New reinsurance-related and arbitration developments from Carlton Fields
In this Special Focus piece, entitled “The Benefits of Cat Bonds for Ceding Insurers and the Potential for Life and Annuity Risk Bonds,” Rollie Goss compares the relative advantages of catastrophe bonds over traditional reinsurance, as well as the developing market for transfer of life and annuity risks.
This post written by Rollie Goss.
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Swiss Re has released its annual insurance-linked securities (“ILS”) market update, noting that 2012 has seen the most active first half since the record-setting issuance in 2007 (and 2012 is not far behind). The ILS market – an alternative to traditional reinsurance – consists mainly of catastrophe bonds (or “cat bonds”) and longevity bonds, both of which serve as hedges against traditional insurance-based risks (property-casualty risks in the case of cat bonds, and “longevity” based risks associated with the life insurance, pension and annuity markets). A number of new sponsors came to market, with U.S. hurricane risk the most common covered peril for new issues. The update notes that sponsors are increasingly turning to “indemnity” triggers (coverage triggers based on loss levels, thus functioning more or less like traditional excess or reinsurance), rather than the industry index triggers that were previously more common. The update also notes that the market share for modeling firm AIR Worldwide has increased dramatically to 91%.
This post written by John Pitblado.
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Florida’s state-owned property insurer, Citizens Property Insurance Company, is the ceding insurer on the largest reinsurance cat bond ever to be placed, a $750 million hurricane risk bond issued by Bermuda special purpose reinsurer Everglades Re, which provides coverage for two years. This is Citizen’s initial cat bond, and the Citizens Board has authorized the purchase of private reinsurance for the 2012 hurricane season to supplement the risk transfer of the cat bond. This represents a significant expansion of the cat bond market. Reinsurance Focus blogmaster Rollie Goss and Carlton Fields attorney Bob Shapiro served as special reinsurance counsel to Citizens for the Everglades Re cat bond and for Citizens’ private reinsurance placements.
This post written by Rollie Goss.
See our disclaimer.
The United States Court of Appeals for the Second Circuit has vacated the criminal convictions of Gen Re and AIG executives stemming from a finite reinsurance transaction with undisclosed payments, which allegedly was intended to improve AIG’s financial statements without transferring any significant risk. A jury had convicted all of the defendants on all charges. The matter was remanded for a new trial. After hundreds of pages of briefing and numerous arguments of prosecutorial misconduct, erroneous evidentiary rulings and improper jury charges, the Court of Appeals found only two bases for vacating the convictions: (1) the admission of three bar charts which linked the decline in AIG’s stock price to the transaction at issue; and (2) a jury charge “that allowed the jury to convict without finding causation.”
The stock price evidence was interesting because the court found that “the charged offenses here do not require a showing of loss causation ….” Nevertheless, the prosecution sought to use causation evidence “to humanize its prosecution” and show that the transaction harmed AIG stockholders who had purchased AIG stock for their retirement accounts or the college funds of their children. The evidence presented the defendants with a dilemma: to allow the jury to attribute the full stock price decline to the transaction or introduce prejudicial evidence “of other besetting scandals, wrongdoing, and potentially illegal actions at AIG.” The defendants sought to sidestep the problem by stipulating to materiality, but the government refused. The court found that the district court’s admission of the charts was inconsistent with other rulings on the stock price issue, and was prejudicial to the defendants.
With respect to the jury charge issue, the court noted that the defendants did not specifically object to the causation instruction, which was the product of competing suggestions by counsel, but that the instruction nevertheless warranted reversal under the plain error rule, as it “is improbable, let alone ‘absolute[ly] certain[],’ that the jury based its verdict on a properly instructed ground.”
This opinion contains an extensive but relatively concise discussion of the finite reinsurance transaction at issue, and of the fact that low risk finite reinsurance transactions are acceptable, “and have their uses,” unless they violate FAS 113, the so-called 10-10 rule, entail no risk, and amount to fraud. The court described how this particular transaction was deliberately structured to conceal certain credits and repayments from the companies’ outside auditors. The court rejected all but two of the defendants’ numerous challenges, including allegations that one key prosecution witness had committed perjury, although it suggested that the government be circumspect about how his testimony is presented in a new trial. A major “take away” from this opinion is the clear holding that finite reinsurance transactions can be the basis for criminal convictions of the executives involved in such transactions. United States v. Ferguson, et al., No. 08-6211-CR (2d Cir. August 1, 2011).
This post written by Rollie Goss.
The recent earthquake and tsunami in Japan have roiled the reinsurance markets. In this Special Focus article, John Pitblado examines some of the ensuing bond issues the industry will want to watch carefully.
This post written by John Pitblado.