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Project Christmas present

Dear friend

Famous last words, but not much seems to be happening today, unless you count Lloyd’s’ soon to be Bermuda-domiciled Omega releasing unchanged (but creditably good) syndicate results forecasts for its 2004 and 2005 years as earth-shattering news

But it’s sometimes nice to have a quiet news day to catch up on a bit of reading.

I came across the full legal text of the SEC fraud complaint against Mssrs Stanard, Merritt and Cash of Renaissance Re at a really cool legal blog called and I’d been meaning to wade through some of the legalese to see if there was anything interesting.

Well I’ve had a read-through now and as rap sheets got this one is eminently readable. Here is the main charge:

“Together , they [Stanard, Merritt and Cash] orchestrated a scheme involving a transaction that had no economic substance and no purpose other than to smooth and defer $26.2 million of RenRe's [link] earnings from 2001 to 2002 and 2003. In effect, the transaction enabled RenRe to create a "cookie jar" into which it put excess revenue from one good year, to be drawn upon in a future period to increase income”.

This is how the SEC [link] said they did it:

“First, RenRe purported to assign at a discount certain assets ($50 million of recoverables due to RenRe under certain industry loss warranty contracts) to Inter-Ocean Reinsurance Company, Ltd. in exchange for $30 million in cash, for a net transfer to Inter-Ocean of $20 million. RenRe recorded income of $30 million upon executing the assignment agreement. The remaining $20 million of its $50 million assignment became part of a "bank" that RenRe planned to use in later periods to bolster income.

“Second, RenRe entered into a purported reinsurance agreement with Inter-Ocean that was just a vehicle to refund to RenRe the $20 million transferred under the assignment agreement plus the purported insurance premium paid under the reinsurance agreement. The reinsurance agreement purported to cover losses in excess of certain specified amounts, conditioned upon the occurrence of a particular kind of loss event.

“For this purported reinsurance coverage, RenRe paid Inter-Ocean a $7.3 million premium. This reinsurance agreement was a complete sham. Not only was RenRe certain to meet the conditions for coverage; it also would receive back all of the money paid to Inter-Ocean under the two agreements plus investment income earned on the money in the interim, less certain transactional fees and costs. In other words, the two parties consented to a round trip of cash. RenRe's claim under the reinsurance agreement would be paid with its own money”.

And, as the Christmas season approaches, the SEC allegations allude to a fitting image:

“In November 2000, two senior executives of RenRe recognized that 2000 would be a financially strong year for the Company. In e-mail correspondence, they discussed a project called the "4th quarter challenge" and "project Christmas present" and considered structuring a transaction that would help some other company meet earnings expectations for the fourth quarter of 2000 while possibly helping RenRe defer earnings”.

Have you been a good boy this year?

If you haven’t Santa might bring you something you didn’t ask for in your letter!

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