Examiner Questions Lehman Reinsurance Play

The valuation of a $300 million investment made by Lehman Brothers in life reinsurer Wilton Re is being questioned by a court appointed bankruptcy examiner, according to the report issued last week.

The examiner — Anton R. Valukas of the New York law firm Jenner & Block — wondered how the value of Lehman’s equity position in Wilton Re remained unchanged for 15 months while the performance of other reinsurers lagged significantly during the same period between 2007 and 2008.

“Given day‐to‐day fluctuations in the market, economic variables, and the circumstances of any particular company and its business operations, it is highly improbable that the value of a company, and therefore the value of Lehman’s equity position in it, would remain constant over an extended period of time,” the report said.

The examination of the Wilton Re investment is part of a broader section of the 2,200 page report that focuses on the valuation of Lehman’s private equity investments.

A footnote in the section focusing on private equity valuations calls into question Lehman’s Wilton Re funding which was made in March of 2007.

According to the report, Lehman estimated that its Wilton Re holdings outperformed an index of similar reinsurers.

“During the first three quarters of 2008, Lehman’s marks for Wilton increased slightly while a comparable index showed a significant decrease in value,” the report said.

As an example, the report added that insurers such as AFLAC, Hartford, Allstate, Everest Re and Reinsurance Group of America all underperformed in the quarter ending in August of 2008 while Lehman estimated Wilton Re outperformed those companies by as much as 19.4 percent.

“The performance of comparable companies is but one indicator of the value of a private equity position,” the bankruptcy examiner said in his report, adding that other financial information and circumstances could alter valuations.

“However, comparable companies provide insight into the valuation trends to which a company in a particular industry may be subject. Instances in which Lehman’s valuation of a particular private corporate equity position seem inconsistent with the performance of comparable companies suggest further review may be warranted,” the report said.

Christopher Stroup, CEO of Wilton Re, says that Lehman was provided with all the relevant information in order to accurately make its valuation decisions.

“We provide financial and operating information to our investors—how our investors use that information generally is not shared with us,” Stroup said in an emailed statement.  “We were not aware of Lehman’s valuation of its investment in Wilton Re’s common stock.”

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