Risk & Compliance

Execs May Face Finite-risk Charges

Executives at Assurant, the company formerly known as Fortis, could be charged in an SEC finite insurance probe.
Stephen TaubJuly 5, 2007

Officials at Assurant Inc. said two company executives may face civil charges related to finite insurance products. Michael Steinman, senior vice president and chief actuary, and Dan Folse, vice president-risk management, both of the company’s Assurant Solutions/Assurant Specialty Property unit, each received a “Wells notice” from the Securities and Exchange Commission in connection with its ongoing investigation of certain loss mitigation insurance products. The company did not provide additional details about the nature of the charges or the insurance products.

However, a Wells notice indicates that the SEC staff is considering recommending that the SEC bring a civil enforcement action against these individuals for violating various provisions of the federal securities laws, the insurer stressed. Under the SEC’s procedures, recipients of a Wells notice have the opportunity to respond to the SEC staff before the staff makes its formal recommendation to the commission on whether any civil enforcement action should be brought by the regulator.

In May 2005, Assurant, formerly called Fortis, announced that it received a subpoena from the SEC seeking documents relating to “certain loss mitigation insurance products.” At the time, officials assured investors that the company intended to fully cooperate with the SEC’s request. The subpoena came amid a wider investigation into finite insurance practices. Other companies that received subpoenas related to finite insurance in 2005 included XL Capital, Genworth Financial, and Frankfurt-based Hannover Re AG.

Finite insurance arrangements most often involve a corporation that is willing to pay a premium nearly big enough to cover all the expected losses. The payment is held in a special account with the insurance carrier. If subsequent losses are less than the premium, the carrier returns the difference to the corporation that bought the insurance; if losses are greater than the premium, the corporation pays an additional premium to the carrier.

As CFO.com reported when the scandal first broke more than two years ago, critics view finite insurance as an accounting scheme to manipulate earnings. In those cases, a “substantial” amount of risk is transferred, allowing the transaction to be booked as insurance. At that point, the underlying asset can be removed from the policyholder’s balance sheet.

Last year, American International Group agreed to pay $126 million to settle Department of Justice and SEC charges that it sold products that helped PNC Financial Services Group Inc. and Brightpoint inflate earnings via the use of finite insurance, Reuters noted.