Woo vs. Harmon - Witness Robert Clements

David C. Farmer, Successor-Trustee vs. Harmon

(Formerly Woo vs. Harmon & Nicholson vs. Harmon)

U.S. District Court For the District of Hawaii

—

DEFENDANT’S WITNESS

ROBERT CLEMENTS

Marsh & McLennan career employee; helped establish Bermuda insurance companies, ACE Ltd., XL Capital Ltd., and Mid-Ocean Re for Marsh & McLennan.

~ ~ ~

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 6, 2004

How Paul Bremer profited from 911

by jail kissinger, San Francisco IMC

Paul Bremer was hired by an insurance company that had
hundreds of employees die in the world trade center,
to reap maximum profits for antiterrorist insurance

Insurance Industry Stands to Benefit from
Changes Wrought by Sept. 11

By Christopher Oster, The Wall Street Journal

For Marsh & McLennan Cos., the Sept. 11 attacks have meant two very different things.

One is personal loss. The world’s largest insurance brokerage lost 295 employees who worked at the World Trade Center. “It was very painful for us, agonizing for loved ones and close friends,” Jeffrey W. Greenberg, Marsh’s chairman and chief executive, told employees at a memorial service in St. Patrick’s Cathedral in New York on Sept. 28.

But in the days after the attacks, even as the company was sorting out who was safe and who had perished, it quickly became clear that Sept. 11 presented a tremendous business opportunity for Marsh and other strong players in the industry.

Within days of the twin towers’ destruction, Mr. Greenberg and top lieutenants began planning to form a new subsidiary to sell insurance to corporate customers at sharply higher rates than were common before Sept. 11. Marsh also accelerated plans to launch a new consulting unit to capitalize on heightened corporate fears of terrorism. Vice Chairman Charles A. Davis says the company is merely meeting new marketplace demands. “There’s a financial reward for doing that,” he says.

Unlike airlines, which are reeling as travelers hesitate to fly, insurers have seen improved financial prospects since Sept. 11. Insurers expect to have to pay out $40 billion to $70 billion in claims related to the attacks. That sounds daunting, but in fact, it is manageable for an industry that collectively has $300 billion in capital.

Moreover, in response to Sept. 11, insurers are already raising prices by 100% or more on some lines of commercial and industrial insurance. ... For much of the 1990s, carriers had engaged in a price war, keeping premiums relatively low. The prospect of large payouts related to the attacks gave the industry grounds for demanding substantial increases....

Insurance stocks have jumped 7% since the attacks, outpacing the broader market, and the atmosphere in the industry is one of eager anticipation. Marsh set out to raise about $1 billion in outside money to capitalize in a new company. Investors volunteered six times that much, and dozens had to be turned away.

Amid these signs of robust health, however, the industry is stressing potential disaster as it pressures Congress for emergency aid. By the end of December, lawmakers are expected to approve legislation under which the government could have to pick up billions of dollars in claims related to future terror assaults in the U.S.

This federal backing would have tremendous financial value to insurers in the event of another disaster. And it would have an immediate impact, too, emboldening the industry to sell new terrorism coverage, for which it will charge higher premiums. Carriers collect their money now, while the government would help pay any claims later....

In the weeks after Sept. 11, newspapers carried numerous advertisements touting insurers’ intent to pay disaster claims promptly. Less well-known is how these companies plan to recoup much of the money they will be sending to policyholders....

The decade-long premium-price war had been ending before the attacks, as weaker insurers collapsed or retrenched and stronger ones began gradually to charge more. Now, faced with payouts related to Sept. 11, the healthier companies are demanding that their customers share the pain by paying higher premiums. Some insurance companies are so confident in this strategy that they are expanding operations. Since Sept. 11, at least seven insurers have sold additional shares of stock. An additional six, including Marsh, have formed new companies.

Among the new units is a Bermuda-based carrier put together by American International Group Inc., Chubb Corp. and investment bank Goldman Sachs Group Inc.

