Royal & Sun Alliance management buyout faces opposition

A proposed management buyout and eventual dissolution of Royal & Sun Alliance Insurance Group’s U.S. operations could leave policyholders in jeopardy, according to critics trying to halt the deal that is before Delaware regulators.

The proposed buyout was the subject of a lengthy hearing recently in Delaware, where the British company’s U.S. affiliates are incorporated. Delaware insurance commissioner Matt Denn is expected to make a decision within 30 days, after receiving a report from the hearing officer.

Royal & Sun announced in 2003 that it did not consider its U.S. business central to its main operations, and it stopped writing new policies with the eventual goal of exiting the U.S. market after more than 150 years.

Among the four U.S. subsidiaries that managers of Royal & SunAlliance USA plan to “runoff” is Royal Indemnity Co., which has been sued over more than $250 million that it may owe to the developer of the World Trade Center site in New York City. Royal Indemnity and more than two dozen other insurers took out policies with developer Larry Silverstein weeks before Sept. 11, 2001.

RSA USA also is involved in litigation over potentially costly asbestos and environmental claims, including a Michigan lawsuit in which General Motors has asserted a claim of more than $1 billion, for which the insurer has not put up any reserves.

RSA USA chief operating officer Dennis Cahill accused GM of lobbying other large policy holders, including DaimlerChrysler, Federal-Mogul Corp. and the Student Loan Corp., in an effort to kill the buyout.

Meanwhile, New York Sens. Hillary Clinton and Charles Schumer, along with New York City Mayor Michael Bloomberg, have expressed concerns that the deal may leave Royal Indemnity unable to meet its obligations.

“Without Royal Indemnity Company’s full payment of its obligations, efforts to redevelop Ground Zero will be seriously impeded,” Clinton wrote in a letter to Denn.

RSA USA executives said the company has a good claims payment history, including more than $1 billion World Trade Center-related claims, and will meet future obligations as they become due.

Delaware regulators described RSA USA as one of the department’s “problem children,” burdened by the 9-11 attacks and an ill-advised acquisition of a big workers compensation portfolio in the 1990s.

RSA USA chief executive officer John Tighe said the company has made significant progress in reducing expenses and resolving major lawsuits since 2003, and that the buyout represents a “great benefit” to policyholders. “Our ultimate objective is to achieve a solvent runoff,” he said. “We have not approached this endeavor naively.”

RSA USA currently has $2 billion in reserves to meet likely claim obligations, according to Delaware insurance regulators, and more than $700 million in surplus funds.

Royal & Sun’s U.K. parent has agreed to provide an additional $287.5 million in financing for the buyout, but opponents contend that amount is insufficient to ensure that obligations are met.

Marc Wolinsky, an attorney representing the World Trade Center policy holders, said the buyout will result in management lining its pockets at the expense of policy holders. He noted that the management group has put up nothing for the buyout but has been promised $27.5 million by the British parent to cover operations and salaries during the runoff.

“Their downside is protected, and their upside is … whatever they can squeeze from policy holders,” Wolinsky said.

Tighe asserted that Royal U.K.’s offer of $287.5 in seller financing, backed by $300 million in non-interest bearing subordinated notes from the U.S. executives, helps ensure that policyholders are protected. “Royal U.K. made it very clear to us that they have limits to what they would be willing to provide,” he said. “We understand the challenges we face and believe we have sufficient capital to meet policy holder obligations.”

Deputy insurance commissioner Michael Vild noted that Royal U.K., at the insistence of Delaware regulators, has provided nearly $1 billion to support its struggling American operations since 2001, most of it before the runoff decision was made.

When RSA USA approached Delaware regulators last year, it was told a solvent runoff was unlikely without an infusion of additional capital. Royal U.K. reluctantly agreed to provide the $287.5 million, narrowly winning over the Delaware regulatory staff.

“It’s close,” said Vild, adding that in the event RSA USA becomes insolvent, the $287.5 million could come in handy.

George Culmer, chief financial officer for the British parent company, asserted that the $287.5 million is contingent on the deal being approved, and that the company will not inject any more capital into the U.S. businesses.

Wolinsky dismissed the notion that Royal U.K. would risk its international credibility by abandoning the U.S. group to face liquidation if the deal is not approved. “They’re saying, ‘approve this transaction or we’re going to commit economic suicide,”‘ he said. “They’re not going to do that.”

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