Sightings from The Catbird Seat
~ o ~
November 12, 2007
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."
Excerpt from RICO In Paradise
...From Equity No. 2048, Petition of the Attorney General on Behalf of the Trust Beneficiaries to Remove and Surcharge Trustees:
“The Trustees have been unfaithful to the Will and the purpose of the Trust. They have failed to comply with clear directives of the Will. They have subordinated the sole purpose of the Trust to their personal gain. They have squandered Trust assets intended for education by their excessive compensation, and by imprudent and improper Trust management and investments. They have violated Hawaii statutes and court orders. They have engendered hostility between themselves and the Beneficiaries whose interests the Trustees were appointed to serve.
. . . [Henry] Peters became lead trustee for asset management in 1993 and assumed responsibility for Trust investments and for due diligence on prospective investments.
Peters as lead trustee purposely withheld information on existing and potential investments from his co-Trustees, dismantled the Trust’s internal audit function, instructed staff employees to withhold information from the co-Trustees, and used his position to approve Trust payment of improper non-Trust expenditures.
. . . As to Peters, the effect of these violations has been that Trust assets have been mismanaged and misspent to the detriment of the Trust purpose.
. . . Trustees Peters, Wong, and Lindsey have violated their duty of loyalty to the Beneficiaries by using their positions as Trustees and by using Trust assets and opportunities to benefit themselves and their relatives and friends.
. . . In 1992, the Trust invested approximately $31 million in Mid Ocean, Ltd. (Mid Ocean), a Bermuda-based insurance company, and acquired 310,000 Mid Ocean Class A shares.
In 1993, when Matsuo Takabuki retired as a Trustee of the Trust, Peters succeeded to Takabuki’s seat as a director of Mid Ocean.
Peters served as a Mid Ocean director until early 1998.
Peters’ service as a Mid Ocean director fell within his duties as Trustee and was a Trust opportunity.
Peters used Trust personnel to prepare him for Mid Ocean directors’ meetings.
While a director of Mid Ocean, Peters received substantial director’s fees and received options to acquire 6,000 shares of Mid Ocean stock.
The Mid Ocean fees and stock options are assets that belong to the Trust and not to Peters individually.
Peters has enriched himself at the expense of the Beneficiaries by retaining the fees and stock options for his personal benefit.
(Note: Marsh & McLennan, and its subsidiary, Guy Carpenter, were major players in the creation and management of Mid-Ocean.)
. . . During his 1986, 1988, 1990, and 1992 political campaigns while a Trustee, Peters used Trust employees to photograph his and his supporters for his campaign materials, in violation of Trust restrictions on political activity by the Trust and its employees.
. . . The Trust presently qualifies as a charitable non-profit entity under the Internal Revenue Code and thus is exempt from federal, state, and local income and other taxes.
Maintaining the tax exempt status is critical to the Trust and its ability to serve its intended purpose.
The Trustees’ duty to protect the interests of the Beneficiaries includes zealously protecting the Trust’s tax-exempt status.
By taking excessive compensation and by using Trust assets for private inurement, the Trustees have imperiled the Trust’s tax-exempt status and hence the full effectuation of the Trust’s purpose.”
Beginning around March 1996, Harmon began questioning what appeared to be excessive premium charges being made by M&M for KSBE’s property insurance, and for the fees M&M was billing to P&C. He again raised the issue of his job transfer from KSBE to P&C.
For the next several months, Plaintiff was subjected to threats, intimidation and various abuses from Aipa and Kam for questioning the excessive fees of M&M and his transfer to P&C. In a meeting in early 1996, with Aipa and Sansone, Harmon asked Aipa about the status of his transfer. Aipa’s response was that it wasn’t going to happen because “arms-length was no longer an issue,” (referring to previous legal opinions from Price Waterhouse that the IRS might revoke the Trust’s tax-exempt status if it did not maintain arms-length from its taxable subsidiaries).
On October 11, 1996, Harmon was called into a meeting with Peters and Aipa. At this meeting, Peters instructed Harmon that he was to report to Aipa on all matters relating to P&C. Peters also stated that he would hold Aipa responsible for all matters relating to P&C. He also informed Harmon that he could be replaced as President of P&C if he failed to follow Aipa’s directives.
On November 20, 1996, Peters made good with his threat and terminated Harmon’s appointment as President of P&C. No explanation was given for the termination.
Harmon was also terminated by Aipa from his position as Risk/Insurance & Safety Manager for KSBE, allegedly due to “differences in philosphy”.
Plaintiff Harmon alleges that a major reason for his terminations was his refusal to follow the directives of Henry Peters, Nathan Aipa and Louanne Kam for to pay M&M substantial fees for work that was not under contract and which was not justified.
