Ge Sails Into A White Squall
It seemed wholly innocuous, certainly not the sort of move that would stir up an international insurance imbroglio.
At a hearing in Boston last June, David F. St. Laurent, chairman and president of Electric Mutual Liability Insurance Co., asked Massachusetts regulators to allow him to split his company. Insurance policies covering the large and costly environmental liabilities of policy-holder General Electric Co. would remain in Electric Mutual, which would relocate to Bermuda. As a mutual, Electric Mutual is owned by its policyholders, and GE was the largest. The remaining healthy business would be moved to an already existing subsidiary, Electric Insurance Co., which would be spun off as a separate company and stay in Massachusetts. Despite a notice in The Boston Globe a week earlier, no one besides St. Laurent and a handful of executives involved in the deal showed up at the hearing. Eight days later, the Massachusetts Insurance Div. gave St. Laurent the go-ahead.
The fallout from that decision, however, has garnered considerably more attention--and heated controversy. Last October, just four months after Electric Mutual moved offshore, the company suddenly identified $750 million in potential environmental and asbestos liabilities tied to GE policies. Facing a capital deficit of about $500 million, Electric Mutual filed for liquidation, the equivalent of a bankruptcy filing for an insurance company. The move raises questions about how such a massive hit appeared out of nowhere and questions about GE's role in the debacle. Under Bermuda law, GE, as the sole policyholder of Electric Mutual after the restructuring, can have significant control over the liquidation process. In the U.S., state insurance departments typically oversee liquidations.
GE's advantageous position has reinsurers crying foul. Reinsurers--including Kemper Reinsurance, General Reinsurance, Allstate Insurance, and some underwriters at Lloyd's of London--were paid to provide backup coverage for Electric Mutual's policies with GE. These four reinsurers have filed lawsuits against the Massachusetts Insurance Div., seeking to reverse the move to Bermuda. Their primary worry: that GE will dictate when and how much reinsurers will have to pay on the GE claims. Those payments go to Electric Mutual, but would eventually flow to the sole creditor, GE. "The concern is that GE will control the show," says Debra J. Hall, general counsel for the Reinsurance Assn. of America. The Massachusetts regulators have asked the court to dismiss the suits, arguing that any harm to reinsurers is speculative.
INSIDERS? Electric Mutual's St. Laurent contends that the reinsurers' contractual obligations and legal defenses do not change simply because the company is in Bermuda. And a GE spokesman says the company did not direct Electric Mutual's restructuring. Still, the deal was handled by an Electric Mutual board elected largely by GE with four of its nine seats held by former GE executives, including St. Laurent, who headed investor communications at the Fairfield (Conn.) giant until 1989. And GE is now poised to take a direct role in the deal: On Dec. 20, the company agreed to pay roughly $125 million to buy the healthy Electric Insurance, which for now is controlled by Electric Mutual through a trust.
The expected liquidation of Electric Mutual highlights the problems insurers face as the costs of asbestos liabilities and environmental cleanup mount. Standard & Poor's Corp. figures that losses to insurers from claims related to pollution traceable in part to manufacturing by large industrial companies like GE, could top $40 billion--more than 20% of the industry's capital base. And as insurance companies are increasingly forced to pay claims tied to asbestos and environmental problems, they are turning to their reinsurers to cover part of the bill. The collection process can be particularly complicated in insolvencies like Electric Mutual's. "This is the issue for the 1990s," says Hall of the Reinsurance Assn. In the case of Electric Mutual, A.M. Best Co. analyst John H. Snyder figures that the bill to reinsurers for claims could be $100 million or more.
Environmental headaches were of little concern when Electric Mutual was founded in 1927 to provide workers' compensation coverage for GE employees. Over time, though, Electric Mutual expanded, providing multiple lines of business to GE, as well as to outside companies and individuals. Problems began to surface in the early 1990s as the company upped its reserves for future losses on policies in a number of product lines, a move that dragged down earnings. In 1994, Electric Mutual nearly doubled its reserves for asbestos and environmental liabilities, to $185 million. Most of that was tied to exposure to GE environmental liabilities at polluted sites around the country. It was those warning signs that set last year's reorganization in motion.
St. Laurent declines to comment on how the new environmental hit surfaced, citing the litigation surrounding the restructuring. But the filing by Electric Mutual for liquidation has raised eyebrows. "You don't just find out overnight that you have a huge environmental liability with a big industrial company like GE," says Best's Snyder, who slashed Electric Mutual's rating from A- to D after the disclosure. And Daniel R. Judson, deputy general counsel for the Massachusetts insurance regulator who signed off on the deal, said he had found "nothing in the record to indicate" that Electric Mutual would be liquidated when it moved to Bermuda.
Regardless of the questions surrounding Electric Mutual's collapse, it seems certain that GE will benefit by dealing with the claims in Bermuda instead of Massachusetts. While Electric Mutual executives decline to comment on how the company will be liquidated. But in Bermuda, creditors may choose an expedited workout, which is not available in Massachusetts. To wind up the process early, Bermuda liquidators can estimate all future claims, generating early payments to policyholders, and therefore early bills to reinsurers for those claims. That means policyholders may collect, and reinsurers may be asked to pay, on claims that haven't materialized yet. In Massachusetts, regulators liquidating an insurance company typically pay claims and bill insurers only as claims are brought. So, while liquidations in the U.S. can take more than 20 years to finish, the Bermuda approach has resolved liquidations in half that time. Unless reinsurers are able to block that process, in short, GE could get its claims money sooner.
"SUBSTANTIAL INFLUENCE." GE could also have a key role in how the insurance tab is calculated. While the state insurance commissioner usually oversees insolvencies in the U.S., in Bermuda creditors generally have a say in appointing the liquidator. So as the only creditor of Electric Mutual, GE may help select and oversee the liquidator. One Bermuda attorney, who declined to be named, says that if GE opts for the speedy resolution, the company will offer evidence of the claims it is likely to be owed in the future. In doing so, GE could help determine how much reinsurers pay on those claims. A General Reinsurance brief said the company "now faces the reality that GE has a substantial and unanticipated influence over the adjudication of GE's own claims."
If so, some reinsurers claim, this would not be the first time. They contend Electric Mutual has in the past cut deals with GE at reinsurers' expense. Electric Mutual filed four lawsuits in 1993 to force several London reinsurers to pay more than $40 million on environmental and asbestos claims the insurer had settled with GE. Attorneys for the reinsurers claim the losses were not covered under the Electric Mutual policies. "It is our position that there was collusion between Electric Mutual and GE," says Alice E. Richmond, an attorney who is representing the reinsurers in the still-pending lawsuits. "They just turned around to [the reinsurers] and said, `Pay us."'
GE's ingenious Bermuda gambit could allow it to reap substantial benefits from the liquidation of one of its own entities. But the coziness between Electric Mutual and GE may have a downside. The next time Electric Insurance, the surviving company, needs backup reinsurance coverage, some reinsurers could well run the other way.