In No. 71 posted November 6, 2014, I focused on a $1.837 billion parental guarantee that Iowa-based TLIC Riverwood Reinsurance, Inc. (Riverwood), a "limited purpose subsidiary" (LPS), received from Aegon USA and recorded as an admitted asset in accordance with Iowa's frightening insurance accounting rules. In No. 72 posted November 11, I provided further information about Iowa's LPS rules and mentioned the existence of similar rules in Georgia, Indiana, Nebraska, and Texas. Here I present information about Iowa's five other LPSs and Nebraska's three LPSs. At the outset, however, I comment on the aura of confidentiality surrounding LPS accounting rules.
The Confidentiality Mystery
As mentioned in No. 71, I encountered confidentiality concerning certain aspects of Iowa's LPS accounting rules. In working on this follow-up, I encountered a confidentiality provision in Nebraska's LPS law that prevented me from obtaining financial statements and independent auditor reports for Nebraska's LPSs.
I was unable to learn the rationale for the confidentiality provision in Nebraska's LPS law. Not a word about the provision is in the legislative committee's statement about the bill, in the committee's statement about the intent of the bill, or in the transcript of the hearing on the bill.
In July 2013, the Captive and Special Purpose Vehicle (SPV) Use Subgroup of the Financial Condition Committee of the National Association of Insurance Commissioners (NAIC) released a white paper with many references to confidentiality. However, the paper did not identify the rationale for confidentiality. Here is an example of how the writers of the paper danced around the issue:
The Subgroup recommends that the NAIC study the issue of confidentiality related to commercially owned captives and SPVs more closely. This study would pursue greater clarity regarding the specific reasons for and against the use of confidentiality for such entities. The Subgroup believes it may be necessary to develop a framework that would provide greater uniformity in this area. More specifically, it may be appropriate to consider the type of information that should, and should not, be held confidential.
I asked people with knowledge of the matter, but they declined to explain the rationale. They did not make clear whether they do not know the rationale, or whether they know it and will not explain it to me.
Therefore I will speculate on the rationale. I think the confidentiality provision in the Nebraska LPS law and certain confidentiality provisions in Iowa's LPS rules are designed to prevent the public from learning the facts about LPS accounting rules. I think LPS accounting rules allow the operation of a shell game in which the players cannot allow full disclosure of the facts because disclosure would destroy the game. In other words, I think LPS accounting rules allow the creation of a house of cards, the collapse of which will cause severe losses to many innocent people.
Iowa's Other LPSs
Iowa has five LPSs other than Riverwood. They are Cape Verity I, Inc., Cape Verity II, Inc., Cape Verity III, Inc., MNL Reinsurance Company, and Solberg Reinsurance Company.
Cape Verity I
Cape Verity I is owned by Iowa-based Accordia Life and Annuity Company. Accordia carries Cape Verity I as an admitted asset at Cape Verity I's statutory net worth of $50 million.
Accordia is owned by Massachusetts-based Commonwealth Annuity and Life Insurance Company. Commonwealth's ultimate parent is Bermuda-based Global Atlantic Financial Group Ltd., which is 20 percent owned by Delaware-based The Goldman Sachs Group, Inc. and 80 percent owned by "Third Party Investors." The "Notes to Financial Statements" in Cape Verity I's 2013 financial statement say:
Pursuant to Iowa Administrative Code (IAC) Section 191-99.11(3), Limited Purpose Subsidiary Life Insurance Company, the Company [Cape Verity I] has included as an admitted asset the outstanding principal amount of a Variable Funding Puttable Note (contingent note) serving as collateral for reinsurance credit taken by an affiliated cedant [Accordia] in connection with a reinsurance agreement entered into between the Company [Cape Verity I] and the affiliated cedant [Accordia]. The contingent note was issued by Tapioca View LLC [a Delaware-based subsidiary of Accordia] and is held for the benefit of the affiliated cedant [Accordia]. The contingent note is not included as a risk-based asset in the Company's [Cape Verity I's] risk-based capital calculation.
The reconciliation accompanying the above paragraph shows that Cape Verity I's statutory net worth is $50 million based on Iowa's rules and minus $449.4 million based on statutory accounting principles (SAP) promulgated by the NAIC. The difference of $499.4 million is Tapioca's contingent note, which Cape Verity I recorded as an admitted asset under Iowa's rules.
A reinsurance exhibit in Cape Verity I's statement shows a $1.02 billion reserve assumed from Accordia. That reserve is the entire liability side of Cape Verity I's balance sheet.
Cape Verity I's independent auditor is the Des Moines office of PricewaterhouseCoopers (PwC). The appointed actuary is David E. Neve, FSA, MAAA, who is also the chief actuary of Accordia and Global Atlantic. Cape Verity I's financial statement includes this strange item:
The Company [Cape Verity I] issued a Variable Funding Surplus Note (surplus note) to Tapioca View LLC on October 1, 2013, with an initial outstanding principal amount of $0. As of December 31, 2013, the carrying value of the surplus note was $0. There were no interest or principal payments made during 2013.
