Toomre Capital Markets LLC

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Finite Reinsurance Probes Continue for Max Re and Fairfax

In the last two weeks, both Max Re and Fairfax Financial Holdings Ltd have seen their share prices suddenly plunge more than 10% as both announced further developments in how they accounted for finite reinsurance transactions. In the case of Max Re, they announced that both the audit committee and risk management committees of their board of directors were looking into two 2001 and 2003 reinsurance transactions that could have the effect of reducing 2001-2005 net income by approximately $50 million. The Bermuda Gazette has more information on the Max Re announcement here.

The case of Fairfax Financial Holdings Ltd. appears to be more complicated. Previously, Fairfax had received a suponea from regulators about finite reinsurance transactions that started from the probe of a large AIG/General Re probe of industry practices. The Canadian National Post has more details on why now Fairfax, its auditors and an outside investor have received subpoenas in the last two weeks. On Wednesday, March 22, when the information was announced, the Fairfax stock plunged more than 14% on the NYSE. What is particularly interesting from this story is that Federal prosecutors in the U.S. Attorney's Office in the Southern District of New York are also said to be participating in the investigation with the SEC.

This latter fact suggests that federal crimal probes of finite reinsurance remain on-going and Max Re might very well get swept up now in the industry probe. Your thoughts and comments are welcome