ACE Pays $80M To Settle Bid-Rigging, Finite Probes

ACE Limited agreed last week to pay $80 million in restitution and penalties to settle charges with three states of rigging bids on insurance contracts and improperly accounting for finite reinsurance transactions.

New York Attorney General Eliot Spitzer and State Insurance Superintendent Howard Mills said in their announcement that Connecticut Attorney General Richard Blumenthal and Illinois Attorney General Lisa Madigan were also part of the settlement with the Bermuda-based firm.

Evan Greenberg, ACE's chief executive officer, said the deal is “a significant step toward achieving resolution of these matters that have weighed on both ACE and the industry.” But “it is not a global settlement, because it does not include other states, class action plaintiffs, nor the SEC,” he said during a conference call last week.

ACE could face penalties from the Securities and Exchange Commission relating to accounting of finite deals, but Mr. Greenberg said his crystal ball could not predict the SEC timeline for such action.

Last week's agreement with the attorneys general and New York department calls for ACE Limited, the holding company, and its U.S. subsidiaries to adopt a series of business practice reforms, including ending the payment of contingent commissions on excess property-casualty business through 2008 and agreeing to support legislation to end such commissions.

“We had already come in line voluntarily with everything [regulators] were asking us to do,” Mr. Greenberg said last week, referring, in part, to the fact that ACE put a halt on contingents in the fall of 2004.

A portion of the settlement document included an apology from ACE acknowledging improper conduct.

The settlement is the latest multimillion-dollar agreement that New York authorities have arranged involving big name insurers and brokers, after investigations turned up evidence they had engaged in extensive price-fixing schemes that involved payment of hidden commissions to brokers.

Mr. Mills said his department is “pleased that ACE has agreed to compensate policyholders.” The company is required to set up a toll-free number and Web site to let clients know how to secure restitution.

Included in the settlement document is an outline of various improper ACE activities, including sending fraudulent e-mails and generating false documentation as part of bid-rigging activity. After it agreed to rig bids with Marsh, ACE excess casualty premiums jumped from $5 million in 2001 to $93.5 million in 2004, according to document.

ACE's arrangement involved submitting phony inflated losing bids when Marsh wanted to steer a contract to a different insurer, such as American International Group or Zurich America, two carriers who have also agreed to settlements.

The document contains excerpts from e-mail messages between ACE and Marsh describing the process of submitting the fake “B-quotes.”

In addition, it describes two situations in which ACE executives gave preferred treatment to brokers, not through bid rigging, but by agreeing to place ACE's reinsurance business through the reinsurance arm of a particular broker.

In a different situation, an ACE executive agreed to pay $500,000 to a Willis broker in the fourth-quarter of one year for the promise of new business in the next year, and sent a fraudulent e-mail, which was later given to Willis' auditors, to justify the fourth-quarter payment.

The settlement also details ACE's use of improper finite reinsurance to bolster both its own financial results and those of clients. “In at least six separate deals, ACE created the false appearance of risk transfer, utilizing methods such as secret side agreements to negate the wording of written contracts,” the settlement agreement, called an “Assurance of Discontinuance and Voluntary Compliance” said.

According to authorities, in 2000, ACE entered into a sham reinsurance deal with privately held American Capital Access. Under terms of the deal, it was explained, ACE and ACA entered into a series of written reinsurance contracts that appeared to contain sufficient risk to qualify as reinsurance. In reality, the investigators say, the two parties entered into secret side agreements that capped and guaranteed the profits ACE could make from the deal, thereby eliminating any risk for either party.

The settlement papers also detail a similar arrangement made with London's Hiscox Syndicates Ltd. in 1998, and an internal arrangement between ACE Tempest Reinsurance Ltd. and ACE Bermuda Insurance Ltd. to enhance ACE earnings.

Last year, ACE restated its financial results for five years and for first-quarter 2005 to correct improper accounting for eight finite transactions. The cumulative impact of the restatements at the time was to push shareholders' equity up $1.0 million.

Under last week's agreements, $40 million will be paid to ACE's policyholders harmed by bid-rigging activities. In addition, ACE will pay penalties of $24 million to New York and $8 million each to Connecticut and Illinois.

Spitzer Art

“We continue to clean up the insurance industry,” Eliot Spitzer said, announcing the ACE settlement last week.

Since the NY AG's Office and Insurance Department started probing industry misconduct in 2004, there have been six settlements, guilty pleas from 20 insurance company executives and officers, and recoveries of roughly $3 billion in restitution and penalties.

Evan mug

The settlement is “a significant step toward achieving resolution of these matters that have weighed on both ACE and the industry.”

Evan Greenberg, CEO, ACE Limited