Royal & Sun America
A Marriage Made In The Underworld.
Sightings from The Catbird Seat
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April 15, 2009
Gary L. Reback, Forbes
What brought down AIG, the lumbering financial giant, and with it the nation's economy? If you said reckless trading in exotic mortgage-backed securities, you're only half right. Turns out that our nation's deeply flawed merger review policy contributed just as much to AIG's demise as the company's high-risk credit default swaps.
Once upon a time--only about 10 years ago, to be more precise--AIG was a successful, rock-solid commercial property and casualty insurer. In 1998, the company bought Sun America, a huge firm that specialized in savings instruments for retirement. Then, in 2001, AIG bought American General, an enormous life insurance and consumer loan company.
Last quarter, according to press reports, AIG lost a staggering $18 billion in its retirement and life insurance businesses--just about the same amount the company lost from credit default swaps. No one seems to know just how much bailout money has gone into propping up AIG's Sun America and American General subsidiaries. But without taxpayer assistance, say analysts, AIG would have declared bankruptcy, requiring state regulators to take over existing insurance policies.
Insurance companies are exempt from federal antitrust laws, so AIG's two big acquisitions (and many others like them) escaped serious merger review. Stringent antitrust enforcement might well have mitigated the AIG disaster by preventing some of the company's ill-conceived acquisitions. But more likely, antitrust enforcers, enfeebled by decades of laissez-faire attitudes, would have blessed the deals.
The most influential antitrust thinkers of the Reagan era believed in scrutinizing closely only mergers between direct competitors--and then only if the mergers resulted in an outright monopoly. In this view, mergers between companies that offer complementary products (sometimes called "vertical" mergers)--AIG's commercial property insurance and Sun America's retirement instruments, as an example--merit not a moment's worth of attention because an acquisition in a related market rarely augments a company's ability to charge higher prices.
In fact, so the reasoning goes, mergers between companies that offer complementary products far more often increase economic efficiency by avoiding duplicative management and distribution costs. Deemed benign at worst, and more often beneficial, mergers involving complementary products attracted little antitrust attention.
This approach continued even when the Democrats took control of the nation's antitrust enforcement apparatus in the 1990s. Citing increased efficiency and the potential for economic growth, President Clinton signed the repeal of the Glass-Steagall Act, permitting commercial banks to expand into new markets by acquiring investment banks. As a result of lax merger policies, markets of all types became increasingly intertwined--and therefore more efficient, government officials assured us.
Economic apocalypse followed. The "efficiencies" from these mergers never really materialized. Instead, the mergers produced untoward concentrations of economic power, forcing single-product competitors out of business and raising customer prices. Worse yet, discrete management oversights that might have produced limited damage in earlier generations became systemic failures precisely because markets had been linked together in vertical mergers and other complementary transactions.
In March, Fed Chairman Ben Bernanke acknowledged the obvious. He defended the massive financial bailout by arguing that some companies were not simply too big to fail, they were "too interconnected to fail." The invocation of putative efficiencies to justify mammoth vertical mergers is no longer credible.
Bernanke's admission comes late in the day. Permissive antitrust attitudes have already set up much of the economy for systemic disasters by permitting the creation of vertically integrated behemoths. Whole industries, beyond financial services, are now dependent on a supplier or two, and the failure of management in even the smallest cog of one of these vertical monstrosities can bring the whole enterprise down and, with it, all of the market's customers.
In my book, Free the Market!, I point to the roughly 40 complementary acquisitions Oracle made to restructure the entire software market for applications used by big companies. Oracle's successful acquisition strategy forces customers to choose a single supplier for most components of an enterprise software solution, rather than picking the most desirable products for each separate function from among different suppliers.
Expectations are high in the legal profession and in Washington that President Obama's antitrust enforcers will scrutinize mergers between direct competitors more carefully than their predecessors ever did. But the litmus test for the new administration's enforcement policies--the real indication of how much Obama's team understands the new interconnected economy--will come from its evaluation of deals involving companies that don't compete directly with each other.
