACE reportedly paid Marsh a secret $50,000 commission to steer an $80 million state contract to the company.
Blumenthal’s office is investigating whether ACE may have paid additional illegal commissions to Marsh in the deal.
Marsh reportedly never told the Department of Administrative Services (DAS), which paid the company $100,000 to act as its advisor on the contract, about the $50,000 or any additional payments. Marsh reportedly solicited and accepted the $50,000 commission, even though the DAS clearly expected the company to accept no additional fees.
It was also reported that Marsh failed to inform the DAS that ACE was in serious financial difficulty at the time it sought the contract.
The lawsuit is the first of a series of legal actions that Blumenthal expects to bring soon in his ongoing investigation into insurance industry abuses.
“As offensive as this specific scheme is the outrageously common pattern and practice of illegal commissions and kickbacks that it reflects,” Blumenthal said.
“This lawsuit - the first of a series anticipated against insurance abuses - shows particular arrogance and avarice in victimizing the state and its taxpayers. Whatever name they are called - bonuses, commissions, overrides - the effect of these concealed kickbacks is to steer contracts, corrupt competitive bidding, inflate costs and deceive customers. The resources raided by Marsh and ACE were a public trust to be used for compensating workers. Our investigation is active and ongoing, and additional legal action will be forthcoming shortly involving other companies and consumer victims.”
In April 2001, the DAS sought an insurance company to administer 678 workman’s compensation cases. The cases involved state workers with serious injuries, many of them requiring long-term care, and were therefore unusually expensive....
Two brokers, Marsh and Hagedorn & Company, responded to the state’s request for qualification (RFQ). As required by the RFQ, Marsh named its “preferred” companies, including ACE.
The DAS eventually selected both Marsh and Hagedorn. In its contract, Marsh agreed to limit its commission to a $100,000 fee from the state.
Despite that express limit, Marsh reportedly demanded that ACE pay Marsh a commission on the DAS contract if it wanted to continue receiving similar contracts. On Dec. 3, 2001, less than two weeks after the deal was finalized, a Marsh executive informed the company’s New York office that ACE had agreed to pay a $50,000 commission on the DAS contract. The two companies then reportedly signed a confidentiality agreement preventing ACE from revealing the terms of the deal.
In selecting ACE, Marsh also reportedly failed to inform the DAS of the company’s dire financial condition resulting from claims stemming from the Sept. 11 terrorist attacks.
The DAS awarded ACE the contract in November 2001, paying the firm $80 million to take over the portfolio of cases.
Blumenthal’s suit accuses Marsh of violating Connecticut consumer protection laws by accepting a commission other than the $100,000 paid by the state, falsely claiming that it considered only the state’s best financial interests in arranging the contract, and falsely claiming that it recommended ACE sole on ACE’s qualifications.
The attorney general’s action seeks actual and punitive damages, information allowing determination of how much Marsh was falsely paid and reimbursement