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Reinsurance Transactions

NAIC GROUP MEETS TO DISCUSS POTENTIALLY ABUSIVE USE OF CAPTIVES

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The NAIC Captive and Special Purpose Vehicle Use Subgroup held a meeting on August 11, 2012 to discuss the Subgroup’s Captives and Special Purpose Vehicles draft White Paper. The Subgroup was formed earlier this year, the draft White Paper explains, to address the broadened use of captives and the potential concern that a “shadow insurance industry is emerging.” The draft White Paper addresses, in some detail, state authority over captives and SPVs, transparency and confidentiality requirements, the types of business and risks ceded to captives and SPVs, capitalization standards, accounting and reporting requirements, credit for reinsurance, and holding company analysis considerations.

A primary concern of the Subgroup is that some captives and SPVs may be being used as a means to avoid statutory accounting rules. The White Paper concludes that, in the transactions the Subgroup reviewed, regulators properly required that transactions made with captives to support economic reserves be backed with investment grade, liquid assets, such that the “net result” of the transactions be that “collectively the ceding insurer and captive have liquid assets supporting GAAP equivalent reserves.” The White Paper also makes recommendations regarding the accounting treatment for XXX and AXXX reserve redundancies, and encourages states with active captive and SPV markets to adopt the NAIC’s Special Purposes Reinsurance Vehicles Model Act, and further suggests that changes might be made to this model act to encourage states to adopt it. Minutes of the August 11 meeting and minutes of prior meetings of the subgroup held by conference call are available for review.

This post written by Ben Seessel.

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SWISS RE ILS MARKET UPDATE

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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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PROSECUTORS TO DISMISS INDICTMENT AGAINST GEN RE AND AIG EXECUTIVES

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On August 2, 2011, we reported on a decision by the United States Court of Appeals for the Second Circuit to vacate the criminal convictions of Gen Re and AIG executives stemming from an allegedly fraudulent finite reinsurance transaction designed to improve AIG’s financial statements. On June 22, 2012, the defendants entered into agreements with prosecutors to defer prosecution and dismiss the indictments after passage of one year, subject to the defendants’ respective payment of fines ranging from $250,000 to $100,000, and compliance with other conditions. The agreements identified “relevant considerations” to their execution, namely, (a) the Second Circuit’s vacatur decision, (b) the 12 months time that has now elapsed since the defendants’ conduct, (c) the significant resources required to conduct a retrial, (d) the defendants’ payment of fines, (e) SEC penalties, and (f) defendants’ admission that certain “aspects” of the reinsurance transaction were fraudulent. United States v. Ferguson, Case No. 3:06CR137 (USDC D. Conn. June 22, 2012).

This post written by Michael Wolgin.

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MULTI-STATE COMPACT FOR SURPLUS LINES TAX COLLECTION (NIMA) IS SHEDDING MEMBERS

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Several states have recently withdrawn from the Nonadmitted Insurance Multi-State Agreement (“NIMA”), the interstate compact sponsored by the NAIC to collect and allocate surplus lines tax revenues consistent with Dodd Frank’s Nonadmitted and Reinsurance Reform Act of 2010 (“NRRA”). We have reported earlier on NIMA’s development and progress. States that have withdrawn include Alaska, Connecticut, Mississippi, Nebraska and Hawaii. Departing states have cited several reasons for withdrawing: the lack of a financial benefit from participating; the increased burden and cost in overseeing and auditing NIMA’s Clearinghouse; increased costs imposed on brokers and insureds from the Clearinghouse’s service fee; and conflict with state insurance laws on reporting requirements. Mississippi is among the states withdrawing notwithstanding that its insurance commissioner was a principal officer of NIMA. NIMA’s remaining members include only Florida, Louisiana, Nevada, Puerto Rico, South Dakota, Utah and Wyoming.

This post written by Ben Seessel.

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CITIZENS PROPERTY INVOLVED IN LARGEST CAT BOND EVER

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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.

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