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NEW YORKSeveral captive insurers writing workers compensation programs are waiting to see how much they will recover from a Bermuda-based reinsurer that collapsed this summer only two years after it was formed.
Hatteras Reinsurance Ltd., licensed in 2004, was ordered into liquidation by a Bermuda court in June after auditors expressed doubts about the "validity of certain documents" backing the value of one of the reinsurer's principal assets. Documents included a falsified audit opinion attached to the financial statement of a trust fund in which Hatteras claimed an investment, Bermuda regulators charged.
Hatteras reinsured workers comp and auto liability programs for a handful of companies or their captives, including Philadelphia-based food service company Aramark Corp.; Gevity HR Inc., a Bradenton, Fla., staff leasing company; Electronic Data Systems Corp. of Plano, Texas; and Windsor, England-based InterContinental Hotels Group P.L.C.
Separate premium trust accounts that Hatteras set up for all of these companies, except for Gevity, will continue to pay claims under agreements reached with Hatteras' liquidators, court records show. Gevity reached its own settlement with the liquidators in September, recovering most of its premium and retaining a claim against Hatteras for the cost of replacement coverage.
Whether the policyholders ultimately recover all of the losses Hatteras would otherwise have paid remains to be seen.
Ken Coleman, a lawyer representing the Bermuda liquidators in an ancillary proceeding in U.S. Bankruptcy Court in New York, said the extent of Hatteras' insolvency is not yet known. The liquidators, partners of KPMG in Bermuda, are preparing a financial statement for the reinsurer, he said.
Hatteras was incorporated and licensed in Bermuda in mid-2004 by Frank P. Meadows III, a Rocky Mount, N.C., businessman. He recently resigned as chief executive officer of The Nottingham Co., a company he founded that provides administrative and regulatory compliance services to mutual funds. He is also the principal of several other North Carolina corporations involved in real estate and other businesses, state corporation records show.
He previously had a run-in with regulators: In 1997, the Securities and Exchange Commission charged that he improperly diverted money from funds managed by Nottingham and altered accounting records related to the transfers. Mr. Meadows and Nottingham paid fines of $35,000 and $15,000, respectively, SEC records show.
Mr. Meadows and his lawyer in the Hatteras matter could not be reached.
About three months after licensing Hatteras, the Bermuda Monetary Authority granted the reinsurer's request to reduce its statutory solvency margin to $120,000 from the minimum $1 million required under the island's insurance law, according to an affidavit filed in the liquidation by Jeremy Cox, Bermuda's supervisor of insurance. In granting the request, the BMA ordered Hatteras not to write any business that was not fully secured by collateral.
In June 2005, though, the company's Bermuda manager, Independent Management Ltd., told regulators that Hatteras had written risk-bearing business, violating the order. Regulators then required Hatteras to submit a revised business plan and raise new capital.
The reinsurer subsequently reported it had issued $30 million in preferred stock to NB&TC Holding L.L.C.-a North Carolina company controlled by Mr. Meadows-in exchange for rights to a stake in Pamlico Enhanced Cash Trust. Pamlico was a Delaware trust, funded by Pamlico Asset Management Ltd. of the Cayman Islands and for which Mr. Meadows acted as the individual trustee, state records show.
Meanwhile, Hatteras was to submit its first financial statement to regulators by the end of April 2005 but was allowed to change its fiscal year end to Sept. 30. This pushed the deadline for its first statement to January 2006, according to Mr. Cox's affidavit. In January, Hatteras got a three-month extension, but as of April 30 still had failed to file a financial report.
The reinsurer's auditor, Arthur Morris & Co., had been unable to complete its work, regulators learned, because of "doubts regarding the validity" of documents related to the Pamlico investment, Mr. Cox's affidavit says. One was an audit opinion on Pamlico, purportedly issued by Deloitte & Touche in the Cayman Islands; Deloitte told Arthur Morris in May, though, that it had never issued the opinion and had not done audit work for Pamlico.
The BMA obtained a liquidation order on June 7 and the next day won a temporary restraining order from the New York bankruptcy court freezing the reinsurer's U.S. assets.
Liquidators have since found documents indicating the Delaware Pamlico trust-renamed the Pamlico Short Term Income Fund-was terminated as of March 17, 2006. A Delaware corporate filing canceling the trust was signed by Frank P. Meadows Jr., a Rocky Mount lawyer who is Mr. Meadows' father, court records show.
Mr. Meadows Jr. could not be reached, and lawyers for the Hatteras liquidators would not comment on the status of the Pamlico asset.
In an interview, Mr. Cox declined to answer questions about Hatteras specifically, including its reasons for seeking a reduction of its solvency margin in 2004. Generally, though, the BMA would not grant such a request to a company assuming risk and would only allow it for rent-a-captive or segregated portfolio companies whose business is fully secured, he said.
Mr. Cox added that regulators would not extend reporting deadlines without preliminary financial data showing no problems and "solid reasons" for the extension. "The BMA followed its processes as it should" and moved quickly once it saw there was a problem with Hatteras, he said.
Several workers comp policyholders are among the largest creditors in the Hatteras liquidation (see story, page 41).
The liquidators, meanwhile, are pursuing other potential assets of the Hatteras estate. Before Hatteras' collapse, for example, Mr. Meadows used $5 million of the reinsurer's funds to buy a Beechcraft twin-engine jet, transferring ownership to Air Roxanne L.L.C., a North Carolina corporation he controls, liquidators charge in a court filing. Air Roxanne sought to sell the jet in July, and liquidators and Mr. Meadows have agreed that the proceeds will be held in trust until the bankruptcy court rules on their disposition.