Is Cigna Creating A Time Bomb?by
Is Cigna Corp., the nation's 24th-largest property and casualty insurer, trying to walk away from billions of dollars in asbestos and environmental claims and leave rivals with the bill? That's what some of Cigna's biggest competitors are afraid of.
On Oct. 2, the Philadelphia-based insurer announced a plan to transfer those claims to a new company, Brandywine Holdings. Since that would make the remainder of Cigna healthier, the move has been a smash on Wall Street, driving the firm's shares to a new high. Says Cigna Property & Casualty Div. President Gerald A. Isom: "Our objective is to stay viable."
If Cigna gets its way, other insurers may also limit their environmental losses by moving liabilities into separate units. But several rivals--AIG, Chubb, and St. Paul Cos.--want to thwart Cigna's strategy. Chubb General Counsel Robert Rusis says he may take legal action to block the Brandywine deal. And American International Group Inc. Chairman Maurice R. Greenberg indicates he may file a complaint with Pennsylvania's Insurance Dept. He fumes: "This is unacceptable."
Indeed, a draft of a possible AIG complaint, obtained by BUSINESS WEEK, calls Cigna's plan a "farce." Cigna, the document says, "is seeking the department's blessing to benefit itself by walking away from its responsibilities to its existing policyholders."
Cigna insists nothing could be further from the truth. It says that if anything, Brandywine will be overcapitalized, with $7.5 billion in assets and other coverage to offset possible losses. But Cigna's opponents worry that won't cover these liabilities, which even Cigna concedes are hard to predict. If Brandywine's reserves were insufficient, the Pennsylvania Guaranty Fund might have to rescue it. By law, any shortfall in the fund would be covered by other insurers, including those--like AIG and Chubb--that weren't writing environmental policies decades ago.
Cigna is far from the only insurer that is grappling with rising environmental costs from old policies. Paulsen, Dowling Securities, a Hartford brokerage firm, estimates that the industry eventually will face as much as $75 billion in asbestos and environmental claims. Yet insurers have reserved only $40 billion against such potential losses. Several major players, including Aetna and Fireman's Fund, have boosted reserves to cover environmental liabilities. Along with its restructuring plan, Cigna boosted reserves for such claims by $1.2 billion, taking a charge of $750 million against third-quarter earnings.
Cigna's foes are now pressuring Pennsylvania Insurance Commissioner Linda S. Kaiser. Greenberg charges Kaiser shouldn't rule on Brandywine because she was a Cigna staff lawyer from 1985 to 1992. A spokesman for Governor Thomas J. Ridge says "there's absolutely no conflict of interest," and Kaiser still plans hearings after Thanksgiving. The outcome will have ramifications far beyond the Keystone State.
A DISPUTED TRANSFER
WHAT CIGNA PLANS
It wants to split its U.S. property and casualty insurance business, putting old asbestos and environmental claims into a new carrier called Brandywine with assets and other commitments of $7.5 billion.
WHAT COMPETITORS SAY
American International Group, St. Paul Cos., and Chubb claim Brandywine won't be adequately capitalized and may eventually be forced to tap Pennsylvania's industry-financed insurance guarantee fund.