A couple of months ago, the world's largest ticket-selling network (Ticketmaster) and the world's biggest concert promoter (LiveNation) announced their intention to merge. Proponents of the deal claim that the greater efficiency of bringing both functions under a single management will help the new company cut ticket prices in the future. Critics predict higher consumer prices as a consequence of concentrating economic power.
If the new president actually intends to invigorate antitrust enforcement as he promised during his campaign, you should expect the new antitrust enforcers in Washington to declare the Ticketmaster deal dead on arrival at the Justice Department.
Gary L. Reback is a Silicon Valley attorney who led the private sector antitrust crusade against Microsoft Corp. during the 1990s. He is also the author of Free The Market!, published in April by Portfolio, the business imprint of Penguin Group USA.
Obama's Antitrust Dilemma
You Don't Always Win When Rivals Lose
$ $ $
November 13, 2006
Delaware court approves $50M settlement
covering ex-Hollinger directors
CHICAGO (CP) - Delaware Chancery Court has approved a $50-million settlement involving Henry Kissinger, Marie-Josee Kravis and other former directors of Hollinger International Inc.
Sun-Times Media Group Inc. (NYSE:SVN), as Hollinger International now is known, said Monday that the settlement, announced in May 2005, will be funded from its officers-and-directors liability insurance policies.
The claim had been filed in 2003 by Hollinger International investor Cardinal Value Equity Partners, whose law firm pockets $2.5 million of the $50 million being paid to Sun-Times Media.
As part of the settlement, Cardinal's claims against deposed Hollinger chairman and CEO Conrad Black and others, including his wife Barbara Amiel Black and associates Daniel Colson and David Radler, are dismissed without prejudice.
Sun-Times Media said the dismissal without prejudice enables the company to continue pursuing its claims against Black and the others.
This litigation has been stayed pending the outcome of the criminal cases against Black and others, who were charged last year in Chicago.
Sun-Times Media "is committed to continuing our efforts to obtain additional recoveries," Gordon Paris, the company's CEO and chairman of a special committee of the board, said Monday.
The former directors covered by the Cardinal settlement include former U.S. state secretary Kissinger, former Illinois governor James Thompson, former U.S. diplomat Richard Burt, and Kravis, a Quebec-born economist formerly married to symphony conductor Charles Dutoit and now the spouse of New York financier Henry Kravis.
Other ex-directors included in the agreement are Shmuel Meitar, Dwayne Andreas, Raymond Chambers, Robert Strauss, Alfred Taubman, Lord Weidenfeld and Leslie Wexner.
The settlement contains no admission of wrongdoing.
The Delaware court also approved a previously announced $2.8-million settlement with former company executive Peter Atkinson, who was once part of Black's inner circle who later agreed to help Hollinger International's investigation.
Sun-Times Media, which at its late-1990s peak under Black's direction included Canada's dominant group of big-city newspapers, the Telegraph of London and the Jerusalem Post, has shrunk to the Chicago Sun-Times and an assortment of other Chicago-area publications.
Cardinal was among the first to raise complaints about Black's corporate governance, which ultimately led to his removal from the company's lushly appointed executive suite amid an avalanche of ongoing legal proceedings....
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AIG Subsidiary, Chubb Allowed to Pay
Hollinger Director Accord
May 31 (Bloomberg) -- American Home Assurance Co., a unit of American International Group Inc., and Chubb Corp. may pay $50 million to cover a settlement by ex-Hollinger International Inc. directors sued by a minority shareholder, a Canadian judge ruled.
In exchange for the $50 million, Hollinger shareholder Cardinal Capital Management LLC agreed to drop its lawsuit against directors accused of disregarding the alleged looting of the company by ex-Chief Executive Officer Conrad Black.
The proposed payout was opposed by excess insurers Ace Ltd., Zurich Insurance Co. and Royal Insurance Plc, which cover losses over $50 million. Having exhausted the limits of American Home and Chubb coverage for Hollinger directors, the May 23 ruling puts the onus on Ace, Zurich and Royal to cover future settlements in the case.