These “sweetheart deals” with M&M, and the threats to Harmon that he could be terminated for failing to follow the directives of Peters, Aipa and Kam to “go along” with these improper deals, constitute conspiracy to defraud the beneficiaries of the Estate of Bernice Pauahi Bishop; racketeering; mail fraud; wire fraud; extortion; breach of fiduciary duties; and violations of the Interim Sanctions provisions of the IRS Code, as detailed in Plaintiff’s complaint.
March 5, 1998
The Bishop trustee will
not seek re-election as a director
of the firm in which the estate
is a big shareholder
By Rick Daysog, Star-Bulletin
Bishop Estate trustee Henry Peters is stepping down as director of Mid Ocean Ltd., a Bermuda-based reinsurance company in which the estate is a big shareholder.
Peters -- whose role at Mid Ocean has come under the scrutiny of state Attorney General Margery Bronster in her investigation of the estate -- said he recently decided not to seek re-election to Mid Ocean's board of directors due to time constraints.
His term expires at Mid Ocean's annual shareholders meeting, which was to be held today.
A Mid Ocean board member since 1993, Peters said his workload at Bishop Estate and other corporations made it difficult to serve on Mid Ocean's board. But he said he was comfortable leaving the board at this time given the company's current management.
The announcement comes as Bronster has subpoenaed documents relating to Bishop Estate's investment in Mid Ocean.
The attorney general is investigating charges of financial mismanagement and breaches of fiduciary duties by individual Bishop Estate trustees. Sources say the state may be delving into Peters' investments in Mid Ocean.
Mid Ocean, based in Hamilton, Bermuda, is a publicly traded company that sells coverage to insurance companies, enabling the insurers to spread their risk.
Bishop Estate is Mid Ocean's fourth-largest shareholder behind Bermuda-based EXEL Ltd., the Scudder, Stevens & Clark Inc. investment company and the Wall Street firm of Oppenheimer Group Inc. The charitable trust's 1.86 million shares represent 5.16 percent of the company's 36.1 million outstanding common shares.
Since 1993, Mid Ocean has granted Peters options to acquire 4,500 shares of Mid Ocean stock under its long-term compensation plan for outside directors, according to a 1996 proxy statement filed with the Securities and Exchange Commission. Those options would be worth more than $266,000 based on Mid Ocean's closing price of $59.13 yesterday.
Peters and other outside directors also earned $30,000 each in the form of Mid Ocean stock and deferred shares last year, according to Mid Ocean's proxy statement for its 1997 fiscal year.
Outside directors received an additional $3,000 for each board meeting attended and $1,500 for each committee meeting attended. Peters was present at at least six board and committee meetings in 1997.
The Mid Ocean director's fees are on top of the $843,109 in commissions Peters received as a Bishop Estate trustee for the year ending June 30, 1996.
Peters took issue with recent criticism about his Mid Ocean stock options. He said he has not exercised the options, which were offered to all of Mid Ocean's outside directors.
He said the options were not given to directors for free: Directors must acquire them at market prices and can only sell them after a set time period.
"I haven't even looked at them," Peters said.
To be sure, Bishop Estate's investment in Mid Ocean has been successful.
The estate's initial investment of $31 million in 1992 is now worth about $110 million.
Last year, the estate earned nearly $5.6 million in dividends from its Mid Ocean stock, or more than double the $2.5 million in dividends it received in fiscal year 1996.
Critics argue that Peters' stock options in Mid Ocean raise the appearance of a conflict of interest given Bishop Estate's big stake in Mid Ocean.
Randall Roth, University of Hawaii law professor and co-author of the "Broken Trust" article that prompted the state's investigation of the estate, believes that co-investing should be avoided by trustees of Bishop Estate.
Roth said he wasn't familiar with the details of Peters' role in Mid Ocean. But he noted that the estate's internal guidelines forbid trustees from placing personal money in trust investments.
The issue of Peters' Mid Ocean stock options has raised questions within the estate's board room. Fellow trustees weren't aware of the options until media reports criticizing the awards surfaced in September, sources have said.
Consequently, board members told Peters to not exercise the options and said he should not receive future director's fees, sources said.
He has not returned past director's compensation.
The estate is studying ways to transfer ownership of Peters' Mid Ocean stock options to Kamehameha Schools.
"Arguably, this creates an appearance of a conflict of interest if not an (actual) conflict of interest," Roth said.
"A trustee is supposed to avoid even the appearance of a conflict."
# # #
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Originally posted: February 2, 2008, by The Catbird
Last Update March 19, 2009
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