Spectre of Lehman Brothers still haunts reinsurance industry

by Artemis on January 28, 2011

Ever since the collapse of Lehman Brothers the tangled web of connections made through re/insurance linked deals with the firm have gradually unravelled to expose the massive influence and impact the companies failure had. A number of catastrophe bonds were impacted by Lehman’s collapse but the impact to reinsurers has spread beyond the cat bond market.

The latest connection between Lehman and the reinsurance industry has now come to light as Lehman Brothers Holdings Inc. is being sued by Bermuda based reinsurer Pulsar Re Ltd. Pulsar Re claims that Lehman Re abused the repurchase agreements they had in place and effectively ‘looted’ $450m from them. They say Lehman took the cash in 2008, at a time when it was struggling, and that they were left with assets which were worth well below the market values that Lehman has assigned them.

Pulsar Re claim that Lehman had abused repurchase agreements and used them as one way to create a false picture of financial health at the company, the main issue being the inaccurate valuation of collateral.

This issue must bring back painful memories for some in the insurance-linked securities who saw collateral gained through total-return swap counterparty agreements with Lehman become practically worthless when it collapsed. It serves as a good reminder why these collateral structures are no longer used widely in the catastrophe bond market.

More coverage on this story over on Business Insurance.

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