Are indictments on finite deals in the works for other insurers?

Business Insurance
February 6, 2006
Posted February 10, 2006

Observers say the scope of the federal investigation of questionable accounting techniques related to finite insurance could expand to other companies.

Criminal indictments were issued by a federal grand jury in Norfolk, Va., last week naming former General Re Corp. and American International Group Inc. officials, while the U.S. Securities and Exchange Commission also filed a lawsuit. Both the indictments and the lawsuit focused on a retrocessional loss portfolio transaction between Gen Re and AIG.

No other companies' officials have, at least so far, been named in comparable proceedings, although regulators have investigated several other firms.

Regulators' interest in finite coverage, though, has already led to the virtual disappearance of the products from the insurance and reinsurance markets.

Mark K. Schonfeld, director of the SEC's Northeast regional office, said in a statement, "This case shows the commission's continued commitment to pursuing cases involving the fraudulent abuse of insurance and reinsurance to manipulate a public company's financial results."

"A lot of the accounting techniques that were used by General Re and AIG were the types of techniques that were used by other companies as well," said Robert Heim, an attorney with Meyers & Heim in New York.

"I think it's just a question of whether enough evidence can be gathered against other individuals to make additional cases" elsewhere, said Mr. Heim.

"It's hard to believe that this did not occur at other carriers as well, that this was something just isolated to these two companies," said Jerry Reisman, a defense attorney with Reisman, Peirez & Reisman in Garden City, N.Y. Someone may well have had the attitude that if something may have worked for AIG, "let's see what we could do with another company," he said.

"It is not fair to assume that a broad and active investigation involving two or three other companies necessarily means it will extend investigations into the entire industry," said Jacob S. Frenkel, an attorney with Shulman, Rogers, Gandal, Pordy & Ecker P.A. in Rockville, Md. "That said, the nature of the allegations is such that it certainly is likely that they will go beyond these companies," Mr. Frenkel said. "They certainly have taken on others."

The SEC has notified Pembroke, Bermuda-based RenaissanceRe Holdings Ltd., for example, that it may face civil charges related to finite transactions that led to the reinsurer's earnings restatement in February. Its founder and chairman and CEO, James N. Stanard, resigned in November amid the finite risk-related probes.

Armonk, N.Y.-based MBIA Inc. began settlement talks last year after it was served with a "Wells" notice, which informs recipients that the SEC is considering filing civil charges against them for violating securities laws. A Wells notice gives its recipient an opportunity to respond before the SEC takes action.

In November, the financial guaranty insurer said it was setting aside $75 million for an expected settlement of SEC and state investigations into its use of retroactive reinsurance to cover a massive bond loss.

In addition, federal prosecutors in New York have subpoenaed Chubb Corp., and the SEC subpoenaed General Electric Co. The GE subpoena also applied to GE affiliates Genworth Financial Corp. and GE Life & Annuity Assurance Co.

Last year, New York-based Trans-atlantic Holdings Inc. also disclosed that the New York Insurance Department had subpoenaed information regarding its dealings with a Cayman Islands-based malpractice reinsurer owned by a former official of Arthur J. Gallagher & Co.

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