Then, of course, there was Eliot Spitzer, the powerful New York attorney general, who first triggered the current wave of regulatory probes by suing Marsh & McLennan Companies last October for alleged bid-rigging practices. In addition to seeing his brother former MMC Chief Executive Jeff Greenberg resign his post last October, Mr. Evan Greenberg also saw his own company embroiled in the scandal.

ACE, one of the insurers named in Mr. Spitzer's suit against MMC, ended up discontinuing contingency fees to insurers. The company also saw one employee plead guilty to a misdemeanor charge. That employee, Patricia Abrams along with ACE Casualty Risk President Geoffrey Gregory was terminated, with three others getting suspended last November. The company's own internal probe is scheduled to conclude soon.

Most recently, Connecticut Attorney General Richard Blumenthal filed a suit against MMC and ACE's Financial Solutions unit in January with a charge that Marsh secretly steered an $80 million workers' compensation state contract to ACE for an additional commission of $50,000. ACE said it would file a motion to dismiss the charge.

But despite a long list of distractions during the past year, ACE still performed solidly in its core operations of North American and international insurance operations in 2004.

“Considering the events cat, A&E action, the industrywide investigation into business practices ACE performed extremely well. I believe this speaks to the strength of our organization,” Mr. Greenberg emphasized to analysts last month after ACE's full-year financial results were released.

ACE reported $1.1 billion in income, down 20 percent on a year-over-year comparison, yet still at a robust level. Among major business units, ACE North American insurance operations had a $242 million profit for 2004down from $532 million a year ago because of third-quarter catastrophe losses. Overseas general insurance operations income improved to $523 million in 2004, up from $315 million a year ago.

ACE's 2004 profits were especially impacted by a $302 million after-tax charge for asbestos, environmental and other runoff charges recorded in the fourth quarter, and by $437 million in after-tax losses from 2004 hurricanes.

Mr. Greenberg said the 2004 figures were “obviously impacted by the reserve action we took,” commenting that this move “masks” the excellent and broad-based performance of ACE's active companies.

The $302 million reserve charge in the fourth quarter involved two ACE units Brandywine Holdings and ACE Westchester Specialty. The charge for Brandywinewhich houses most of ACE's A&E claim runoff exposures amounted to $279 million after taxes. It will result in a reserve boost of $788 million gross, or $339 million net of reinsurance and before tax.

The charge for ACE Westchester Specialty was much more modest at $19 million after taxes, reflecting a reserve boost of $200 million gross and $25 million net of reinsurance and before tax.

ACE picked up its old asbestos liabilities in 1999 when it bought Cigna Corp.'s global p-c insurance business for $3.5 billion. The Cigna deal actually had numerous positives for ACEit pushed ACE to move ahead by boosting its size, products and geographic jurisdictions around the world. But still, if ACE management knew then what it now knows about A&E liabilities, “it may very well have caused them to pause,” speculated A.M. Best Company's managing senior financial analyst, Joyce Sharaf, who monitors the Bermuda-based insurer.

On the other hand, Mr. Greenberg's emphasis on 2004 results was “good growth in net premiums written, strong underwriting gains, and excellent growth in investment income.”

“Our underwriting results,” Mr. Greenberg said, “were impacted by outstanding 2004 performance of our short-tailed business property lines in particular.”

ACE had $11.5 billion in p-c net premiums written for 2004, up from $10.2 billion a year ago. Its combined ratio in 2004 was 96.6, deteriorating from 91.5 in 2003 but still remaining at a profitable level.

“All in all,” Mr. Greenberg told analysts, “we had quite a good performance given the events of the year.” He pointed out that ACE p-c premium growth exceeded 20 percent, while investment income rose 16 percent to $1 billion for the year, though the insurer substantially added to its loss reserve position. “It speaks to our earnings power, our momentum and the increasing strength and depth of our balance sheet in general,” he said.

A.M. Best's Ms. Sharaf agreed with Mr. Greenberg's positive assessment. “ACE did very well despite two significant events one for the hurricane loss and then the A&E charge,” she said. “ACE showed that its underlying strength continued, even though it had challenges.”

A.M. Best currently has an “A” financial strength rating for ACE U.S. units and an “A-plus” financial strength rating for ACE Bermuda and reinsurance companies, with a “stable” outlook.

Jeff Berg, a senior analyst for Moody's Investors Service in New York, said, “If you look at their core, they did really well even in spite of a large catastrophe loss. When you also put the A&E charge in, it takes the year down a peg.”

“Still, earnings of billion-plus dollars are nothing to sneeze at,” Mr. Berg added.

