RenaissanceRe Holdings Ltd. has agreed to pay a $15 million fine to settle civil securities-fraud charges by federal regulators over what they said was a sham transaction designed to burnish its earnings by smoothing their volatility.
The settlement, announced by the Securities and Exchange Commission, was the second such action in about a week to come out of the SEC’s investigation into so-called finite risk insurance. Regulators say it is sometimes used improperly to help companies artificially inflate earnings without a real transfer of risk.
Last Monday, the SEC and New York state regulators announced a $75 million settlement with MBIA Inc., a large insurer of municipal bonds, regarding an alleged sham transaction in 1998.
Bermuda-based RenaissanceRe is a reinsurance company, selling insurance to primary insurance companies to spread risk. It neither admitted nor denied wrongdoing in the settlement with the SEC but did agree to refrain from future violations of the securities laws. The company also agreed to hire an independent consultant to review its internal financial controls and other functions.
The SEC’s charges filed in September against RenaissanceRe’s former chairman and CEO, and two other former executives are still pending.
The company “essentially played a shell game with its revenue — hiding it in one year when it was not needed, only to reveal it in a later year when it would improve the bottom line,” Mark Schonfeld, director of the SEC’s Northeast regional office in New York, said in a statement.
The SEC said RenaissanceRe devised the phony transaction to defer about $26 million in earnings from 2001 into the next two years, creating a “cookie jar” reserve to hold excess profit from a strong year to be used to buttress future leaner ones. RenaissanceRe used two seemingly unrelated reinsurance contracts with Inter-Ocean Reinsurance Co. Ltd. to conceal what actually was “a round trip of cash,” the SEC said.
No risk was transferred in the contracts, according to the agency.
“We are pleased to have put this difficult chapter in our company’s history behind us,” RenaissanceRe’s chief executive officer, Neill Currie, said in a statement.
Companies caught up in the recent wide-ranging investigations of finite risk reinsurance in the United States and abroad include insurers Ace Ltd. and American International Group Inc., and General Reinsurance Corp., a subsidiary of Berkshire Hathaway Inc.
Topics Reinsurance
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