U.S. Securities and Exchange Commission
Litigation Release No. 21388 / January 21, 2010
Accounting and Auditing Enforcement Release No. 3109 / January 21, 2010
SEC v. Assurant, Inc., Civil Action No. 10-Civ.-0484 (MGC) (SDNY)
SEC Charges Assurant, Inc. With Improper Reinsurance Accounting
Company Agrees To Permanent Injunction And Civil Penalty
On January 21, 2010, the Securities and Exchange Commission filed a civil injunctive action in the United States District Court for the Southern District of New York charging Assurant, Inc., a publicly-traded insurance company, with violating corporate reporting, books and records and internal controls provisions of the Securities Exchange Act of 1934 ("Exchange Act"). Assurant has offered to settle the charges by consenting, without admitting or denying the allegations in the complaint, to the entry of a final judgment permanently enjoining Assurant from violating these Exchange Act provisions and imposing a civil penalty in the amount of $3.5 million.
The Commission's complaint alleges that Assurant improperly accounted for a $10 million recovery it obtained under a reinsurance policy in the aftermath of the 2004 Florida hurricane season. The complaint alleges that Assurant booked the $10 million payment as a bona fide reinsurance recovery when, in fact, the payment was, and should have been booked as, the return of a deposit under Generally Accepted Accounting Principles ("GAAP"). As a result, Assurant materially overstated the net income that it reported for the quarter ended September 30, 2004 to the public and in Commission filings.
The Commission's complaint specifically alleges as follows: Assurant failed to properly account for $10 million that one of its business segments (Assurant Solutions) obtained from American Re-Insurance Company ("Am Re"), a private reinsurer, in the third quarter of 2004 under a reinsurance policy that originated in 1992 and was renewed annually through 2004. The arrangement between Assurant (through its subsidiaries that comprise Assurant Solutions) and Am Re consisted of the formal reinsurance treaty documents (i.e. the written policy contract) and an oral side-agreement, which the parties referred to as their "handshake" agreement.
Although the terms of the written treaty transferred the risk of certain losses from Assurant Solutions to Am Re under certain conditions, the terms of the so-called "handshake" agreement negated the transfer of risk. Pursuant to this handshake agreement, Assurant Solutions agreed that if the total amount of claims paid by Am Re exceeded the total amount of premiums paid by Assurant Solutions over the life of the treaty, Assurant Solutions would reimburse Am Re for the difference. In return, Am Re agreed that if the total amount of premiums paid by Assurant Solutions exceeded the total amount of claims paid by Am Re, Am Re would return the difference to Assurant Solutions.
Assurant accounted for the Am Re treaty improperly by using principles of reinsurance accounting instead of deposit accounting. Under reinsurance accounting, the reinsured is permitted to offset relevant losses in the amount of the probable recovery under a reinsurance agreement, which reduces the impact of those losses on the reinsured's income statement. Under deposit accounting, the payment by the reinsurer is treated as the return of a loan or deposit and cannot be used to offset losses on the income statement. Because the "handshake" agreement between Assurant and Am Re, and in particular its pay-back provision, negated risk transfer, GAAP required the use of deposit accounting and not reinsurance accounting for the premiums paid and any recoveries made under this particular treaty.
After the 2004 Florida hurricane season, Assurant booked a $10 million claim payment made by Am Re as a reinsurance recovery rather than the return of a deposit, thereby reducing the adverse impact of the hurricane losses incurred by Assurant Solutions on Assurant's reported financial results. By improperly booking the $10 million payment using reinsurance accounting instead of deposit accounting, Assurant overstated its net income for the quarter ended September 30, 2004 by $6.41 million, or 9.4%. Assurant misstated its financial results for the third quarter of 2004 to the public in two Forms 8-K, filed on November 4 and December 22, 2004, and in a Form 10-Q filed on November 12, 2004.
Assurant is charged in the SEC's complaint with violating Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-11 and 13a-13. In offering to settle these charges, Assurant has consented, without admitting or denying the allegations in the complaint, to the entry of a final judgment permanently enjoining it from violating the foregoing Exchange Act provisions and imposing a civil penalty in the amount of $3.5 million. The determination of this penalty amount took into account, among other things, the company's failure fully to comply with Commission subpoenas on a timely basis. The proposed settlement is subject to court approval.
See Also: SEC Complaint