Accounting for Reinsurance

REN RE FOUNDER AND FORMER CEO LIABLE FOR SECURITIES FRAUD

March 4, 2009 by Carlton Fields

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.

NEW YORK INSURANCE DEPARTMENT PROPOSES CHANGES TO REINSURANCE CREDIT REGULATION

February 6, 2009 by Carlton Fields

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.

FURTHER RULINGS IN FINITE REINSURANCE CRIMINAL ACTION

February 2, 2009 by Carlton Fields

AIG’s former vice-president of reinsurance has been sentenced in the criminal finite reinsurance prosecution to four years imprisonment, and fined $200,000. The court also has entered a Final Order of Forfeiture, in the amount of $5 million jointly and severally for all defendants. Gen Re has paid the $5 million amount in full. Perhaps more significantly, defendant Ferguson has appealed his conviction, and the government has appealed his sentence. The appeal means that the issue of the criminalization of the underlying disputed reinsurance contracting will be addressed by the Second Circuit.

This post written by Rollie Goss.

NAIC EXECUTIVE COMMITTEE REJECTS WORKING GROUP’S PROPOSALS

February 1, 2009 by Carlton Fields

On Tuesday, January 27, 2009, this author attended the NAIC Capital and Surplus Relief Working Group public hearing in Washington, D.C. The Working Group met to discuss its draft recommendations on nine insurance industry proposals offered by the ACLI designed to provide capital and surplus relief on life insurers’ December 31, 2008 statutory financial statements. One proposal offered by ACLI requested that regulators allow insurers to utilize the 2001 CSO Preferred Mortality Tables for contracts based on the 2001 CSO Mortality Table and issued prior to the January 1, 2007 effective date on which the Mortality Tables were set to become applicable. The Technical Group assigned to consider this proposal expressed concern that some companies may already be addressing the overly conservative reserves through a questionable reinsurance accounting practice. The Technical Group recommended that Insurance Commissioners consider requiring companies to demonstrate that they have not used such reinsurance accounting practices before allowing the company to utilize the new Mortality Tables. Another proposal related to collateral for reinsurance transactions. After spirited discussion among regulators, industry representatives, and consumer advocates, the Working Group formally approved each of its prior draft recommendations and forwarded its recommendations to the NAIC Plenary Body.

On Thursday, January 29, the NAIC Executive Committee held a teleconference vote on the proposals forwarded by the Capital and Surplus Relief Working Group. The Executive Committee, in a near unanimous vote, rejected the Working Group’s recommendations noting that neither the ACLI nor any insurance company provided sufficient information to justify enacting these proposals on an emergency basis.

The Executive Committee concluded that NAIC Working and Technical groups should continue to provide feedback and guidance during the current financial crisis. The Committee commented that companies should continue to work with their state regulators to maintain sufficient capital, and that the NAIC was open to considering these issues again in the future. Read the NAIC's release on the action..

This post written by John Black.

SECURITIES FRAUD CLASS ACTION AGAINST MBIA NOT OVER YET?

January 28, 2009 by Carlton Fields

In a March 8, 2007 post, we covered the district court dismissal of a securities fraud class action against MBIA as time-barred. The plaintiffs alleged that MBIA’s financial statements were materially misstated because MBIA had booked proceeds from a series of retroactive reinsurance agreements as income when these agreements were actually loans. The district court determined that the plaintiffs were on inquiry notice of the alleged fraud for more than two years prior to commencing the action and granted MBIA’s motion to dismiss. On appeal, the Second Circuit affirmed the dismissal of the case as time-barred, interpreted the dismissal to be without prejudice, and remanded the matter to the district court. Prior to the district court’s order of dismissal, the plaintiffs had sought leave to file an amended complaint. The circuit court’s ruling allows the plaintiffs to file their amended complaint, which likely will have to allege diversity jurisdiction and state law claims with a longer statute of limitation period. City of Pontiac General Employees’ Retirement System v. MBIA, Inc., Case No. 07-1117-cv (2d Cir. Nov. 12, 2008).

This post written by Dan Crisp.