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Ace’s Run-Off Sale Deemed A Step In The Right Direction

Bermudian insurance group Ace’s sale of three run-off units to U.K. run-off manager Randall & Quilter Investment Holdings will not solve the firm’s asbestos woes, but analysts say it is a step in the right direction.

Bermudian insurance group Ace’s sale of three run-off units to U.K. run-off manager Randall & Quilter Investment Holdings will not solve the firm’s asbestos woes, but analysts say it is a step in the right direction.

Ace announced on June 5 that it had sold Ace American Reinsurance Company, Brandywine Reinsurance Company (U.K.) and Brandywine Reinsurance Company SA-NV – based in Belgium – to Randall & Quilter. These firms are part of Brandywine Holdings, the company set up to house the asbestos and environmental liabilities Ace acquired when it bought U.S. insurer Cigna’s property/casualty book in 1999.

The firm says the sale has reduced its exposure to old liabilities, including asbestos, by US$900 million, and its reinsurance recoverables by US$400 million.

“It is definitely a positive,” says Cliff Gallant, analyst at investment bank Keefe, Bruyette & Woods. He says Ace’s shares are discounted compared with other Bermudian firms. “The reason is fear over asbestos exposure,” he says. “It is really the only Bermudian that has got asbestos exposure. This transaction helps move some of it off the balance sheet.”

The reduction in reinsurance recoverables is also a positive. “It gets rid of some of the potential credit risk in the form of reinsurance recoverables,” says Michael Paisan, analyst at investment bank Stifel Nicolaus. “Ace had, in relation to many companies, a higher reinsurance recoverable leverage.”

But the transaction will not put Ace’s asbestos troubles behind it completely. As of March 31 this year, the company had US$4.2 billion of gross loss and loss expense reserves for asbestos and environmental business – or US$2.2 billion net of reinsurance.

Nevertheless, analysts believe the transaction is important because it should pave the way for more. “Ace certainly has some way to go,” says Paisan. “It still maintains a fairly healthy exposure. But this sets a precedent for the company to find a buyer for the rest of the exposures.”

He adds, “Had they not got the approval from the regulators, it would have been difficult to find someone else to buy the rest of it.”

Ace seems keen to sell more of its run-off entities. “We are considering potential options for disposition of other Brandywine entities, including a possible sale of Century [Indemnity Company, another run-off entity],” the firm said in its first-quarter results filing.

The sale of the three entities has been long delayed. Ace first revealed it had reached an agreement with Randall & Quilter back in January 2005, and expected the deal to close in the first half of that year. The deal was stalled by strong opposition, particularly in the U.S. A group of Ace’s rival insurers in the U.S., including American International Group, tried to block the sale of Ace American Reinsurance by writing to Diane Koken, insurance commissioner of Pennsylvania, who had to approve the transaction.

The amount Randall & Quilter paid for the units was not disclosed, but Ken Randall, chairman of the firm, describes the sum as “not very much at all.” He adds that his firm will inject US$2.5 million into Brandywine U.K. and pay US$5 million for half of a reinsurance program to cover Ace American Reinsurance. Ace will pay for the other half.

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