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Hartford settlement resolves bid-rig probe

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HARTFORD, Conn.--Hartford Financial Services Group Inc. last week became the latest insurer to settle bid-rigging allegations associated with contingent commissions--and the latest to embrace the new compensation system the industry has developed in response to criticism of the controversial commissions.

As part of the settlement, which also resolves "market-timing" allegations, the Hartford, Conn.-based insurer will pay $115 million in fines and restitution and will sharply curb its use of contingent commissions, including paying no contingents on excess casualty placements through 2008, among other changes.

At the same time, the insurer announced plans to launch a new supplemental commission program to replace prospective contingent arrangements compensating brokers and agents in commercial lines of business (see story, page 33).

Last week's settlement ends probes by regulators into market timing within Hartford's variable annuity products business. In a statement, New York Attorney General Andrew M. Cuomo said that, among other problems, the probe "uncovered that Hartford failed to police opportunistic hedge funds that were market timing or making rapid trades in and out of its variable annuities."

The Securities and Exchange Commission also informed Hartford "that it has concluded its investigation (related to market timing) without recommending any enforcement action," the insurer said in a statement.

Hartford's settlement further resolves probes by attorneys general in New York, Connecticut and Illinois relating to compensation arrangements between Hartford and its property/casualty agents and brokers. The New York State Insurance Department joined in the settlement.

Hartford was one of many insurers that colluded with brokers to artificially inflate bids and pay undisclosed contingent commissions to steer business, the officials said.

Under its settlement, Hartford neither admitted nor denied violating state or federal laws.

It did, however, issue an apology as part of its settlement agreement: "Hartford acknowledges that certain of its employees violated acceptable business practices...Hartford apologizes for this conduct and has enacted business reforms to ensure that this conduct does not occur again."

As part of the pact, Hartford--like other insurers that entered settlements as part of the bid-rigging probe launched in 2004 by former New York Attorney General Eliot Spitzer--agreed to forgo paying contingent compensation in any line of its property/casualty business in which more than 65% of the U.S. market does not pay contingent compensation.

Before Oct. 1, Hartford must cease paying contingent compensation on the following lines of business: homeowners, personal automobile, boiler and machinery and financial guarantee, the settlement documents state.

Additionally, the company promised to improve disclosures about compensation paid to brokers and agents via a Web site and toll-free telephone number accessible to clients.

Of the $115 million settlement package, the bulk--$84 million--will go toward restitution for certain of Hartford's variable annuity contract holders found to have been harmed due to alleged market timing activities from 1998 through 2003.

Hartford will also pay a total of $26 million in penalties, of which $20 million will go to New York, and $3 million each will be paid to Connecticut and Illinois.

Another $5 million will be paid into a fund to refund certain commercial property/casualty policyholders related "to a limited number of isolated instances of improper quoting between 2001 and 2004," Hartford said.

The $115 million settlement amount will be largely covered by $83 million in reserves previously set aside for regulatory matters, Hartford said. The insurer--which last week reported a 24.8% boost to profits for the first half of the year to $1.50 billion--also took a $30 million charge to second-quarter earnings a result of the settlement.

Jeffery Berg, senior analyst at Moody's Investors Services said: "We had previously highlighted concerns about compliance challenges for the company given its market leading position on both P/C and life sides. The fact that the settlement itself resolves virtually all of the regulatory issues surrounding the company, most of our near term concerns have been alleviated."

Meanwhile, as part of its quarterly earnings filing last week, Hartford disclosed that it is one of about 20 companies targeted by Connecticut Attorney General Richard Blumenthal in a separate probe into the reinsurance industry.

The subpoena, which Hartford received in May, sought information related to the insurer's "participation in certain reinsurance facilities," Hartford said. Hartford wrote reinsurance for nearly 30 years but exited the market in 2003 to focus on its property/casualty business, divesting its HartRe unit to Bermuda-based Endurance Specialty Holdings Ltd.

The company said it is cooperating with Mr. Blumenthal's investigation.