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Liberty Mutual and Gen Re Resolve Finite Reinsurance Dispute

Source: BestWire

Posted on 01 Jun 2010

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Liberty Mutual Insurance Co. will not get a piece of General Re Corp.'s $92.2 million finite reinsurance settlement with the U.S. Securities and Exchange Commission, following a resolution of a legal dispute.

A federal judge has signed an order saying the dispute between Liberty Mutual and Gen Re (which was backed by the SEC) has been resolved, and Liberty Mutual's attempt to intervene in the case is moot.

"The matter was resolved on terms acceptable to us," John Cusolito, vice president at Liberty Mutual, said May 28. He said he couldn't comment on the terms of the agreement.

Earlier this year, Liberty Mutual claimed it was the victim of finite reinsurance fraud and asked a federal court to give it $12.2 million of the $92.2 million Gen Re agreed to pay to settle the SEC's allegations of fraud involving the former Prudential Financial property/casualty companies.

Both Gen Re and the SEC filed motions in the U.S. District Court Southern District of New York on March 12, asking the court to deny Liberty Mutual's attempt to intervene.

On Feb. 8, the court ordered the SEC to keep the $12.2 million paid by Gen Re in a separate interest-bearing account pending resolution of the motion. In her May 26 order, Judge Loretta A. Preska released those funds back to the SEC, who is to turn the money over to the U.S. Treasury.

Liberty Mutual, which acquired the former PruPac companies in 2003, had asked the court to allow it to intervene in the SEC's case with Gen Re so it could lay claim to funds it says Gen Re still owes.

Berkshire Hathaway's Gen Re had agreed to pay a total of $92.2 million and dissolve a Dublin subsidiary to resolve federal charges relating to sham finite reinsurance contracts with American International Group Inc. and PruPac.

The SEC claimed Gen Re entered into a series of sham reinsurance contracts with Prudential's property/casualty division from 1997 to 2002. The contracts had no economic substance and purpose other than to allow Prudential to build up and then draw down on an off-balance sheet asset or "finite bank" parked with Gen Re, the SEC said. As a result of the sham transactions, Prudential improperly recognized more than $200 million in revenues in 2000, 2001, and 2002. Gen Re received fees totaling $8.1 million for structuring and executing the scheme with Prudential. Prudential didn't admit or deny the allegations and consented to a permanent injunction.

As part of the larger settlement, Gen Re agreed to disgorge $12.2 million -- the $8.1 million in fees from the PruPac deal, plus interest.

In court papers, Liberty Mutual said it was unaware of the sham reinsurance transactions that Gen Re and PruPac were involved in. When Liberty Mutual purchased PruPac, it expected to receive $41 million from PruPac's reinsurance policies with Gen Re. Gen Re only paid Liberty Mutual $29 million, Liberty Mutual said in court papers.

The disgorged sum mirrors the $12.1 million Gen Re still owes Liberty Mutual, so Liberty Mutual argued that the $12.2 million should go to Liberty Mutual, rather than the U.S. Treasury. However, both Gen Re and the SEC argued that there is no relation between the money Liberty Mutual claims it is owed and the disgorged $12.2 million.

General Re Group's currently has a Best's Financial Strength Rating of A++ (Superior). Liberty Mutual Insurance Cos. currently have a Best's Financial Strength Rating of A.