Assumption 2A: Loss in Year #1, No Loss in Year #2

Assumption 2B: Losses in Years #1 and #2

When Would Company Cancel?

Risk-Transfer in First Year of Contract Standing Alone

The company could cancel in a deficit at the end of Year #1, and the reinsurers would sustain $4 million loss and a 115% loss ratio. Many auditors would view that potential in a one-year contract as risk transfer. Ceded premiums could be expensed against current income.

However, since there is no risk-transfer after Year #1, if the contract wasn't canceled, any deficit to the reinsurers would have to be accrued as a liability by the company.

Losses ceded against the treaty would be reduced by the accrued deficit in calculating current results.

Excess recoveries would be booked as a deposit and will not protect underwriting results or surplus.

Risk Transfer Issues

Excerpt from another company's SEC 8-K filing, reporting change in auditor after a dispute over a "St. Ives Cover":

• "... there were discussions between Registrant and [Auditor] regarding a catastrophe reinsurance program proposed by [another broker, not Holborn] retained by the Registrant, which program would have saved the Registrant a substantial sum on its reinsurance premiums. The Registrant sought the input of [Auditor] to determine whether the reinsurance package proposed by [other broker] would be properly accounted for as reinsurance. [Auditor] advised that the reinsurance program as proposed could not be accounted for as reinsurance, but should instead be treated as a deposit arrangement."

This filing was necessary the because the auditor felt that they had been dismissed over this dispute (8-K filing under item 304 ( a)(1)).

Public companies do not like 304 (a) filings

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