Is Cigna's Asbestos Plan Fireproof?

Criticism ignites over the insurer's plan to split off liabilities

Just 10 months ago, it seemed CIGNA Corp. had solved the problem of what to do with a seemingly bottomless pit of asbestos and environmental liabilities. In a novel move, the Philadelphia insurer split its property and casualty operations in two: one unit for ongoing business and a separate, inactive outfit to handle potentially more than $4.5 billion in problematic liabilities.

In one of the biggest brouhahas in the commercial insurance industry in years, rivals tried to thwart the plan, complaining that they might have to pick up the tab if the new outfit defaulted. They argued that the industry would then face higher bills for its self-insuring guaranty fund system. CIGNA, though, won endorsements of its restructuring from the Pennsylvania Insurance Commissioner and regulators in seven other states.

End of story? Far from it. CIGNA's critics have intensified their campaign to derail the insurer. On Dec. 11, Chubb, St. Paul, and American International Group will appeal the Pennsylvania commissioner's action before the state's Commonwealth Court. The National Conference of Insurance Guaranty Funds and the Consumer Federation of America are also raising protests. Argues the Consumer Federation: "Insurance companies should not be encouraged by regulators to employ slick corporate maneuvers to wriggle out of their contractual obligations."

CIGNA faces trouble on other fronts. The North Carolina Insurance Dept., which is considering revoking or suspending the CIGNA property/casualty unit's license there, plans a hearing for February. Michigan regulators say the state could require CIGNA to deposit up to $165 million to do business if the split is upheld.

CIGNA officials decline comment on North Carolina and Michigan. And they are playing down the December court action. "This is nothing more than the appeal process working its way through," says CIGNA spokesman James S. Ely. "Our position will prevail."

MUCH ADO? CIGNA insists it is wriggling out of nothing and is setting aside far more than needed for its obligations. After objectors argued their case last winter, Pennsylvania Insurance Commissioner Linda S. Kaiser ordered CIGNA to provide $800 million in reinsurance--up from $500 million originally proposed by CIGNA--and at least $50 million more in working capital, along with assets of $4.5 billion for the new company, called Brandywine Holdings. "What we've done is something good for all our policyholders," says Ely.

A study by Tillinghast-Towers Perrin, a consulting firm, backs that up. Commissioned by Kaiser, the firm looked at 162 scenarios for estimating CIGNA's asbestos and environmental liabilities and found that Brandywine held enough money for all but four cases. In those four, the additional capital required by Kaiser would cover the shortfall. Insisting it is overfunding its plan, CIGNA says it expects to have money left over after all liabilities are paid.

Critics are skeptical. "If the asbestos and environmental claims turn out to be much bigger than they currently project, what happens?" asks J. Robert Hunter, the Consumer Federation's insurance director. "It could end up with consumers being victims." Claims could go unpaid, he says.

RATINGS UP. The trade group for state guaranty funds, the National Conference of Insurance Guaranty Funds, worries that the plan could shake confidence in the industry's self-insuring system, which operates as a kind of FDIC. The group maintains that Brandywine would likely not be covered by guaranty funds if it went broke. "Everybody loses if there is an insolvency and there is no guaranty-fund coverage," says Kevin Harris, the NCIGF's general counsel.

Despite the altercation, CIGNA's ratings have improved markedly since its restructuring was approved last February. A.M. Best Co. rates CIGNA's ongoing property-casualty operations an A-, while giving its Brandywine Holdings unit B+. Investors have hiked CIGNA's stock some 30% this year. Says Sanford C. Bernstein & Co. senior analyst Weston M. Hicks: "I don't think there's a real risk to CIGNA."

Still, with all the combatants trying to avoid getting burned by a potential multibillion-dollar hot potato, the main guarantee in this nasty dispute would seem to be a lot more litigation.

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