Ontario Superior Court Judge Colin Campbell's ruling, ``held, in effect, that they can't just veto the settlement,'' Eric Hoaken, lawyer for Hollinger International, said in a telephone interview. ``I think it's an important case that clarifies the obligations of insurers.''
Insurance companies generally don't provide coverage for derivative lawsuits, where a shareholder sues on behalf of the company, Gary Luftspring, a lawyer representing Ace, Zurich and Royal, said. Where coverage is provided, it's usually limited to derivative suits where a shareholder has a stake of less than 10 percent in the company, as in this case.
Chubb, based in Warren, New Jersey, is the second-largest U.S. insurer of corporate boards. American Home is a subsidiary of New York-based American International Group, Inc., the world's largest insurance company. The $50 million payout must still be approved by a judge in Delaware, where the Cardinal suit was initially filed, Hoaken said.
Hollinger International, based in Chicago, publishes the Chicago Sun-Times, among other newspapers.
The company's board ousted Black as CEO in November 2003, sued him and stripped him of the title of chairman the following January. Hollinger International sued Black to recover more than $425 million that it accused him and his associates of stealing to finance lavish lifestyles.
Black, 61, was also sued by his holding company, Hollinger Inc., and by the U.S. Securities and Exchange Commission. He pleaded not guilty to U.S. criminal charges of racketeering, money laundering, wire fraud and obstruction of justice. His trial is set for March 5, 2007.
The case is Re: Hollinger International Inc. No. 05-CV- 285277PD3, Ontario Superior Court, Toronto.
December 10, 2004
$700,000 Disbursed To Settle Church Case
By Edwin Tanji, Maui News
WAILUKU - Faced with paying Maui County as much as $700,000 for the legal costs of a lawsuit filed by the Hale O Kaula Church, the county’s insurance company has paid the church that much to settle the suit, county officials said Thursday.
“It was paid to the church at 3 p.m. today,” said Deputy Corporation Counsel Madelyn D’Enbeau, who said the settlement was based on an agreement that had the dispute going back to the Maui Planning Commission for resolution.
The commission last month voted to approve a five-year special permit to allow the church to build a sanctuary for worship services on its 5.8-acre agricultural-zoned property in Pukalani.
As part of the settlement, the church agreed to drop its demands for its legal fees, estimated to be in excess of $1 million involving three law firms, D’Enbeau said....
The dispute dates back more than 10 years, to when the church members first purchased the farm lot at the end of a private road in a subdivision developed in a former pasture in Pukalani....
An initial request to build a church on the property was denied in 1995 when other landowners along the private road protested that it would create congestion and noise in an agricultural district.
A new request for a special permit for a church was filed in 1999, and, after a lengthy and disputed contested case process, was again denied. After the second denial in 2002, the church filed a suit in federal court, accusing the county of discrimination in rejecting its permit request.
The church was supported in its suit by a national organization, the Becket Fund for Religious Liberty, that sought to make the issue a test case for a new federal law, the Religious Land Use and Institutionalized Persons Act of 2000....
Because of the issues raised by RLUIPA, the case also received attention from the federal government, with the Civil Rights Division of the Department of Justice also filing a suit against the county for an alleged civil rights violation in its handling of the land-use issue....
Although the county’s insurance carrier, Royal & SunAlliance, negotiated the settlement, the county was prepared to carry the case to the U.S. Supreme Court for resolution to protect the local government’s rights over its land-use procedures.
In the case, the church had gone through a contested case hearing but declined to present evidence to the hearings officer assigned to the case [Judith Neustadter Fuqua, Esq.], claiming that she had displayed a bias against the church. When the hearings officer’s recommendation went to the Maul Planning Commission, there was no evidence to support the church’s application and the commission denied the permit.
“Our position was always that you have to go to the planning commission. You have to present evidence. It’s not as though you should be able to decide whether you like the hearings officer or not. You have to use the process just like everyone else does,” D’Enbeau said....
In dealing with the legal complaints, D’Enbeau noted that the county’s policy with Royal & SunAlliance had the insurance carrier paying the county for the legal work of defending itself.
