Zurich Pays $25 M To Settle SEC Charge Over Sham Reinsurance Deals

National Underwriter News
December 11, 2008

Zurich Financial Services has paid $25 million to settle a securities fraud action by federal regulators over its use of phony reinsurance transactions to pump up its financial statements.

The Zurich, Switzerland based corporation, which admitted no guilt, said it had settled the civil case to "eliminate the burden, expense and uncertainty of potential enforcement proceedings."

SEC's action stemmed from company activity from 1999 through 2001 with a former Zurich subsidiary, Converium Holding AG (now known as SCOR Holding (Switzerland AG). The company said, "None of the individuals responsible for these transactions has been employed by Zurich for several years."

According to the SEC announcement, the company helped Converium with a fraud that involved the use of finite reinsurance transactions to improperly inflate Converium's financial picture.

Zurich reinsurance group management Zurich Re, in 1999 developed three reinsurance transactions to obtain accounting benefits, SEC said.

The company was accused of making the transactions appear to transfer risk to third-party reinsurers, when, in fact, no risk was transferred outside of Zurich own entities.

For two of the Zurich transactions, the SEC said, the company ceded risk to third-party reinsurers, but took it back through retrocession agreements with another Zurich entity.

A third transaction, regulators said, involved ceding a risk to a third-party reinsurer, but at the same time entering into an undisclosed side agreement with the reinsurer under which Zurich Re agreed to hold the reinsurer harmless for any losses realized under the reinsurance contracts.

Because the risk actually remained with Zurich, the transaction should not have been accounted as reinsurance, the SEC explained. A number of entities used for the circular transactions were in Cologne Germany and the Barbados and only identified by letters of the alphabet.

The SEC complaint alleged the phony deals were part of misleading filings when Zurich spun Converium off in an initial public offering.

According to the government, Converium understated its reported loss before taxes by approximately $100 million or 67 percent in 2000, and by about $3 million or 1 percent in 2001, which had the effect of decreasing Converium loss ratios.

The complaint indicated that a motivating factor for some of the activity was Zurich executives' concerns in 2000 about the financial statement impact of Zurich Re's exposure to losses arising out of Zurich Re's involvement in the failed Unicover Occupational Accident Reinsurance Pool ("Unicover Pool").

Today's settlement took care of a lawsuit that was filed against the company in Manhattan U.S. District Court. SEC said it took into consideration cooperation the company had provided in accepting the settlement.

Paris-based SCOR, which purchased Converium in 2007 issued a statement noting that the events involving Converium, now known as SCOR Holding (Switzerland SHS), occurred before a November 2005 restatement of Converium's financial statements for the fiscal years ended Dec. 31 1998 through 2004. AG. It said SHS took part in the settlement without admitting or denying any wrongdoing ever associated with SCOR. There are no fines, disgorgement payments or financial remedies associated with the settlement.

"We are pleased that we have been able to conclude this legacy matter with the SEC relating to historical conduct at the former Converium, on a basis where no financial burden will be incurred. With this legacy matter behind us, we will continue to implement our strategy in order to ensure the long- term success of our company," commented Denis Kessler, chairman and chief executive officer of SCOR SE.

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