State Farm Mutual Automobile Insurance Co. and RenaissanceRe Holdings Ltd. are creating another one. Since Sept. 11, insurers have raised a total of about $4 billion in new capital, to which they are adding a modest amount of their own money....

Since the attacks, aviation underwriters have raised premiums for airlines by 200% to 400%, according to insurance brokers. At the same time, the underwriters are canceling parts of airlines’ coverage for liability to third parties other than passengers in future terrorist acts.

U.S. airlines don’t have to worry about these increases immediately. The airline-bailout bill Congress approved after Sept. 11 included provisions under which the federal government for six months will pay any increases in commercial insurance and cover airlines’ potential third-party liability for terrorism. In the not-too-distant future, though, the airlines could collectively face billions of dollars in additional annual premiums.

New Surcharge

Led by giant AIG, insurers have offered airlines a new, more-expensive package to replace the rescinded terrorism coverage. The new price includes a $3.10-per-passenger surcharge. Lacking the backing of the U.S. government, numerous foreign airlines are buying the new coverage, which is expected to boost insurers’ revenue by a total of hundreds of millions of dollars a year....

Medium-sized and small corporate policyholders are also seeing premiums jump. One week after the attacks, Industrial Risk Insurers, a unit of General Electric Co.’s Employers Reinsurance unit, told textile manufacturer Johnston Industries Inc. that it wouldn’t renew Johnston’s property-insurance policies, which expired Oct. 31. Bill Henry, a vice president at the Columbus, Ga., company, says it wound up paying $1 million more to a European carrier for a year’s coverage ... a 150% increase. The limit of the new policy is only $350 million, or half of what Johnston previously received from the GE insurance unit....

Government Aid

While aggressively raising premiums, the insurance industry has been busy seeking relief in Washington. Ten days after the attacks, a delegation of chief executives, including AIG’s Maurice R. Greenberg, the father of Marsh’s Jeffrey Greenberg, descended on the capital to lobby President Bush and lawmakers.

The industry leaders sounded an alarm that reinsurance companies – which spread corporate risk by selling insurance policies to the insurance industry – were moving to cancel terrorism-related reinsurance coverage. The big primary carriers told the politicians they would eliminate almost all terrorism coverage unless the government stepped into the role of the reinsurers.

Without this coverage, many lenders would hesitate to finance everything from factories to new real estate development, the insurance executives warned their Washington hosts. Large area of the economy could grind to a halt.

The pitch worked. Congress in now expected to approve a mechanism that will guarantee that if there are huge future terrorism liabilities, taxpayers will help pay them....

“This is not a bailout,” says Democratic Sen. Christopher Dodd of Connecticut, home to several large carriers. Rather, the government is proposing to serve as a “backstop” to encourage underwriters to provide terrorism coverage, he says....

Marsh & McLennan see vast opportunity in this fast-changing environment. The company is primarily an insurance broker, not an underwriter. As a result, it has limited exposure to Sept. 11 property and liability claims. It took a $173 million charge for the third quarter, which ended Sept. 30, to cover costs related to the attacks. A big piece of that was for payments to families of its own injured and dead employees.

Marsh’s Mr. Greenberg knows well the dangers of appearing opportunistic in the wake of catastrophe. He gained this experience after Hurricane Andrew hit Florida in 1992, which until Sept. 11 was the industry’s costliest disaster. Then a vice president at his father’s AIG, the younger Mr. Greenberg wrote an internal memo saying that Andrew was “an opportunity to get price increases now.” After the memo was leaked to the media, Florida regulators imposed a moratorium on premium-rate increases.

This embarrassment didn’t stop Jeffrey Greenberg, now 50 years old, and his subordinates at Marsh from swiftly scouring the post-Sept. 11 business landscape for new opportunities.

The World Trade Center attacks were a devastating blow to the company, which has its headquarters in midtown Manhattan. About 1,900 Marsh employees worked in the twin towers. Within an hour of the attacks, the company had set up a phone bank to assemble information about the missing. Counseling sessions and memorial services were held daily for weeks.

