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New reinsurance-related and arbitration developments from Carlton Fields

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Accounting for Reinsurance

AIG SETTLES FINITE REINSURANCE DISPUTE WITH PENNSYLVANIA DEPARTMENT OF INSURANCE

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AIG has settled issues with the Pennsylvania Department of Insurance arising out of finite reinsurance and bid-rigging allegations, agreeing to pay over $9 million in penalties and costs. This is the largest penalty ever levied upon an insurer by the department. The finite reinsurance issues arose out of one of the transactions included in the recent criminal conviction in Connecticut. New compliance measures are included to ensure accurate financial reporting and increased transparency of commission payments to agents and brokers. Details of the settlement are generally set out in a press release issued by the Department, and in a detailed settlement agreement.

This post written by Rollie Goss.

COURT DECLINES TO DISMISS COMPLAINT REGARDING LETTER OF CREDIT POSTED AS SECURITY FOR REINSURANCE

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Letters of credit were posted as security for a loss fund in an off-short based rent-a-captive reinsurance program. When the reinsurance program ended, and the remaining claims were finalized, it was agreed that the obligors on the letters of credit had satisfied their obligations under the program and that the letters of credit should be returned. The party holding the letters of credit contended, however, that they were legally entitled to retain the letters of credit for use in unrelated rent-a-captive programs. The obligors sued, seeking damages for the failure to release the letters of credit, alleging breach of fiduciary duty and violation of Connecticut’s Unfair Trade Practices Act. The district court denied a motion to dismiss, relying upon the fact that the letters of credit were the property of the obligors, but that the holder was exercising complete control over the instruments. WEB Management LLC v. Arrowood Indemnity Co., Case No. 07-424 (USDC D. Conn. Mar. 5, 2008).

This post written by Rollie Goss.

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.

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.