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Nature of investments in certain reinsurance trusts attracts regulatory scrutiny

is notthe only U.S. life and health insurer to allegedly encounter challenges inrecent weeks associated with the investments backing certain agreements withoffshore reinsurers.

Departmentsof insurance in New York and Indiana directed CNO subsidiaries andWashington National Insurance Co.to remedy deficiencies associated with investments that did not comply with theapplicable requirements for assets held in reinsurance trusts to supportlong-term-care coinsurance agreements with Cayman Islands-licensed Thedevelopment led the insurer to serve notice of the of those agreements, seekthe withdrawal of all assets from the trusts, commence arbitration with thereinsurer, and file litigation against certain of the reinsurer's current andformer principals. Claims against Beechwood Re include gross negligence andviolations of the Racketeer Influenced and Corrupt Organizations Act.

Daysbefore CNO took those actions, Durham-based North Carolina Mutual Life Insurance Co. warned in aseries of federal court filings that it may face the prospect of rehabilitationor liquidation after the North Carolina Department of Insurance provided whatthe company characterized as informal notice that certain of the assetssupporting a 100% coinsurance treaty for life and annuity business with CaymanIslands-licensed Port RoyalReassurance Co. SPC Ltd. are non-admissible.

Beechwood's reinsurancetreaties

TheCNO lawsuit references several media reports indicating that federalprosecutors have been investigating Platinum Partners LP, a fund manager thatallegedly maintained significant ties with Beechwood Re.

Thecompany alleged that the three named defendants established Beechwood Re"with the objective of entering into one or more reinsurance treaties withinsurance companies, so that they could take control of reinsurance trust fundassets and use those assets to benefit Platinum, thereby enriching Platinum'sand Beechwood's owners." The suit charged Beechwood's principals withengaging in "a continuous stream of misrepresentations" regarding thereinsurer's ownership; CNO alleged that the reinsurer had been largelycapitalized by a $100 million note from entities linked to Platinum Partners'owners and founders.

The insurer claimed it "gave Beechwood the keys to a$550 million reinsurance trust, without ever suspecting that they were inreality doing business with Platinum." Insurers "typically would notmake significant (orany) investments in high-risk funds like Platinum," the company added.

"Therehave been no losses and Beechwood has acted appropriately at all times," aBeechwood Re spokesman said in response to CNO's announcement.

Newsof the termination of the relationship came two weeks after published reportsindicated that Senior HealthInsurance Co. of Pennsylvania was in the process of divestinginvestments associated with Platinum Partners. A review of Senior Health's2015 annualstatement finds that the company had more than $160 million incarrying value in investments in the combination of various Platinum Partnersfunds, "Beechwood Re investments" and positions in several of theentities referenced in the CNO lawsuit as having links to Platinum Partners.

Aninsurer of closed blocks of long-term care insurance, Senior Health reportedthat Beechwood Re and the affiliated Beechwood Bermuda International Ltd. and B Asset ManagerLP managed $263.8 million in other invested assets as of Dec. 31, 2015, andthat the firms had guaranteed an annual return of 5.85% per annum.

Seeking redress forForefront investments

North Carolina Mutual's situation has roots in a coinsuranceagreement the company entered in December 2003 with a predecessor to , a unit ofMarkel Corp. An April2015 novation agreement facilitated the coinsurance agreement with Port Royal,allowed Markel to retain $5 million as a ceding commission, and required NorthCarolina Mutual and Port Royal to execute a reinsurance trust agreement. Theamount life in force under the coinsurance agreement totaled $53.7 million asof Dec. 31, 2015, and North Carolina Mutual took a reserve credit of $29.6million associated with the treaty.

Port Royal, as part of the trust agreement, allegedlyentered an investment advisory agreement with Stamford Brook Capital LLC. NorthCarolina Mutual was to serve as the sole beneficiary of the assets undermanagement. But the insurer alleged in a lawsuit dated Sept. 23 that itdetermined that an altered or forged copy of the investment advisory agreementhad been submitted to the trust account's custodian, with what it alleged to bean employee of Forefront CapitalHoldings LLC signing that document on Port Royal's behalf. NorthCarolina Mutual alleged in the suit that Forefront Capital is affiliated withStamford Brook Capital.

A letter from the attorney for Stamford Brook Capital andForefront Capital Holdings presented as a court exhibit claimed that theinvestment advisory agreement had never been executed and that any documentshowing a Stamford Brook Capital signature is a forgery. The letter furtherdenies that the two firms owe any obligation to North Carolina Mutual and thatthe insurer's recourse would be to "look to" Port Royal or the trustaccount's custodian.

The attorney said the suit is without merit and that hisclients "never had any … dealing with" North Carolina Mutual."But, he added, they are "fully cooperating" with the insurer inresponse to its inquiries and they are confident that the insurer will besatisfied once the relevant information is provided.

North Carolina Mutual alleged that representatives ofForefront, relying on the supposedly fraudulent agreement, invested"virtually all" of the trust account's cash into assets linkeddirectly or indirectly to Forefront, including as seed funding for closed-endinvestment company Forefront Income Trust and various other investments thatthe insurer claims do not comply with North Carolina law.

Another court exhibit contained a letter reporting thatNorth Carolina Department of Insurance Chief Financial Examiner Monique Smithhad requested "certain information" from the custodian in August. Inresponse, the custodian disclosed that three accounts associated with the PortRoyal North Carolina Mutual Reassurance Trust had ending balances of $24.1million, $9.8 million and less than $713,000, respectively, as of Sept. 8.North Carolina Mutual reported in its most recent annual statement that the trust contained $33.7 millionof short-term notes and loans secured by real estate.

North Carolina Mutual, however, claimed that it has received"conflicting information" regarding the nature of the investments, butthat certain of the disclosures it has received suggests that the assets havebeen invested inappropriately. The North Carolina Department of Insurance didnot offer comment on the situation when contacted Sept. 30.

"North Carolina Mutual has great concern regarding thestatus of its assets," the company said in a court filing dated Sept. 27."Should the Department of Insurance determine that the Trust Assets arenon-admissible under [the applicable state statute], which North CarolinaMutual believes is imminent, North Carolina Mutual will have an extremelylimited time within which to attempt to force the conversion of those assetsinto admissible assets. The failure to do so could have drastic financialimplications for North Carolina Mutual."

The company reported $36.2 million in net admitted assetsand $9 million of capital and surplus as of June 30. A.M. Best its financial strengthrating for North Carolina Mutual by two notches to C++ in May, citing asignificant decline in capitalization during 2015.

Among the relief North Carolina Mutual is seeking throughthe lawsuit is unspecified amounts of actual and punitive damages as well as aninjunction to compel the defendants to provide a full accounting of the trustaccount assets. If those assets are determined to consist of ineligiblesecurities, the insurer asked the court to order the defendants to liquidate,redeem or otherwise exchange them into cash.

A federal judge Sept. 30 denied the insurer's request for anexpedited hearing date on its motion for a preliminary injunction, citing afailure to show good cause.