The company already owes the county $200,000 in attorney’s fees, mostly for work performed by D’Enbeau.
“They pay $200 an hour. That’s more than I get paid,” she said.
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For more regarding Judith Neustadter Fuqua, and the Maui Planning Commission, GO TO > > > The Harmon Arbitration; More Claims By Harmon: The American Arbitration Association; Paving Paradise.
< < < FLASHBACK < < <
July 12, 1999
Recent Stories from Insurance Mergers & Acquisitions:
Royal & Sun Alliance Insurance Group Plc
buying Orion Capital Corp (OC)
$ $ $
From The Crossroad Group website:
Brad K. Heppner is chairman and chief executive officer of The Crossroads Group. Mr. Heppner was previously a senior consultant at Bain & Company, where he advised clients on strategies to improve the profitability and operations of their firms.
Prior to serving at Bain & Company, Mr. Heppner was director of investments with responsibilities for a diversified public and private equity portfolio at the John D. and Catherine T. MacArthur Foundation. Mr. Heppner initiated the foundation’s investment in several segments of the private market, including venture capital funds, buyout partnerships, distressed debt and natural resources.
In addition to serving on numerous boards, he has also served as a director of Orion Capital Holdings, L.P. and BDM Holdings, Inc., an investment joint venture of the Kamehameha Schools Bernice Pauahi Bishop Estate, Duke University and the MacArthur Foundation.
Early in his career he was employed at Goldman, Sachs & Co. as an investment analyst. In addition to his responsibilities at The Crossroads Group, Mr. Heppner serves on the board of directors for the Greater Dallas Chamber of Commerce and is a past member of its executive committee and prior chairman of the Dallas Business Technology Council....
For more, GO TO > > > A Connecticut Yankee in King Kamehameha’s Court; The Marsh Birds; The Washington Baseball Club
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September 4, 2003
Insurer Royal & Sun Seeks Cash,
Cuts More Jobs
By Sean Farrell, www.programbusiness.com
LONDON (Reuters) - Britain’s Royal & Sun Alliance Insurance Group Plc asked shareholders for 960 million pounds ($1.5 billion) on Thursday to help cover asbestos and other claims, and said another 1,000 UK jobs would go.
Britain’s second-biggest general insurer, hit in recent years by a slump in stock markets and a shortage of capital, also announced Finance Director Julian Hance would leave the firm early next year, following his former boss out the door. Bob Mendelsohn quit as CEO last year after dismal results and dividend cuts....
Royal & Sun has sold businesses and on Thursday raised its target for job cuts by the end of next year to 6,000 from 5,000.
The company is selling U.S. assets to reduce risk and focus on general insurance in Britain, Scandinavia and Canada, said Chief Executive Andy Haste, who joined Royal & Sun in April.
NO POSITIVE NEWS
“(The rights issue) allows us to address the past and (fund) growth in these businesses,” Haste told reporters. In a rights issue, a company raises money by offering shareholders extra shares based on their existing holdings, usually at a major discount to the prevailing market price.
The issue is fully underwritten by investment banks Merrill Lynch, Goldman Sachs and Cazenove, which stand to make up to 35 million pounds in total fees....
Moody’s Investors Service cut its rating on Royal & Sun’s financial strength by one notch in July, citing concern about litigation and liabilities in the United States that threatened the company’s earnings and capital.
The company said on Thursday it was selling renewal rights to its U.S. personal lines business and most of its commercial lines business to Travelers Property Casualty Corp for a maximum of $90 million.
The sale follows the disposal of its U.S. speciality underwriting business in July to Alleghany Insurance Holdings LLC to reduce the U.S. business’s exposure to catastrophes. The insurer may sell further U.S. assets, Haste said....
The potential 800 million pound provision is to cover a 744 million pound reserves deficit, including about 150 million pounds for asbestos and environmental risk in the United States and Britain and about 500 million for other U.S. requirements.
