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Insurer settles charges over bid coordination with key shareholder

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Insurer settles charges over bid coordination with key shareholder

PEMBROKE, Bermuda—Allied World Assurance Co. Holdings Ltd. has agreed to pay $2.1 million to settle charges by the Texas Attorney General that it illegally coordinated bids on excess casualty placements with principal shareholder American International Group Inc.

Under the settlement, AWAC--which denies the allegations--also agreed to make certain changes in its business practices and agreed not to coordinate bids with its founding shareholders, which also include Chubb Corp.

AWAC was created in 2001 with $1.5 billion in capital contributed by AIG; Chubb; Goldman Sachs & Co., a unit of Swiss Reinsurance Co.; and scores of other investors.

Texas Attorney General Greg Abbott's antitrust lawsuit against AWAC, filed concurrently with the settlement, notes that AWAC was structured to operate independently of its insurer shareholders. Goldman Sachs' 2001 private placement memorandum for AWAC stock notes that AWAC would be competing with its principal shareholders in various lines of business, the suit says.

In fact, though, AWAC and AIG informally agreed not to compete and "frequently refused brokers' requests for quotes when one learned that the other was the incumbent carrier or was intending to quote the same piece of business," the complaint alleges.

Responding to a broker's request for a quote for a hospital client in May 2004, for example, an AWAC underwriter wrote, "I am going to have to decline to look at this. We have elected not to compete against our investor companies and as (AIG's Lexington Insurance Co.) is the incumbent on this program xs of $25M, I am not going to be able to offer a quote for that layer," the complaint says.

The Texas lawsuit also de-scribes an internal AIG system called E-Start, which allowed an AIG subsidiary to "reserve" the right to quote a particular piece of business and prevent other AIG units from competing against it. Before providing quotes, AIG underwriters had to check E-Start to see whether another AIG unit had already reserved the business; if the business was reserved, other AIG units were blocked from bidding, the suit says.

AIG gave AWAC access to E-Start when the insurer was formed in 2001, and AWAC continued to use it until January 2006, the suit says. During that period, AWAC underwriters regularly checked E-Start to see if AIG had already reserved business it planned to quote on. In some cases, AWAC underwriters asked AIG to "unblock" a particular submission, but AIG often refused, the suit says.

The complaint cites one June 2004 incident in which an underwriter at an AIG unit was told by a London broker that AWAC had quoted on a casualty placement for the Baylor College of Medicine in Houston. The AIG underwriter e-mailed AWAC, saying, "I can't find anything in e-start for you guys; can you have the (AWAC) underwriter contact me to ensure that we are not competing against each other," according to the suit.

Meanwhile, the complaint also charges that AWAC "on at least one occasion" participated in rigging casualty bids. In that one case, an AWAC underwriter agreed to inflate a quote at the request of an unnamed broker to avoid competing with another insurer, the lawsuit alleges.

Along with the $2.1 million payment, AWAC agreed in the settlement not to use policyholder databases maintained by its insurer shareholders and not to violate antitrust laws in the future.

In a statement, AWAC denied wrongdoing and said that it agreed to the settlement "to avoid the uncertainty and expense of protracted litigation."

The insurer disclosed the antitrust investigation in a Securities and Exchange Commission filing last year, and set up a reserve for the settlement during the fourth quarter of 2006.