Prudential Financial has settled with the Securities and Exchange Commission over charges that it engaged in improperly accounting for reinsurance agreements.
The SEC alleged that from December 1997 through December 2002, Prudential's former property and casualty subsidiaries, known as the Prupac companies, entered into a series of so-called finite reinsurance contracts with General Reinsurance that had no purpose other than to build up and then draw down on an off-balance-sheet asset, or "bank," that Gen Re held for Prupac.
According to the complaint, the contracts were written to look like they met the requirements to qualify for reinsurance accounting, when they were actually subject to an oral side agreement that effectively eliminated any risk to either party. From 1997 through 2000, Prupac built up the bank, depositing approximately $190 million of the $200 million it would eventually deposit with Gen Re in the form of premiums on reinsurance policies for which no reinsurance recoveries were triggered.
In 2000, 2001 and 2002, Prupac drew down on the bank, structuring the purported reinsurance contracts to ensure it recovered virtually to the penny every payment it had made, plus interest, less Gen Re's fee. As a result of these recoveries, the SEC said that Prudential improperly reported additional pre-tax income of $97 million, $80 million and $41 million in 2000, 2001 and 2002, respectively.
Without admitting or denying the SEC's allegations, Prudential agreed to settle the charges by consenting to a permanent injunction against further violations.
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