$ $ $
October 23, 2004
Troubled Times For Insurers
By Martin Flanagan, The Scotsman
It has been a rough few years for insurers - and, this week, it just got a lot worse. The attack by Eliot Spitzer, New York’s attorney general, on the probity of the United States insurance industry - and its possible ramifications on this side of the Atlantic, with the Financial Services Authority closely monitoring events - has crowned an appalling time for the sector.
The industry-wide jitters triggered by the lawsuit Spitzer has launched have compounded by Prudential’s shock £1 billion call on the stock market on Tuesday, suggesting that finances in the sector are still shaky.
The hoped-for light at the end of the insurance tunnel is now looking a bit more like an oncoming train. Arthur Levitt, the chairman of the US’s powerful Securities and Exchange Commission, said yesterday: “it [the controversy] is really far more pernicious that almost any other scandal if this decade.”...
To recap: tumbling equity markets from 2000 to 2002 ravaged the insurers’ balance sheets. It led the FSA to impose tougher capital requirements for their operations going forward - the so-called realistic accounting regime.
Those more rigorous capital adequacy rules were the pivotal factor in persuading Standard Life controversially to ditch 179 years of mutuality and seek a stock market flotation. Ironically, the poor performance of the club it now wants to join has led Standard to ditch its mortgage endowment promise of helping to make up shortfalls.
Apart from mortgages, there continue to be other major embarrassments for the sector on the mis-selling front, such as pensions and precipice bonds - with fines of the great and good ranging from Royal & Sun Alliance and Lloyds TSB, to Scottish Amicable and Allied Dunbar....
It is against this backdrop that we have had over the past week both the Spitzer bombshell in New York and the Pru’s grenade.
First, Spitzer the Spitfire. The stock value of Marsh & McLennan, the world’s biggest insurance broker, has virtually halved after New York’s attorney general accused it and other companies of rigging business and cheating customers. Spitzer went further, accusing the insurance industry of endemic corruption and anti-competitive practices.
He said scathingly: “The insurance industry needs to take a long, hard look at itself ... there is simply no responsible argument for a system that rigs bids, stifles competition and cheats customers.”
Four other companies in Spitzer’s sights are AIG, ACE, The Hartford and Munich American Risk Partners.
The central allegation of the suit is that Marsh duped clients by steering them to insurers with which it had “lucrative payoff agreements”.
These kickbacks were related to the volume and profitability of business steered by the brokers to insurers, and are known in the trade as “contingent commissions” - commissions paid on top of normal commissions for business.
The scandal has undermined UK insurers because it is pretty certain contingent commissions have been wide used here, as well as in the US.
The British broker Willis Group reacted swiftly on Thursday, saying it would no longer accept the so-called contingent commissions.
Now the scandal has widened out. Spitzer is also examining the practices of life and health insurers as well as property and casualty insurers and brokers.
On the day last week that he went public with his attack, the contagion quickly spread across the Atlantic, with four leading insurers among the top ten FTSE 100 fallers - the Pru, Aviva, Royal & Sun Alliance and Legal & General....
Taken all in all, insurers would surely wish they had taken a policy out against the sort of battering they have taken in the past four years, and which has markedly worsened now.
$ $ $
November 11, 2004
AIG Subsidiaries Purchase Royal & SunAlliance Insurance Portfolio in Japan
Press Release, American International Group, Inc.
NEW YORK & TOKYO - (Business Wire) - American International Group, Inc (AIG) has announced that its subsidiaries American Home Assurance Company and AIU Insurance Company will purchase the insurance portfolio of the Royal & SunAlliance (RSA) branch operations in Japan. The purchase price of the book of business is GBP92 million, and AIG expects ongoing annual gross premiums to approximate 11 billion Yen....
The transaction is subject to regulatory approvals and other customary conditions.
American International Group, Inc. is the world’s leading international insurance and financial services organization, with operations in more than 130 countries and jurisdictions....
AIG also has one of the largest U.S. retirement services businesses through AIG SunAmerica and AIG VALIC, and is a leader in asset management for the individual and institutional markets, with specialized investment management capabilities in equities, fixed income, alternative investments and real estate...