Cape Verity I's total adjusted capital for risk-based capital purposes is $50.94 million, company action level risk-based capital is $11.14 million, and the company action level risk-based capital ratio is 457 percent. If Tapioca's contingent note had not been recorded as an asset, the risk-based capital ratio would have been significantly negative and far below the mandatory control level.
Cape Verity II
Cape Verity II's financial statement is similar to that of Cape Verity I. Cape Verity II's statutory net worth is $260 million based on Iowa's rules and minus $339.7 million based on the NAIC's SAP. The difference of $599.7 million is a Tapioca contingent note, which Cape Verity II recorded as an admitted asset under Iowa's rules. The reinsurance reserve that Cape Verity II assumed from Accordia is $1.82 billion. Cape Verity II's company action level risk-based capital ratio is 1,106 percent.
Cape Verity III
Cape Verity III's financial statement is similar to those of Cape Verity I and II. Cape Verity III's statutory net worth is $50.5 million based on Iowa's rules and minus $107.8 million based on the NAIC's SAP. The difference of $158.3 million is a Tapioca contingent note, which Cape Verity III recorded as an admitted asset under Iowa's rules. The reinsurance reserve that Cape Verity III assumed from Accordia is $483.4 million. Cape Verity III's company action level risk-based capital ratio is 725 percent.
MNL Re is owned by Midland National Life Insurance Company, which is owned by Sammons Financial Group, Inc. Another affiliate is Guggenheim Capital LLC. MNL Re carries as an admitted asset a $417.44 million "LLC Note Guarantee," which is described elsewhere in the statement as an "irrevocable standby letter of credit." MNL Re's statutory surplus is $78.8 million under Iowa's rules and the NAIC's SAP. Thus the letter of credit (LOC) is an admitted asset under Iowa's rules and the NAIC's SAP. I found no further information about the LOC, such as the identity of the issuer and the terms of the LOC.
MNL Re's assumed reinsurance reserves total $543.56 million from two affiliates—Midland National and North American Company for Life and Health Insurance. The independent auditor is the Des Moines office of PwC. The appointed actuary is Timothy A. Reuer, FSA, MAAA, who is also senior vice president and corporate actuary of Midland National. MNL Re's company action level risk-based capital ratio is 2,258 percent.
Solberg Re is affiliated with Midland National, Sammons, and Guggenheim. Solberg Re carries as an admitted asset $411.5 million of "irrevocable standby letters of credit." The statutory surplus of Solberg Re is $170.5 million under Iowa's rules and the NAIC's SAP. Thus the LOCs are admitted assets under Iowa's rules and the NAIC's SAP. I found no further information about the LOCs.
Solberg Re's assumed reinsurance reserves total $456.3 million from the same two affiliates mentioned in the above discussion of MNL Re. Solberg Re's company action level risk-based capital ratio is 463 percent.
As indicated in No. 72, Nebraska's LPS law is section 44-8216 of the Nebraska Revised Statutes. An official in the Nebraska department said Nebraska has three LPSs: BHG Life Insurance Company, Lancaster Re Captive Insurance Company, and Omaha Reinsurance Company. I filed a public records request with the Nebraska department for the latest annual statements and independent auditor reports for those companies. My request was denied pursuant to the confidentiality provision in Nebraska's LPS law. I had not noticed that provision, which is the last of the 12 subsections of the law. However, I have assembled a little information about Nebraska's LPSs.
BHG Life, according to the Nebraska department official, is owned by Berkshire Hathaway Life Insurance Company of Nebraska. I have not been able to obtain further information about BHG Life.
Lancaster Re was the subject of a qualifying examination by a Nebraska financial examiner. The report of the examination was as of March 26, 2014 and was filed two days later. The examiner recommended that the company be licensed to operate under section 44-8216. Lancaster Re is owned by Resolution Life, Inc., a Delaware corporation with its executive office in Rosemont, Illinois. Resolution Life completed the acquisition of Lincoln Benefit Life Company from Allstate Life Insurance Company in April 2014. Lancaster Re's incorporators are W. Weldon Wilson, chief executive officer of Resolution Life; Keith Gubbay, president and chief actuarial officer of Resolution Life; and Robyn Wyatt, chief financial officer of Resolution Life.
Omaha Re was the subject of a financial examination as of December 31, 2010. The report of the examination was filed June 4, 2012. Omaha Re is owned by United of Omaha Life Insurance Company, which is owned by Mutual of Omaha Insurance Company. Omaha Re's independent auditor is Deloitte & Touche LLP. The balance sheet shows statutory net worth of $50 million as of December 31, 2010. The balance sheet shows a $133.1 million LOC as an admitted asset. Without it, the statutory net worth would have been minus $83.1 million. The report does not provide information about the LOC. Presumably some information about the LOC is in the financial statement and the independent auditor report, both of which are confidential by law.
An Available Document
I am making available a 91-page complimentary PDF containing the 2013 financial statement of Cape Verity I. I think the most important pages of the PDF are 1-4, 17, 22-23, 28, 35, 46, and 50-56. Send an e-mail to email@example.com
and ask for the Cape Verity I financial statement.