Fleming accuses James River of manipulating JRG Re sale price in ongoing legal dispute

Fleming accuses James River of manipulating JRG Re sale price in ongoing legal dispute | Insurance Business New Zealand

Reinsurance

Fleming accuses James River of manipulating JRG Re sale price in ongoing legal dispute

Allegations of reserve suppression and financial violations emerge as part of the complaint

Reinsurance

By
Kenneth Araullo

Fleming Intermediate Holdings has accused James River Group of manipulating the purchase price in the sale of its reinsurance arm, JRG Re, through improper reserve management, according to an amended complaint filed in an ongoing legal dispute.

The complaint alleges that James River’s Reserve Committee, which included CEO Frank D’Orazio and CFO Sarah Doran, had a financial incentive to lower JRG Re’s reserves before the sale.

By suppressing the reserves, Fleming argues James River increased JRG Re’s net worth, artificially inflating the amount Fleming would need to pay through pre-closing and post-closing price adjustments.

Fleming cited Section 4.1(f) of the sales and purchase agreement (SPA), which barred James River from making or adopting changes to JRG Re’s actuarial, risk management, or reserving policies without prior consent. Fleming claims James River violated this provision by altering its policies to suppress reserves and inflate the purchase price.

Additionally, Ernst & Young (EY), James River’s auditor since 2003, identified issues with JRG Re’s reserves prior to the transaction and required an increase in reserves. However, Fleming alleges that the adjustments did not fully address the reserve shortfall and still led to an inflated price.

Court documents revealed that Ernst & Young met with James River in December 2023, presenting findings that JRG Re’s reserves were approximately $185 million – nearly 30% below the $258 million EY deemed necessary.

This $73 million shortfall was specific to JRG Re, while two other James River subsidiaries audited simultaneously, James River Insurance Corporation (JRIC) and Falls Lake, had shortfalls of 9% and 0.2%, respectively.

Fleming alleges that JRG Re’s reserves diverged materially from those of the other subsidiaries by the end of 2023.

The complaint further claims that James River used a loss portfolio transfer arrangement to manipulate how it allocated a $17 million reserves increase demanded by EY. According to Fleming, James River did not allocate the increase based on proper actuarial considerations but instead in a way that would maximize the sales price of JRG Re.

Additionally, Fleming referenced a letter from the Bermuda Monetary Authority (BMA), dated Oct. 15, 2024, which noted that under James River’s ownership, JRG Re’s reduction of capital and surplus exceeded by more than 15% the total statutory capital reported in its 2023 financial statements.

The BMA stated that JRG Re failed to seek formal approval for this capital reduction, in breach of Section 31C(4) of the Insurance Act 1978, which requires prior approval under Bermuda law.

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