SEC recently settled securities fraud charges (US$50m penalty involved) against MBIA Inc., one of US's largest insurers of municipal bonds, for a sham reinsurance transaction to mask a huge loss from its financial statements.
In 1998, the Allegheny Health, Education & Research Foundation (AHERF) defaulted on bonds guaranteed by MBIA which was then forced to make good on its guarantee. MBIA addressed analyst concerns by representing that it had obtained reinsurance to cover its expected losses.
In fact, MBIA had agreed through concessions on other "high premium, low risk" reinsurance agreements to compensate the reinsurers for the losses they were certain to incur on the AHERF contracts. The improper use of reinsurance contracts enabled MBIA to convert its first-ever quarterly loss into a profit and reverse the decline in its stock price.
In another similar case, SEC also settled securities fraud charges against RenaissanceRe Holdings Ltd. (RenRe), a property catastrophe reinsurance company, for creating a sham reinsurance transaction that had no economic substance and no purpose other than to smooth and defer over US$26m of earnings from 2001 to 2002 and 2003. In effect, the transaction enabled RenRe to create a "cookie jar" into which it put excess revenue in one good year, to be pulled out in a future year to increase income.
These cases sound like another Enron story!
No comments:
Post a Comment