Reinsurance Focus

New reinsurance-related and arbitration developments from Carlton Fields

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Week's Best Posts

FURTHER RULINGS IN FINITE REINSURANCE CRIMINAL ACTION

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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

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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.

UK COURT OF APPEALS DISMISSES REINSURER’S APPEAL OF DECISION FINDING CREATION OF REINSURANCE CONTRACT PRIOR TO CASUALTY

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We previously posted on November 12, 2008 about a British court’s decision holding that a reinsurance contract was created prior to a putatively covered ocean-going casualty, based on certain written exchanges between the parties reflecting their negotiations. The reinsurer, Aigaion Insurance Company S.A. (“Aigaion”), appealed, arguing that the lower court’s decision was unclear, and that even if a contract had been formed, it contained a warranty provision allowing the policy to lapse without notice in the case of non-payment of premium (the parties did not dispute that the reinsured, Allianz Insurance Company of Egypt, forwarded timely premium payment to an intermediary broker, who failed to then forward payment to Aigaion).

The Court of Appeals disagreed with Aigaion, finding no basis for its appeal, which it dismissed. The Court found that whether or not the parties negotiated the warranty provision Aigaion sought, it was nonetheless not explicitly included in the terms of the agreement that the lower court had found the parties made by a date certain which, at the latest, preceded the casualty. Allianz Insurance Company of Egypt v. Aigaion Insurance Company, S.A. [2008] EWCA Civ 1455 (Court of Appeals, Civ. Div. Dec. 19, 2008).

This post written by John Pitblado.

COURT COMPELS TRUSTEE OF TRUST AGREEMENT INCORPORATED INTO REINSURANCE CONTRACT TO ARBITRATION

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Homestead Insurance Company (“Homestead”) entered into a reinsurance contract with Interstate Guaranty Insurance Company (“Interstate”). Under applicable Georgia insurance regulations, Interstate was required to place funds in a trust for Homestead’s benefit to protect Homestead in case Interstate became insolvent. Thereafter, Homestead, Interstate and Wachovia Bank entered into a trust agreement, with Wachovia serving as Trustee. The trust agreement contained provisions incorporating it into the reinsurance contract. The reinsurance contract contained an arbitration clause mandating arbitration as a condition precedent to a lawsuit where disputes arose concerning either “the interpretation of [the reinsurance] Agreement” or the “rights of either party” thereunder.

After dispute arose between Homestead and Wachovia pertaining to Wachovia’s conduct as Trustee, Homestead filed an action in New Jersey state court (which was ultimately removed and transferred to Georgia federal court) to compel Wachovia to arbitration as required under the reinsurance contract. Wachovia argued that it was not a party to the reinsurance contract, and thus was not bound by the provision mandating arbitration. However, the court agreed with Homestead, citing terms of the trust agreement that indicated the parties’ intent to incorporate it in its entirety into the reinsurance contract, and finding that the Trust Agreement incorporated by reference the arbitration clause of the Reinsurance Agreement. The court found that the interpretation of the Trust Agreement came within the scope of arbitrable issues. After the court denied Wachovia’s motion to reconsider, Homestead dismissed the case with prejudice. Homestead Insurance Company v. Wachovia Bank, N.A., Case No. 07-2821 (USDC N.D. Ga. 2008).

This post written by John Pitblado.

TROUBLED FINANCIAL GUARANTY INSURER RESTRUCTURES

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CIFG Holding, Ltd., the holding company for CIFG's financial guaranty subsidiaries, has reached an agreement to commute approximately $12 billion in troubled credit swaps and reinsure $13 billion of municipal bonds. The transactions were announced in a press release by CIFG and a news release from the New York Insurance Department. According to New York Superintendent Eric Dinallo, the result will be that the bonds are novated to Assured Guaranty Corp., with the municipal bonds going from junk bond to highest investment grade rating, leaving CIFG as a solvent bond insurer in a position to pay claims on its remaining policies. The consideration for the transactions include cash payment and equity consideration. The result is a change in the controlling shareholders of CIFG, with changes in senior management expected.

This post written by Rollie Goss.