For more on AIG, GO TO > > > AIG: The Un-American Insurance Group
$ $ $
MORE TO COME
And, for some more “birds of a feather” that you’ll also find building nests in this tree...
ACE UP THE SLEEVE
AIG: THE AMERICAN IDOL OF GREED
ALLIED WORLD ASSURANCE
ALOHA, HARKEN ENERGY!
AMERICAN SAVINGS BANK
APARTHEID, HAWAIIAN STYLE!
APCOA: VULTURES IN THE PARKING LOT
BANK OF AMERICA
BANK OF HAWAII
BANK OF HONOLULU
BCCI: THE BANK OF CROOKS & CRIMINALS
BROKEN TRUST: THE BOOK
BUZZARDS OF PARADISE
THE CARLYLE GROUP
THE CHUBB GROUP
CITIGROUP: VAMPIRES IN THE CITY
CLAIMS BY HARMON
CONFESSIONS OF A WHISTLEBLOWER
A CONNECTICUT YANKEE IN KING KAMEHAMEHA’S COURT
THE CROSSROADS GROUP
DIRTY GOLD IN GOLDMAN SACHS
DIRTY MONEY, DIRTY POLITICS & BISHOP ESTATE
FANNIE MAE & FREDDIE MAC
THE FIRING OF EVAN DOBELLE
FIRST HAWAIIAN BANK
THE FREEDOM TO SING!
HAIL TO THE CHIEF BUSH!
HAIL TO THE CHIEF CLINTON!
HARMON’S LETTERS TO THE FBI
HARMON’S LETTER TO THE IRS
I SING THE HAWAIIAN ELECTRIC
HOW TO PLUCK A BILLIONAIRE
HOW TO PLUCK A NON-PROFIT
HUD: THE HOUSING & URBAN DISASTER
THE INTERNATIONAL MONETARY FUND
KAJIMA: BLOOD, BRIBES & BRUTALITY
THE KAMEHAMEHA SCHOOLS PENSION PLAN
KEMPER INSURANCE COMPANIES
THE KISSINGER OF DEATH
MARSH & McLENNAN: THE MARSH BIRDS
THE MYTH & THE METHANE
THE NESTS OF CB RICHARD ELLIS
NESTS OF THE INSURANCE VAMPIRES!
NO BAILOUTS FOR BILLIONAIRES!
OF VAMPIRES AND DAISIES
POINTING THE FINGER AT WORLDPOINT
PREDATORS IN PARADISE
THE GREAT NEST EGG ROBBERIES
THE PRUDENTIAL: A NEST ON SHAKY GROUND
THE QUEEN LILIUOKALANI TRUST
RICO IN PARADISE
RON REWALD: FLYING HIGH IN HAWAII
THE SILENCE OF THE WHISTLEBLOWERS
THE SINKING OF THE EHIME MARU
SUKAMTO SIA: THE INDONESIAN CONNECTION
THE TORCH OF ERIC SHINE
THE VULTURES THAT ATE HONFED
THE VULTURES IN MAUNAWILI VALLEY
THE POOP ON AON
THE PUNA CONNECTION
DIRTY MONEY, DIRTY POLITICS & BISHOP ESTATE
Part I - Part II - Part III - Part IV - Part V - Part VI - PartVII
TRANSYLVANIA TRAVELERS IN ST. PAUL
VULTURE NESTS ALONG WALL STREET
VULTURES IN THE HALLS OF JUSTICE
VULTURES IN THE MEADOWS
VULTURES IN THE NATURE CONSERVANCY
VULTURES IN THE WORLD BANK
VULTURES OF THE SANDWICH ISLES
WHAT PRICE WATERHOUSE?
WILLIAM SIMON SAYS...
YAKUZA DOODLE DANDIES
ZEROING IN ON ZURICH FINANCIAL SERVICES
# # #
TO GO TO THE TOP OF THE TREE!
The Catbird Seat
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MORE OF THE CATBIRD’S FAVORITE LINKS
THE CATBIRD SEAT FORUM
THE CATBIRD SEAT
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Originally posted: December 13, 2004
Last Update April 15, 2009, by The Catbird