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U.S. Securities and Exchange Commission

Zurich Financial Services, Converium Holding AG Settle Reinsurance Fraud Charges


Washington, D.C., Dec. 11, 2008 — The Securities and Exchange Commission today announced settled civil securities fraud charges against Zurich Financial Services and Converium Holding AG, now known as SCOR Holding (Switzerland) AG, relating to finite reinsurance transactions. The SEC's orders find that Zurich's former reinsurance group, which operated under the name Zurich Re and was later spun off in 2001 as Converium, designed three reinsurance transactions to make it appear that risk had been transferred to third-party entities when, in fact, the risk remained with Zurich-controlled entities.

According to the SEC's orders, Zurich Re — and later Converium — improperly used reinsurance accounting for the transactions enabling them to artificially inflate their performance figures. This misconduct allowed Zurich to receive a significant windfall when it spun off Converium in a December 2001 initial public offering. Converium continued the fraudulent scheme following the IPO. Zurich and Converium agreed to settle the SEC's charges without admitting or denying the SEC's findings, and Zurich will pay a $25 million penalty.

"This was a scheme by former executives of Zurich Re, and later Converium, to manipulate their performance results through sham transactions and improper accounting," said Linda Chatman Thomsen, Director of the SEC's Division of Enforcement. "It had the effect of artificially boosting Converium's market standing and IPO offering price, causing significant harm to the investing public."

James Clarkson, Acting Director of the SEC's New York Regional Office, added, "Today's cases against Zurich and Converium, along with the previous enforcement actions brought by the SEC in this area, have been critical in curbing a widespread industry practice."

The SEC's orders against Zurich and Converium find that beginning in 1999, Zurich Re's management developed three reinsurance transactions which improperly obtained the financial benefits of reinsurance accounting because the transactions appeared to transfer risk to third-party reinsurers, when, in fact, no risk was transferred from Zurich-owned entities. For two of the transactions, Zurich Re ceded risk to third-party reinsurers, but it returned the risk through reinsurance agreements — known as retrocessions — to another Zurich entity. For the third transaction, Zurich Re ceded the risk to a third-party reinsurer but simultaneously entered into an undisclosed side agreement in which Zurich Re agreed to hold the reinsurer harmless for any losses realized under the reinsurance contracts. Because the ultimate risk under the reinsurance contracts remained with Zurich-owned entities, these transactions should not have been accounted for as reinsurance.

The SEC's orders further find that as a result of the improper accounting treatment of reinsurance transactions, the historical financial statements in Converium's IPO documents, including the Form F-1 it filed with the Commission, were materially misleading. Among other things, Converium understated its reported loss before taxes by approximately $100 million (67 percent) in 2000. For certain periods, the transactions had the effect of artificially decreasing Converium's reported loss ratios — the ratio between losses paid by an insurer and premiums earned, a key performance metric for insurance companies — for certain reporting segments. The SEC's orders find that Zurich raised significantly more in the Converium IPO than it would have raised had Zurich and Converium not improperly inflated Converium's financial performance.

The SEC's order against Converium also finds that following the IPO, Converium entered into two additional reinsurance agreements for which risk transfer was negated by undisclosed side agreements. As a result, Converium overstated its income before taxes in 2003 by approximately $21.67 million (11.06 percent), in addition to continuing to account improperly for the pre-IPO transactions.

Without admitting or denying the SEC's findings, Zurich and Converium agreed to the entry of cease-and-desist orders. The SEC's order against Converium finds that Converium violated Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, and 13a-1 thereunder, and orders Converium to cease and desist from committing or causing any violations or future violations of those provisions. The SEC's order against Zurich finds that Zurich aided and abetted Converium's violation of Section 10(b) and Rule 10b-5 and orders Zurich to cease and desist from committing or causing any violations or future violations of Section 10(b) and Rule 10b-5. In a related action filed today in the U.S. District Court for the Southern District of New York, Zurich consented to pay $1 in disgorgement and a $25 million penalty.

The SEC acknowledges the assistance of the Swiss Federal Office of Justice in this matter.

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For more information, contact:

Andrew M. Calamari
Associate Director, SEC's New York Regional Office
(212) 336-0042

Gerald Gross
Assistant Regional Director, SEC's New York Regional Office
(212) 336-0085



Modified: 12/11/2008