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In its suit against three former RenaissanceRe Holdings Ltd. executives, the Securities and Exchange Commission alleges that the individuals played various roles in carrying out a two-part sham reinsurance transaction struck in 2001 between RenaissanceRe and Inter-Ocean Reinsurance Co. Ltd.
According to the complaint, RenaissanceRe was "flush with earnings" in late 2000, so the company's top officials began developing strategies to protect future earnings in the event it was forced to pay claims for major losses that it could not adequately reinsure.
In January 2001, company Chairman and Chief Executive James N. Stanard sent an e-mail to company Controller Martin J. Merritt, Senior Vp Michael W. Cash and others, asking them to try to "structure a ceded contract that allows us to 'put away' $25 million," the suit says.
As a result, Messrs. Cash and Merritt negotiated a deal with Inter-Ocean and American Re-Insurance Co., "which managed Inter-Ocean through a subsidiary," the suit said.
American Re and RenaissanceRe both are shareholders in Inter-Ocean, a finite risk reinsurer that entered runoff last year (BI, April 11, 2005).
The suit also notes that an internal American Re e-mail showed that RenaissanceRe asked American Re "not to 'widely broadcast' its proposal 'given the nature of the transaction."'
A spokeswoman for Princeton, N.J.-based American Re, which last month changed its name to Munich Reinsurance America Inc., declined to comment on the suit.
The eventual transaction--which regulators said was "a round trip of cash" and "had no economic substance and no purpose other than to smooth and defer $26.2 million of RenRe's earnings from 2001 to 2002 and 2003"--involved two principal parts, according to the suit.
The first contract, entered into in April 2001, purported to assign $50 million of recoverables due to RenaissanceRe under certain industry loss warranty contracts to Inter-Ocean in exchange for $30 million in cash. The eventual result was a net transfer to Inter-Ocean of $20 million, the SEC said.
RenaissanceRe recorded income of $30 million upon executing the assignment agreement, and the remaining $20 million was considered a "bank" that the company could tap later if it needed to boost income, the suit alleges.
RenaissanceRe entered into the second contract with Inter-Ocean in July 2001, which served solely as a vehicle to refund the $20 million transferred under the assignment agreement--plus a purported premium of $7.3 million paid under the reinsurance deal--to RenaissanceRe, the SEC said.
Both contracts worked in tandem to create a "cookie jar" of earnings into which the company could place excess revenue from "one good year to be drawn upon in a future period," according to the complaint.
The suit notes that recovery under the reinsurance agreement was limited to funds--including the $20 million transferred under the assignment agreement and the premium RenaissanceRe paid Inter-Ocean--that Inter-Ocean held in a trust. In addition, the suit charges that the triggers under the reinsurance agreement were "illusory" as they were structured in a way that guaranteed they would be met.
"The assignment agreement was not a true assignment but at best a temporary deposit, and the reinsurance agreement transferred no risk to Inter-Ocean because RenRe paid Inter-Ocean the entire amount it would recover under the reinsurance agreement," the suit said.