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  #11  
Old 10-17-2002, 09:25 AM
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From this mornings Times:

Regulators Sue Deloitte & Touche
By JOSEPH B. TREASTER


tepping up efforts to recover money in the collapse of the Reliance Insurance Company, insurance regulators in Pennsylvania have turned their sights on the company's auditor, Deloitte & Touche, one of the country's largest accounting firms.

In a civil suit filed in a state court on Tuesday, Pennsylvania's Insurance Department accused Deloitte & Touche and one of its actuaries, Jan A. Lommele, of inflating the insurer's financial statements by $1 billion and filing misleading reports as Reliance's executives were draining cash from the troubled insurer.

Because of the firm's actions, the regulators said, it was more than a year before investors realized that Reliance, one of the country's largest commercial insurers, was in trouble. The regulators seized control of Reliance on May 29, 2001, with hundreds of millions of dollars in claims on its books that it could not pay.

"Risk factors and red flags were ignored by Deloitte," the regulators said in their lawsuit. "Instead, Deloitte and Lommele, in exchange for millions of dollars in fees, facilitated and prolonged Reliance's ability to continue operating."

Deloitte issued a strong denial. "This suit relates to matters the Department of Insurance has been familiar with for years and is a cynical attempt to exploit the current environment by seeking to shift blame for a business and regulatory failure to the independent auditors," said Deborah Harrington, a Deloitte spokeswoman.

David F. Simon, the chief counsel for the Insurance Department, countered that the lawsuit resulted from "a lengthy and thorough investigation and includes input from qualified accounting and actuarial experts."

Mr. Lommele was traveling and could not be reached for comment.

In the lawsuit, the regulators also contended that in 2000 Reliance executives and directors, including the former chief executive, Saul P. Steinberg, "stripped nearly $200 million in cash from Reliance in the form of dividends, purported tax payments and loans," adding that they "continued to remove as much cash as possible from Reliance in the form of excessive salaries and bonuses, misuse of corporate property and preferential payments."

The regulators said Deloitte helped make all this possible by propping up the insurer's financial position and deflecting "regulatory scrutiny."

The suit filed Tuesday expands on a lawsuit filed against Reliance in June. In that suit, M. Diane Koken, the Pennsylvania insurance commissioner, sued Mr. Steinberg and 17 other senior executives and directors, saying they contributed to the company's failure in part by shifting money needed for paying claims to a holding company that then paid extravagant dividends to shareholders.

Mr. Steinberg and his family owned about a third of Reliance's stock and depended heavily on the dividends for personal income, said Jerome R. Richter, a private lawyer working with the regulators.

So far, the regulators said, no criminal charges have been filed against any of Reliance's executives or directors.

The accounting industry has been under close scrutiny recently because of the involvement of Arthur Andersen in several large corporate scandals, including Enron. But accounting specialists said that it was unusual for an insurance regulator to go after the accountants in the failure of an insurance company.

Mr. Simon acknowledged that such lawsuits were "not common practice," but he also said that they were not unprecedented.

"Our standard operating practice is to determine who may be legally liable for the insolvency," he said. "Ultimately, we want to recover money we can then use to pay claims."

Arthur W. Bowman, the publisher of Bowman's Accounting Report, a monthly newsletter in Atlanta, suggested that the regulators might be overreaching in their latest lawsuit.

"In a fraud, especially a fraud at the top level, it is nearly impossible for an auditor to find any of these things because the people inside know where to hide the dead bodies, so to speak," he said. "An auditor doesn't test every transaction."





A.&P. Reports More Problems With Its Books (September 19, 2002) $
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  #12  
Old 10-17-2002, 10:23 PM
Arlie_Proctor Arlie_Proctor is offline
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Jerry and Obi:

I spent a couple of hours looking for literature that addresses "summing" as a reserving technique and came up with almost nothing. The CAS search engine points to a 1994 AFIR article whose title is promising, but I do not have any of the AFIR materials before 1997 handy. Anybody have the 1994 books available? Google turns up nothing of interest based on the parameters I picked. The only articles of interest I found were in the DFA arena where covariance among "lines" would imply that the best estimate of total reserves may not be equal to the sums of the best estimates of the individual "lines" themselves in a DFA exercise, but that's stretching things far beyond what a news writer would understand.

Certainly, any reserving exercise involves "summing" a lot of numbers at various stages of the process. I too am stumped as to what the writer thought he/she was reporting. However, this ought to be an interesting (in a morbid sense) story to follow.
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  #13  
Old 10-18-2002, 10:26 AM
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I don't think they are referring to "summing" as reserve technique. If you read the original article, they said that D&T inlfated Reliance's financial condition by $1B -- $500M was due to understating the reserves and the other $500M was due to overstating the assets. I understand how you understate reserves, by I don't understand how you overstate assets.

And, if you read further in the article, they say that D&T used "summing" to calculate Reliance's cash reserves. I get the impression that they are referring to "cash reserves" as an asset, not a liability. So the summing must have been the technique that overstated the assets. According to the article, the suit alleges that D&T's actuary "manipulated loss ratios" to reduce the reserve requirements. I assume that they are alleging that he understated the ELR for the BF methods.

One other interesting point -- if you recall a few months ago on casnet, Gary Koupf posted a message regarding a Best's report that indicated that "reserve deficiencies" played a big role in the large number of recent insolvencies. Gary then asked if anything was being done to investigate the actuaries who gave clean opinions for companies which later announced very large reserve deficiencies (some, like Reliance, even had to shut the doors on account of this big deficiencies). Well, I guess that post was prophetic.

In any case, I would only caution that we really don't know the whole story here. As for the $500M reserve deficiency (I assume that D&T gave Reliance a clean opinion), there may be many reasons other than poor actuarial work. For instance, data quality issues or just the inherent uncertainty in predicting loss amounts.
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  #14  
Old 10-18-2002, 04:14 PM
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One other thought I had on this --

I bet someone on casnet would know what "summing" is and whether it pertains to loss reserving or something else. I don't think many credentialed P&C actuaries read this board.

I don't actually subscribe to casnet - I just read it off the cas website. If someone here subscribes, could you ask the board what "summing" is? No need to even mention the context if you don't want. Probably better not to, in fact.
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  #15  
Old 10-20-2002, 06:34 PM
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opiate,

I believe that by overstating "Goodwill" you can inflate your assets. There are probably other ways, but this is the first one that came to mind.
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  #16  
Old 10-21-2002, 12:11 PM
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Arlie: There were four AFIR volumes for 1994. As it happens, I still do have Volume 2 (Volumes 1,3, and 4 are history!). What was the title of the article?

Brad Gile
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  #17  
Old 10-21-2002, 01:21 PM
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Tangent: Saulie is Maria Bartoromo's (CNBC's "Money Honey") father-in-law.

Hello, Saulie! Well, hello, Saulie!
It's so nice to see you'n jail where you belong!
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  #18  
Old 10-21-2002, 04:49 PM
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If I were to guess, "summing" probably refers to adding the assets of subsidiaries to the assets of the holding companies. If the assets of the holding companies already include those of the subsidiaries, this could lead to double counting of the assets.
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Old 10-21-2002, 05:04 PM
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That sounds like a good guess, Mack. I bet you're correct.
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  #20  
Old 10-22-2002, 08:44 AM
Arlie_Proctor Arlie_Proctor is offline
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Brad:

The article is titled, "Solvency Risk." The author is Henry Essert.

Let me know if you find it.
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