Reinsurance Focus

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.

The New York State Insurance Department’s Office of General Counsel issued an opinion concluding that a New York domestic insurer may enter into a reinsurance agreement with an Illinois-based risk pooling trust and obtain credit for that reinsurance so long as the New York insurer holds funds provided by the trust in accordance with certain New York insurance law requirements. OGC Op. No. 08-10-02.

The Montana State Auditor’s office issued an advisory memorandum explaining how certain provisions in the Terrorism Risk Insurance Program Reauthorization Extension Act of 2007 may require Montana insurers to submit a filing of the disclosure notices, policy language, and applicable rates. Advisory Memorandum.

This post written by Dan Crisp.

The National Association of Insurance Commissioner’s consideration of proposals made by the ACLI is progressing, according to a release from the NAIC. The NAIC Executive Committee and Plenary on a January 2, 2009 conference call considered the Working Group’s recommendation, and decided to expose the recommendation for public comment (with a January 23, 2009 comment deadline) in advance of a January 27, 2009 public hearing in Washington, DC. The Working Group recommended adopting five of the ACLI’s nine proposals, including the one relating to reinsurance collateral requirements. The reinsurance proposal is now the subject of a proposed guidance letter.

This post written by Rollie Goss.

The Committee on Finance of the United States Senate has made available for public comment a draft bill which would amend the Internal Revenue Code to disallow the deduction of excess non-taxed reinsurance premiums paid to affiliates with respect to United States risks. There is no published comment period. The Committee’s staff has prepared a “technical explanation” of the draft, which includes an analysis of the present tax rules for insurance companies and reinsurance as well as an analysis of the proposed changes to the tax code. In an October 8, 2008 post, we profiled a similar bill introduced in the House, H.R. 6969. Opposition to the proposed tax changes has been submitted by the CEA, the European insurance and reinsurance federation.

This post written by Rollie Goss.

The Court hearing the criminal finite reinsurance case reported on previously has sentenced a former Gen Re executive to 2 years in prison, followed by 2 years of supervised probation, and a $200,000 fine. This sentence is substantially below federal sentencing guidelines. The Court had entered a ruling on loss calculation, victim enhancement and restitution, finding that 36 levels of enhancement are appropriate under federal sentencing guidelines, but not ordering restitution, despite finding that more than 250 investors had sustained losses aggregating $544-597 million. A sentence imposed in accordance with such a finding might be a life sentence for many, if not all, of the convicted executives. The convicted executives have submitted Supplemental Sentencing memoranda. The supplemental sentencing memorandum submitted by the recently sentenced defendant may be read here.

This post written by Rollie Goss.

Continuing a series of consent agreements, the Securities and Exchange Commission has resolved claims relating to the writing of finite reinsurance, entering into agreed Cease-and-Desist Orders with Zurich Financial Services and SCOR Holding (Switzerland) Ltd., f/k/a Converium Holding AG. The Orders detail the reinsurance transactions and side agreements that underlie the SEC’s allegations. The SEC released information about the agreements in a press release and a Litigation Release. In remediation, Zurich has agreed to pay a $25 million penalty and $1 in disgorgement. In re Zurich Financial Services, Admin. Pro. File no. 3-13306 (Dec. 11, 2008); In re SCOR Holding (Switzerland) Ltd., f/k/a Converium Holding AG, Admin. Pro. File no. 3-13307 (Dec. 11, 2008).

This post written by Rollie Goss.

The American Council of Life Insurers (ACLI) has submitted a proposal to the NAIC for immediate reforms to reserve and required capital standards for life insurance companies. One of the suggestions is to “facilitate Commissioners’ use of their existing discretionary authority under the Model Law and Regulation on Credit for Reinsurance to provide immediate relief to ceding insurers.” The ACLI proposes that the changes that it is suggesting take effect December 31, 2008, for the current calendar year. More information is available in a press release issued by the ACLI, a short summary of the proposals prepared by the ACLI and the ACLI’s letter to the NAIC, which categorizes the proposals as affecting the areas of life insurance, variable annuities, reinsurance, investments and accounting. The NAIC has assigned this proposal to the Capital and Surplus Relief (EX) Working Group of the Executive Committee. The Working Group is accepting comments on the ACLI’s proposal to the close of business December 26, 2008. Responses and comments from various areas of the NAIC are available. The NAIC also has created a “Grid of Information Relative to Each ACLI Request,” which may be of interest to those wishing to explore these suggestions.

This post written by Rollie Goss.

The NAIC's Financial Condition (E Committee) has approved the pending Reinsurance Regulatory Modernization Framework proposal. For a complete description of this action, as well as an update on the status of similar actions in Florida and New York, see the attached memorandum

This post written by Rollie Goss.

With the adoption of the Insurance Investment Act of 2008, Bermuda has adopted risk-based capital adequacy standards for “high impact insurers” and instituted a structure which will be equivalent to those in Europe's Solvency II Directive. The requirements include enhanced financial statement disclosures for Bermuda's Class 4 insurers which comply with Generally Accepted Accounting Principles (GAAP), re-classification of the Class 3 insurance sector, with sub-categories based upon risk profiles, and a new category of Special Purpose Insurer, which is focused on fully collateralized special purpose vehicles that are established to conduct certain transactions, especially those related to asset-backed securitizations. One goal of this new classification is to make it less costly for SPVs to be established in Bermuda. A press release issued by the Bermuda Monetary Authority briefly summarizes the Act.

This post written by Rollie Goss.

The Securities and Exchange Commission has filed a lawsuit against Prudential Financial, Inc., alleging violations of the financial reporting, books-and-records and internal control provisions of the Securities Exchange Act of 1934, based upon its former property and casualty subsidiaries (“Prupac”) entering into so-called finite reinsurance contracts with General Reinsurance Corporation. The SEC contends that the reinsurance agreements “had no economic substance and no purpose other than to build up and then draw down on an off-balance sheet asset, or 'bank,' that Gen Re held for Prupac.” Securities and Exchange Commission v. Prudential Financial, Inc., Case No. 08-3916 (USDC N. N.J. Aug. 6, 2008). The SEC reports that it has reached a settlement with Prudential, which has consented to a permanent injunction against further violations of certain sections of the Exchange Act and associated Rules. This is similar to an enforcement action filed by the SEC against Rennaisance Re (see November 6, 2006 blog post).

This post written by Rollie Goss.