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10/21/2014 By Jonathan Terrell

The public comment period closed last Friday, October 17, in the matter of the proposed acquisition of OneBeacon Insurance Company and certain affiliates. This follows a Public Informational Hearing before the Pennsylvania Insurance Department (the “Department”) on July 23, 2014, and a reopening of the public comment period following it. I previously posted on the subject of my first expert report here and on my testimony at the hearing here.

Their Response

Following the written public comments and the live testimony at the hearing, OneBeacon Insurance Group (the Seller) and Armour Group Holdings (the Purchaser), were directed to respond to the numerous points raised by policyholders and reinsurers, who were unanimous in opposing the proposed transaction. A response to these points was filed by counsel for the Seller and the Purchaser on August 12, and a separate response was filed by Towers Watson, the firm of actuaries retained by the Seller.

Not only did these responses summarily dismiss every one of the objections raised by the various interested parties, they attack the professional integrity of those parties in some of the most highhanded language I have ever seen in this context. They save particular vitriol for my contributions, informing the public, inter alia, that:

“Mr. Terrell’s report is riddled with blatant factual errors”

“Mr. Terrell’s transparently inaccurate hyperbole is to pad the record with sensational claims”

“Mr. Terrell has not even attempted to present an accurate case”

Even Towers Watson informs the public that they would report me for disciplinary action if I were an actuary, and I had better be careful with the institute of my own professional body. When the normally staid members of the Actuarial Academy get so hysterical, you really know that you are on to something!

My Response

My Supplemental Expert Report, responding to OneBeacon, Armour, and Towers Watson, was filed with the Department on Friday, October 17, and can be downloaded here, or it can be found on the website of the Pennsylvania Insurance Department along with supporting documentation (documents 188-132). Other parties also filed supplemental reports. In particular, Alan Kaufman, a respected actuary with FTI, filed a compelling actuarial analysis demonstrating the chronic undercapitalization of the insurance companies that are the subject of the proposed acquisition.

I also responded to the request of the Department seeking suggestions for conditions that should be written into the proposed transaction in the event that it is approved. These suggested conditions include:

  1. $530 million in additional capital or $1.6 billion in additional retroactive reinsurance (endorsing the Kaufman conclusion).
  2. Establishment of a Dividend Retention Plan funded initially with $50 million, to maintain Risk-Based Capital ratios at 200% and with the opportunity for replenishment from the Seller’s ongoing operations.
  3. An investment guarantee from the Seller.
  4. The establishment of an independent claims monitor.
  5. The ongoing jurisdiction of the Department.

However, I conclude that the proposed transaction should be rejected in its present form as severely prejudicial to the interests of policyholders and the insurance-buying public.

What are your views on this important proposed transaction? Please comment here and watch for updates as KCIC closely follows the proceedings.

Jonathan Terrell

About Jonathan Terrell

Jonathan Terrell is the Founder and President of KCIC. He has more than 30 years of international financial services experience with a multi-disciplinary background in accounting, finance and insurance. Prior to founding KCIC in 2002, he worked at Zurich Financial Services, JP Morgan, and PriceWaterhouseCoopers.

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