Modest Disruption

From a business perspective, the disaster caused only modest disruption for Marsh, which has 57,000 employees worldwide. On the evening of Sept. 11, Mr. Davis, Marsh’s vice chairman and chief of its MMC Capital arm, sent a fax to Mr. Greenberg’s home that accounted for the unit’s employees – they were all safe – and suggested the formation of a new subsidiary that would underwrite corporate policies.

“We were absolutely thinking about the impact [of the attacks] and what the opportunities were in front of us,” says Mr. Davis, who came to Marsh from Goldman Sachs three years ago.

At a Sept. 18 meeting, 20 executives from Marsh’s operating companies discussed the new terrain in their industry. Participants noted the premium increases already being announced and cancellations of terrorism coverage. Policy-holder demand was as strong as ever, meaning prices could only rise.

There was strong support for Mr. Davis’s idea for a new company. It wouldn’t be the first time Marsh gave birth to an underwriter. In the mid-1980s, it launched Ace Ltd. and Excel Capital, now known as XL. Those moves came in response to some established insurers ceasing to write liability coverage in the wake of huge jury awards for asbestos-related illnesses and big judgments against corporate directors and officers. Both Ace and XL went on to become publicly traded. Marsh retains small stakes in them.

Marsh raised its initial fundraising plan for the new carrier by 50%, to $1.5 billion. But that still wasn’t enough to accommodate all of the investors lining up for a piece of the action. GE’s GE Asset Management unit and TIAA-CREF, the national teachers’ pension-fund manager, were among those allowed to buy stakes. Many others were turned away.

As the investor list was being winnowed, Mr. Greenberg was stirring another pot. He called L. Paul Bremer, a former U.S. ambassador at large for counterterrorism, who had joined Marsh a year earlier.

“Funny you should ask,” Mr. Bremer says he responded to Mr. Greenberg’s query about new business opportunities.

Mr. Bremer had been working on a plan for a crisis-consulting practice for several months. “It was clear to both of us that he should accelerate the introduction of that practice,” Mr. Greenberg says.

On Oct. 11, Marsh announced the formation of a new consulting unit, with Mr. Bremer at its head. Two weeks later, Marsh unveiled a partnership between its new unit and Versar Inc., a counterterrorism-service provider. The partnership will assess chemical and bioterrorism risks for corporate clients.

Original article is at

http://sf.indymedia.org/news/2004/04/1689149.php

© 2000-2003 San Francisco IMC. Unless otherwise stated by the author, all content is free for non-commercial reuse, reprint, and rebroadcast, on the net and elsewhere. Opinions are those of the contributors and are not necessarily endorsed by the San Francisco IMC.

~ ~ ~

Robert Clements is expected to testify with regard to his business, professional and personal relationships with Paul Bremer, Alberto Gonzales, James Bath, James Nicholson, Jim Nicholson, Jack Abramoff, Carole Lam, Duke Cunningham, Dusty Foggo, James Baker III, Karl Rove, George W. Bush, Aloha Petroleum, James Ahloy, Harken Energy, Apollo Advisors, Blackstone Group, Investcorp, Jeffrey Greenberg; Maurice “Hank” Greenberg; C.V. Starr; C.V. Starr Foundation; Marsh & McLennan, Inc.; Putnam Investments; The Chubb Group; Allied World Assurance; American International Group (AIG); Henry Kissinger; The Carlyle Group; Kamehameha Schools/Bishop Estate; Goldman Sachs; Kroll Associates, BCCI, Citigroup, Robert Kihune, Mike McKenzie, McKenzie Methane, Quintana Petroleum, Erik Prince, Blackwater U.S.A., Larry Mehau, David Farmer, Henry Peters, Mid-Ocean Re, ACE, Ltd., XL Capital, Peter Lowe, Rocco Sansone, Michael Tanoue, and others to be named upon discovery.