Moody's currently has an “A3″ senior unsecured rating with a “Negative” outlook for ACE, while ACE American Insurance Company's “A2″ financial strength rating is under review. Meanwhile, ACE Bermuda Insurance's “Aa3″ financial strength rating remained “stable.”

But looking ahead, none of ACE's obstacles in 2004 are likely to disappear anytime soon. A.M. Best's Ms. Sharaf forecast that ACE's biggest challenge in 2005 will be the “proper execution of fundamentals, certainly including execution of profitable pricing” as the marketplace continues to soften.

“ACE needs to make sure it doesn't write underpriced business, making sure they continue to underwrite to a profit,” she explained. “It's extremely difficult to know what underpriced business is. It's very difficult for some companies to say no to underpriced business. That's ACE's challenge right now. Thus far they have done well in this regard.”

Mr. Berg added that ACE should make sure its premium growth is not overextended in the current market. Some insurance, Mr. Berg pointed out, has a very long-tailed nature and there are examples of insurers that have grown too fast and then been burned. Particularly in a softening market, he said, if a company maintains strong premium growth, “that can work as a double whammy, growing into even more exposure.”

Indeed, Mr. Greenberg noted that there are areas now where pricing levels “overshot the mark and are too low.” For example, he cited public directors and officers liability particularly the excess layers, and excess casualty in a number of areas, property-catastrophe and certain areas of energy exposure.

However, Mr. Greenberg emphasized that ACE is maintaining “underwriting discipline in the face of the softening market,” which is shown in ACE's slowing premium growth rates during 2004.

Still, A.M. Best's Ms. Sharaf remained cautious. She pointed out that under Mr. Greenberg's leadership as CEO, “all eyes will be on whether, in fact, he does do what he says about executing proper pricing in the softening market.”

Yet another critical issue ACE will wrestle with in 2005 is its continuing A&E exposure.

“The A&E is a lingering issue, creating a challenging environment for the company to operate in,” Mr. Berg from Moody's said. In fact, ACE's A&E exposure was a key driver in Moody's decision to put ACE on a “Negative” outlook.

Mr. Berg further acknowledged that the $302 million A&E charge was above his expectations, and that Moody's still feels there are significant uncertainties remaining. A.M. Best's Ms. Sharaf said the charge was actually somewhat less than what she anticipated but added that she suspects ACE is not done with A&E charges.

Ms. Sharaf noted that ACE is working diligently on trying to devise a financial solution to their A&E issue that would be “palatable to most everybody. But clearly this is a very difficult task.”

One way ACE was hoping to lose part of its A&E liabilities was by selling three of its runoff reinsurance units. ACE has already signed a definitive agreement with U.K.-based investment group Randall & Quilter Investment Holdings to sell these units.

But four competitors American International Group, Allstate Corp., Chubb Corp. and The St. Paul Travelers Companies are objecting to regulators about the deal, casting doubt on whether the transaction will be completed in the first half of the year as ACE had hoped.

But even if this particular transaction is in the bag, ACE's A&E businesses are not primarily housed in these reinsurance units, analysts observed. The A&E was mostly primary business written through the ACE USA franchise and the company will need to continue to work on the problem, they observed.

So what can they do now? “ACE is trying hard to come up with a solution,” Ms. Sharaf noted. “What that is, I don't think ACE knows yet…Whatever it is, it will be expensive.”

On top of all this, ACE will have to comply with ever-expanding regulatory probes. Mr. Greenberg said ACE's own internal review found that “to date, nothing and boy we are sure glad to report this nothing has been discovered that smells anything like what we have found in the excess casualty unit. So far it's all confined to that, and I expect that's how it?s going to conclude.”

Regarding the Connecticut attorney general's suit, Mr. Greenberg said ACE has looked into the complaint and “both we and our outside counsel believe it's without merit. We will be proceeding accordingly, beginning with a motion to dismiss, which we expect to file in the near future.”

Ms. Sharaf said these regulatory problems have yet to become a decisive ratings issue for her firm but that could change if something materially worse is revealed. “I have not seen any direct link between these issues and a negative business effect for ACE,” she said, “so for now, it's something we just are following. We are watching; we are questioning the company.”

Moody's Investors Service is also monitoring the investigation's progress, but Mr. Berg agreed that there is a possibility the probe could quickly turn into a “ratings issue.”

“Mr. Spitzer may be moving to the next stage. He can further progress down his investigation path,” Mr. Berg speculated. “That could mean additional information in the near term that might implicate ACE and other insurers and their employees.”

Reproduced from National Underwriter Edition, March 4, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.