Evan Greenberg, Ace's president and chief executive officer, said the company would take an after-tax charge of $298 million, or $1.05 a share, against fourth-quarter earnings to strengthen its asbestos, environmental and other runoff reserves. That charge includes $279 million related to Ace's Brandywine unit and $19 million in relation to Ace's Westchester Specialty unit.
The Brandywine reserve increase is $788 million gross and $339 million net of reinsurance and before tax. For Westchester, the increase is $200 million gross and $25 million net of reinsurance and before tax. Most of the Westchester gross losses are covered by a reinsurance agreement with Berkshire Hathaway Inc.'s (NYSE:BRKa) National Indemnity Co.
The fourth-quarter charge includes a bad-debt provision of $95 million and a tax benefit of $161 million.
The Brandywine runoff business consists mainly of the legacy exposures of Century Indemnity Co. and its subsidiaries, which Ace (NYSE:ACE) acquired when it purchased Cigna Property & Casualty in 1999. The foundation of Ace's strategy for addressing those legacy issues is "the fact that Century Indemnity's liabilities are its own, and that the commitments of the Ace companies to meet those liabilities are fixed and finite within the specific contracts with specific terms," said Greenberg in a conference call.
Greenberg said Ace can't yet reflect the limited nature of those liabilities in its financial reports under U.S. generally accepted accounting principles. "We are not yet able to reflect this important limitation in our financial results, because of the consolidation of Century Indemnity with the Ace operating companies," he said. "We intend to make efforts to rectify that."
The reserve strengthening is a result of periodic internal and independent actuarial reviews of Ace's asbestos liabilities, said Greenberg. Those reviews include a biennial review by an independent actuarial firm as mandated by the Pennsylvania Insurance Department as part of Brandywine's 1996 restructuring order. He added that the reserving decisions don't assume any favorable development in the judicial or legislative arenas on asbestos issues.
Greenberg said Ace's most recent actuarial studies indicate that its asbestos liabilities are higher than they were a year ago, when the last round of studies was completed. "The amount of our reserve now exceeds the maximum amount we are obligated to pay to Century Indemnity under our contracts with the company," he said. "Conversely, Century Indemnity's estimated liabilities slightly exceed its assets today, on a statutory accounting basis."
In an effort to unload some of Century Indemnity's liabilities, Ace agreed to sell Ace American Reinsurance Co., Brandywine Reinsurance Co. (UK) Ltd. and Brandywine Reinsurance Co. S.A.-N.V. to Randall & Quilter Investment Holdings Ltd., a London-based runoff investment specialist, said Greenberg. The sale is contingent on approval from the Pennsylvania Insurance Department and the United Kingdom's Financial Services Authority.
The sale of those runoff companies means their claims against Century Indemnity would be commuted, said Greenberg. "The pro forma effect of the sale is to improve Century Indemnity's financial position by approximately $150 million, and to place the estimated capital position of Century Indemnity back into a positive balance," he said. He did not elaborate on the terms of the sale to Randall & Quilter.
Even as Ace works to obtain the necessary regulatory approvals for the sale, it will transfer a preliminary amount of $100 million to Centur