Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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Reinsurance Regulation

GUILTY VERDICTS IN FINITE REINSURANCE TRIAL

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All five former executives of Gen Re and AIG charged in a criminal trial in federal court in Hartford, Connecticut were convicted on all counts in a trial in which it was alleged that certain reinsurance transactions fraudulently added $500 million to AIG's loss reserves. Former AIG Chief Executive Hank Greenberg was named in the case as an unindicted conspirator. The transactions were entered into after AIG's stock price fell on concerns over its loss reserve. The charges included conspiracy, securities fraud, mail fraud and making false statements to the SEC. Sentencing is set for May 15, 1008. United States v. Ferguson, Case No. 06-cr-137 (USDC D. Conn. Feb. 25, 2008).

This post written by Rollie Goss.

IRS WITHDRAWS PROPOSED MODIFICAITON OF CAPTIVE TAX BENEFIT

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In a November 5, 2007 post, we commented upon action of the IRS in proposing a regulation which would eliminate certain tax benefits for captive insurance and reinsurance companies. Following heavy lobbying from politicians, including governors and Senators from states with active captive insurer programs, and heavy lobbying from the captive industry, the IRS has withdrawn the proposed regulation and cancelled the upcoming hearing on the proposal. This action has been viewed in the trade press as being a substantial victory for captive insurers.

This post written by Rollie Goss.

LIQUIDATOR NOT BOUND TO ARBITRATE REINSURANCE DISPUTE WITH JOHN HANCOCK

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This dispute is between the Ohio Superintendent of Insurance, in her capacity as liquidator for Credit General, and John Hancock over amounts potentially owed by Hancock under 13 reinsurance agreements pursuant to which Hancock reinsured risks initially insured by the now-insolvent Credit General. The sole issue presented on this appeal was whether the provisions of the Ohio Liquidation Act precluded enforcement of arbitration clauses against the Superintendent of Insurance functioning as liquidator, when those arbitration provisions were part of a contract that the liquidator otherwise sought to enforce.

The state appellate panel held that the liquidator was not bound to the arbitration clause in a reinsurance agreement finding that the purpose of the Ohio Liquidation Act outweighed the public policies in favor of arbitration. The panel also disagreed with John Hancock’s argument that the Ohio Liquidation Act could not overcome the explicit enforcement of arbitration under the Federal Arbitration Act. The panel reasoned that under the McCarran-Ferguson Act, state statutes that govern the liquidation of insurers supersede federal statutes. Hudson v. John Hancock Financial Srvs., No. 06AP-1284 (Ct. App. Ohio, Dec. 27, 2007).

This post written by Lynn Hawkins.

IRS ISSUES GUIDANCE FOR CELL CAPTIVE INSURANCE ARRANGEMENTS

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The Internal Revenue Service has issued a Revenue Ruling, number 2008-8 and a Bulletin, IRB 2008-5, which address questions relating to the structuring of cell captive insurance arrangements for federal income tax purposes. The Bulletin “provides guidance on the standards for determining whether an arrangement between a participant and a cell of a Protected Cell Company constitutes insurance for federal income tax purposes, and whether amounts paid to the cell are deductible as “insurance premiums” under section 162 of the Internal Revenue Code.” The IRS is requesting comments on this issue by no later than May 4, 2008. The Revenue Ruling “explains how arrangements between an individual cell and its owner are analyzed for purposes of determining whether there is adequate risk shifting and risk distribution to constitute insurance.”

This post written by Rollie Goss.

RULING RELATING TO LEGION LIQUIDATION PROCEEDING STANDS

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In a May 14, 2007 post, we reported on the affirmance by the Illinois Court of Appeals of a summary judgment decision disposing of a dispute under quota share reinsurance agreements related to Legion Indemnity. Without a published opinion, the Illinois Supreme Court has denied review of the decision of the Court of Appeals. In re Liquidation of Legion Indemnity Company.