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RSA sale of U.S. units troubles policyholders

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WILMINGTON, Del.—Major policyholders of Royal & SunAlliance USA Inc. say they could be left with nearly $1 billion in potential claims if RSA USA's London-based parent is successful in selling its operations, which are now in runoff, to a management group.

Charlotte, N.C.-based Arrowpoint Capital Corp., a vehicle established by RSA USA's management team, in September 2006 announced its agreement to acquire Royal Indemnity Co. and other members of RSA USA's insurance pool for $300 million. The deferred compensation arrangement is to be funded by the U.S. operation's future performance.

RSA USA parent company, Royal & Sun Alliance Insurance Group P.L.C., said upon completion of the transaction, it would contribute $287.5 million in capital. RSA announced its plan to exit the U.S. property/casualty market in 2003.

That year, RSA USA sold renewal rights for large parts of its U.S. commercial business to Travelers Property Casualty Corp. unit Travelers Indemnity Co., which assumed no RSA USA liabilities.

According to RSA, the U.S. operations at their height wrote premiums of more than $3 billion over several lines, but its cumulative underwriting losses have been £2.7 billion ($3.55 billion) over the past 10 years driven primarily by adverse claims development.

Detroit-based General Motors Corp. and New York-based World Trade Center Properties L.L.C. are among policyholders expected to protest the deal at a hearing by the Delaware Department of Insurance set for Jan. 19 that could lead to its formal approval.

The policyholders contend the deal could leave the U.S. operation, which no longer writes new property and liability business, with a shortfall of nearly $1 billion (see story, page 20). But spokesmen for the U.S. and London-based operations said Arrowpoint will continue to honor policyholder claims.

Last month, Delaware Insurance Department hearing officer Lawrence A. Hamermesh ruled against policyholders' attempt to be named as formal parties in the proceeding, which would have entitled them to conduct discovery.

Denial of the policyholder's applications for party status "does not deny them a meaningful opportunity to call attention to their concerns about the proposed Royal U.S. acquisition," said Mr. Hamermesh in his Dec. 20 order. "They have not squarely contended that such denial would unconstitutionally deprive them of the due process of law, and any such contention would lack merit."

Mr. Hamermesh also denied World Trade Properties' application to appoint an independent actuary.

Should Mr. Hamermesh approve the deal, policyholders have asked that Delaware Insurance Commissioner Matthew Denn delay implementation until the conclusion of any appeal.

David E. Wilks, a Wilmington, Del.-based partner with Reed Smith L.L.P., who represents RSA USA policyholder, Stamford, Conn.-based Student Loan Corp., in the proceedings said terms of the deal should be changed. "We're certainly prepared" to fight the transaction in court if the department approves it.

Policyholders have already filed an appeal of Mr. Hamermesh's Dec. 20 order in Delaware Superior Court in Wilmington, which the department is opposing.

Marc Wolinsky, an attorney with Wachtell, Lipton, Rosen & Katz in New York, represents New York-based Silverstein Properties Inc., and its affiliates, including World Trade Center Properties. "We bought insurance from an A-rated carrier, and it was A-rated because Royal & Sun Alliance explicitly--and implicitly--pledged their support for this subsidiary, and the ratings of the company were based on the fact that Royal Indemnity was a core part of the business." Royal Indemnity participated in the WTC property coverage.

Then, "things went south, they made some bad bets and they're trying to walk away, and it's just not right," Mr. Wolinsky said.

In a document objecting to the transaction, GM said: "The historical business and corporate structure of the Royal group of companies, the current and extremely precarious financial status of Royal Indemnity and the woefully inadequate capitalization of the applicants, establish that the proposed transaction will jeopardize the financial stability of the insurers, will prejudice the interests of policyholders and will be unfair and unreasonable to these policyholders and not in the public interest." GM is seeking coverage from Royal Indemnity for both property and liability claims.

The filing said "since at least 2003, Royal Indemnity's continuing operations have been made possible only by virtue of the capital infusions" of its London parent.

"Plainly, the proposed transaction should not be approved, both in view of the current bleak status of the insurers, and the inescapable fact that the proposed transaction is not a cure for Royal Indemnity's financial peril (and appears to eliminate the possibility of additional capital infusions)," GM said.

A London-based RSA spokesman said "The transaction is in the best interests of all policyholders." The business has "a sound capital base and the transaction is strengthened" by the $287.5 million capital infusion, he said.

Arrowpoint "will continue to honor its commitments to its policyholders, the London spokesman added.

A spokesman for RSA USA said the deal responds "to the needs of all policyholders."

"Our business has been meeting its policyholder commitments and will continue to do so under the terms of the transaction. We're committed to our policyholders," he said.

Deputy Delaware Insurance Commissioner Michael L. Vild declined to comment.

However, in a filing opposing policyholders' appeal of Mr. Hamermesh's order, the department said policyholders' "hysterical declarations are fundamental misunderstandings of the department's regulatory duties" and they are "hopelessly confused about what an insurance department should do to safeguard all policyholders."

Other policyholders involved in the dispute include Auburn Hills, Mich.-based DaimlerChrysler Corp.; Southfield, Mich.-based Federal-Mogul Corp.; Armonk, N.Y.-based MBIA Insurance Corp.; San Francisco-based Wells Fargo Bank; the Port Authority of New York & New Jersey; and Los Angeles-based Westfield America Inc. and other Westfield units.