Reinsurance Focus

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.

In August, a federal judge preliminarily approved a settlement agreement in a class action against Swiss insurance company, SCOR Holding AG. (See 4/10/2008 blog posting for details on class certification decision). The settlement would resolve claims by U.S. investors that the company’s predecessor, Converium Holding, misrepresented the company’s financial strength to investors during an initial public offering. SCOR has agreed to pay $75 million to resolve claims arising from Converium Holding AG’s IPO in December 2001. Converium’s former parent company, Zurich Financial Services, will pay $9.6 million to U.S. investors who purchased Converium stock on the New York Stock Exchange and the SWX Swiss Exchange. Both SCOR and Zurich have reached separate settlement agreements with foreign investors. Details are available in both the court’s Preliminary Approval Order and in the Memorandum of Law filed by Plaintiffs in support of the approval of the proposed settlement. In re SCOR Holding (Switzerland) AG Securities Litig., Case No. 04 Civ 7897 (S.D.N.Y. Aug. 11, 2008).

This post written by Lynn Hawkins.

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.

The Florida Hurricane Catastrophe Fund has agreed to a creative way to fund potential hurricane losses, and create liquidity, agreeing to pay Berkshire Hathaway $244 million for its agreement to buy $4 billion in 30-year tax-exempt bonds if the Cat Fund suffers insured hurricane losses in excess of $25 billion this year. Press reports state that the Cat Fund is looking to this mechanism to enable it to act quickly to reimburse insurers for incurred losses.

This post written by Rollie Goss.

As reported in a March 3, 2008 post, the Court had scheduled sentencing in the finite reinsurance matter in US District Court in Connecticut for May 15, but sentencing has been continued pending the submission of certain expert reports. The court has ruled upon motions for acquittal or a new trial filed by the defendants, denying the motions. United States v. Ferguson, Case No. 06-cr-137 (USDC D. Conn. May 15, 2008).

This post written by Rollie Goss.