Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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Reinsurance Regulation

REN RE FOUNDER AND FORMER CEO LIABLE FOR SECURITIES FRAUD

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The most recent development in the saga of Ren Re’s finite reinsurance story is a civil enforcement action by the SEC alleging federal securities fraud against Ren Re’s founder and former CEO and Chairman, James Stanard. After a bench trial, the court entered a detailed set of findings and conclusions, concluding that the accounting for one of the reinsurance transactions at issue had been fraudulent. The court found Stanard liable for violations of the anti-fraud provisions of Securities Act Section 17(a) and Exchange Act Section 10(b). The court also determined that Stanard violated Exchange Act Rule 13(a)-14, Rule 13b2-1 (Falsification of Accounting Records), Rule 13b2-2, 13(b)(5) and found Stanard liable for aiding and abetting liability for the above violations.

The court entered a final judgment permanently enjoining Stanard from future violations of the federal securities laws but did not bar him from serving as an officer or director of a public company in the future. The court ordered Stanard to pay $100,000 as a civil penalty. SEC v. Standard, Merritt & Cash, Case No. 06-7736 (USDC S.D.N.Y. Jan. 27, 2009).

This post written by John Black.

COURT APPROVES COMMUTATION AND SETTLEMENT BETWEEN RELIANCE INSURANCE COMPANY (IN LIQUIDATION) AND REINSURER

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In an opinion illustrating the principles for the approval of commutations in liquidation proceedings, a Pennsylvania state court approved a commutation and settlement agreement by and between Reliance Insurance Company (“Reliance”) and General Security National Insurance Company, formerly known as Sorema North America Reinsurance Company (“GSN”). Under the terms of the agreement, GSN agreed to pay Reliance $13,000,000 in exchange for a release of all past, present, and future liabilities which have arisen or may arise under certain reinsurance contracts issued by GSN to certain enumerated Reliance subsidiaries (though generally excluding certain foreign subsidiaries). The court found that the agreement constituted a fair and reasonable settlement of GSN’s past and potential future obligations to Reliance under the reinsurance agreements recited. Ario v. Reliance Ins. Co., Docket No. 269 M.D. 2001 (Pa. Commw. Ct. Dec. 30, 2008).

This post written by John Pitblado.

LIFE INSURERS LOOK TO STATES FOR CAPTIAL AND RESERVE RELIEF AFTER NAIC REJECTS INDUSTRY-WIDE RELIEF

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In the aftermath of the NAIC vote rejecting the requests of the American Council of Life Insurers for industry-wide capital and reserve relief, individual companies have applied to their domiciliary regulators for relief. Some state insurance departments have used permitted practice rules to allow companies temporary relief. For example, the Iowa Department, in Bulletin 09-01, has adopted a modified practice of accounting for deferred taxes which has provided relief to at least ten companies. The Ohio Department has adopted three bulletins, 2009-02, 2009-03 and 2009-04, which provide relief through three different accounting practices. These changes reportedly will provide relief to 20 companies. Connecticut and Indiana have also provided relief to companies domiciled in their state. It is unclear what the impact will be if states approve different and potentially conflicting practices.

This post written by Rollie Goss.

APPELLATE COURT HOLDS THAT SELF-INSURER GROUP IS ENTITLED TO COVERAGE THROUGH STATE INSURANCE GUARANTY ASSOCIATION

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The Louisiana Safety Association of Timbermen – Self Insurers Fund (the “Fund”) is a self-insurance group formed by member companies as a means of securing workers compensation coverage for their employees. In 1998, the Fund obtained statutorily required excess coverage from Reliance Indemnity Company, and in 2001 Reliance became insolvent. The Fund filed proofs of claim against Reliance with the Louisiana Insurance Guaranty Association (“LIGA”). LIGA denied the claims, asserting that the Fund was an insurer and the excess coverage was reinsurance, thus removing the claims from coverage by LIGA under the terms of governing state statutes. The fund brought suit to establish coverage for all past and future claims.

The trial court granted summary judgment to the Fund. The Louisiana Appellate Court affirmed, citing the terms of applicable workers compensation and insurance guaranty association statutes to support its determination that the excess coverage the Fund obtained was not “reinsurance” as that term is used under applicable statutes and that the Fund is not an “insurer” causing it to become statutorily exempt from coverage through LIGA. The Court also rejected LIGA’s argument that a statutory exclusion of coverage to any self-insured corporation with a net worth above $25,000,000 should apply to the Fund’s member companies in the aggregate. The court found that the member companies were not “affiliates” of one another as the term is used in the statute and thus held that their net worth should not be aggregated for purposes of the statutory exclusion. Louisiana Safety Assoc. of Timbermen – Self Insurers Fund v. Louisiana Ins. Guaranty Assoc., No. 43,615–CA (La. Ct. App. Dec. 3, 2008).

This post written by John Pitblado.

NEW YORK INSURANCE DEPARTMENT PROPOSES CHANGES TO REINSURANCE CREDIT REGULATION

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The New York Insurance Department has proposed a revision to Regulation No. 20 (121 NYCRR 125) – Credit for Reinsurance from Unauthorized Insurers. The Department has published a summary of the proposed amendment, and the Notice of Proposed Rule Making notes that comments will be accepted until 45 days after the publication of the Notice. We have confirmed with the Department that the comment period closes February 9, 2009. The amendment proposes to apply principle-based credit risk management standards to all licensed ceded insurers, and provides an alternative credit for reinsurance ceded to unauthorized reinsurers, which adjusts the credit that the ceding insurer may take on its financial statement based upon the financial strength of the unauthorized assuming reinsurer. The financial strength determination is based upon ratings by Standard & Poor’s, Moody’s Investor Services, Fitch Ratings, A.M. Best Company or any other rating agency recognized by the Securities Valuation Office of the NAIC.

This post written by Rollie Goss.