Background
In No. 44 posted April 22, I wrote about Symetra Financial Corporation's stated reasons for redomesticating its operating life insurance subsidiaries from Washington State to Iowa. The redomestications were later approved routinely by both states and have been completed. Among the reasons Symetra gave for the redomestications was to take advantage of Iowa's "state-of-the-art statutes and regulations." I consider that expression a euphemism for Iowa's frightening accounting rules, including its rules relating to the accounting treatment of parental guarantees.
Transamerica Life's 2013 Statement
In No. 44, I mentioned the 2013 annual statement of Transamerica Life Insurance Company (Cedar Rapids, Iowa), whose parent is Aegon USA, and whose ultimate parent is Aegon NV, a Netherlands-based conglomerate. Transamerica Life's "Notes to Financial Statements" mention two Iowa "prescribed practices." One relates to the accounting treatment of a parental guarantee that Aegon USA provided to TLIC Riverwood Reinsurance, Inc. (Riverwood), a small, Iowa-domiciled, special purpose, wholly owned, captive reinsurance subsidiary of Transamerica Life. Riverwood has no employees, is located in Transamerica Life's office in Cedar Rapids, files financial statements in no states other than Iowa, and does not file financial statements with the NAIC. Treating Aegon USA's parental guarantee to Riverwood as an asset of Riverwood inflated Transamerica Life's statutory surplus by $751 million beyond what it would have been under the NAIC's SAP.
The other Iowa prescribed practice, which is beyond the scope of this discussion, relates to the accounting treatment for reserves associated with secondary guarantee reinsurance contracts. The latter prescribed practice inflated Transamerica Life's statutory surplus by $3.53 billion beyond what it would have been under the NAIC's SAP.
Riverwood's 2013 Financial Statement
In this follow-up to No. 44, I elaborate on the first of the above two Iowa prescribed practices—the one relating to the accounting treatment of the parental guarantee that Aegon USA provided to Riverwood. According to Riverwood's 2013 financial statement, Riverwood's $3.169 billion of assets at the end of 2013 consisted of a $1.837 billion parental guarantee from Aegon USA and $1.332 billion of other assets. The "Notes to Financial Statements" in Riverwood's statement include this comment:
The State of Iowa has adopted a prescribed accounting practice that differs from that found in the NAIC SAP relating to the admission of a parental guarantee as capital and surplus. As prescribed by Iowa Administrative Code 191-99.11(3), the Company [Riverwood] is entitled to admit as an asset, the value of the parental guarantee provided to the Company [Riverwood] by Aegon USA, LLC, whereas the Statement of Statutory Accounting Principles (SSAP) No. 97, Investments in Subsidiary, Controlled and Affiliated Entities—A Replacement of SSAP No. 88 would not allow the admissibility of such an asset.
A reconciliation relating to the above comment shows Riverwood's statutory surplus at the end of 2013 based on the NAIC's SAP was minus $1.086 billion, and Riverwood's statutory surplus based on Iowa's prescribed practice was $751 million. The discrepancy arose because Iowa allowed Riverwood to carry the Aegon USA parental guarantee of $1.837 billion as an asset.
Interestingly, yet another Iowa frightening accounting rule allowed Transamerica Life to value its ownership of Riverwood at an amount equal to the $751 million statutory surplus of Riverwood. In other words, Transamerica Life was allowed to report that its statutory surplus was inflated only by $751 million rather than by the entire $1.837 billion parental guarantee that Aegon USA provided to Riverwood.
I filed with the Division a public records request for the $1.837 billion parental guarantee that Aegon USA provided to Riverwood. The Division spokesman who denied my request said:
The Parental Guarantee is a confidential record. The parental guarantee is a part of the insurer's [Riverwood's] plan of operation.
Iowa Code section 508.33(2)(b) states that the plan of operation is a confidential record and to be treated the same as information obtained by or disclosed to the commissioner per Iowa Code section 521A.6 and 521A.7 respectively.
I have three comments on the spokesman's letter. First, he cited no support for the assertion in the second sentence above, and I question whether the parental guarantee is part of Riverwood's "plan of operation." Second, I question whether any parental guarantee carried as an admitted asset should be treated as confidential. Third, I think nonconfidential treatment is especially important when the asset is greater than the company's entire statutory capital and surplus.
I then asked Riverwood's "statutory statement contact" person for a copy of the parental guarantee. I received no reply.
Risk-Based Capital
Riverwood's risk-based capital (RBC) numbers are worthy of note. At the end of 2013, total adjusted capital for RBC purposes was $781.2 million, company action level was $77.4 million, and company action level RBC ratio was a high but meaningless 1,009 percent ($781.2 million divided by $77.4 million, with the quotient expressed as a percentage). Because total adjusted capital was massively inflated by the parental guarantee that Aegon USA provided to Riverwood, the RBC ratio without the parental guarantee would have been a large negative number.
The Ernst & Young Report
Ernst & Young LLP (E&Y) is Riverwood's independent outside auditor. Through a public records request to the Division, I obtained the May 30, 2014 Report of Independent Auditors addressed to Riverwood's board of directors by the Des Moines office of E&Y. The report includes the ten points quoted below. The numbering is mine.
- Management is responsible for the preparation and fair presentation of these financial statements in conformity with accounting practices prescribed or permitted by the Insurance Division, Department of Commerce, of the State of Iowa.
- As described in Note 1, to meet the requirements of Iowa the financial statements have been prepared in conformity with accounting practices prescribed or permitted by the Insurance Division, Department of Commerce, of the State of Iowa, which practices differ from U.S. generally accepted accounting principles [GAAP]. The variances between such practices and U.S. generally accepted accounting principles are described in Note 1. The effects on the accompanying financial statements of these variances are not reasonably determinable, but are presumed to be material.
- In our opinion, because of the effects of the matter described in the preceding paragraph, the statutory-basis financial statements referred to above do not present fairly, in conformity with U.S. generally accepted accounting principles, the financial position of TLIC Riverwood Reinsurance, Inc. at December 31, 2013 and 2012, or the results of its operations or its cash flows for the years then ended.
- However, in our opinion, the statutory-basis financial statements referred to above present fairly, in all material respects, the financial position of TLIC Riverwood Reinsurance, Inc. at December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended, in conformity with accounting practices prescribed or permitted by the Iowa Department of Financial Regulation.
- As discussed in Note 2 to the financial statements, the Company [Riverwood], with the permission of the Insurance Division, Department of Commerce, of the State of Iowa, has included as an admitted asset the value of the parental guarantee provided to the Company [Riverwood] by Aegon USA, LLC at December 31, 2013 and 2012.
- As admissible by the State of Iowa, the parental guarantee is reported as an admitted asset on the balance sheet but would not be under GAAP.
- The admitted value of the parental guarantee asset represents the guaranteed obligation of Aegon USA, LLC. The guaranteed obligation means all amounts payable by the Company [Riverwood] pursuant to the reinsurance agreement with TLIC [Transamerica Life Insurance Company] as of the reporting date. The parental guarantee is valued at the net assumed liability held by the Company [Riverwood].
- The State of Iowa has adopted a prescribed practice that differs from that found in the NAIC SAP related to the admission of a parental guarantee as an admitted asset. As prescribed by Iowa Administrative Code (IAC) 191-99.11(3), the Commissioner found that the Company [Riverwood] is entitled to admit as an asset, the value of the parental guarantee provided to the Company [Riverwood] by Aegon USA, LLC, whereas the NAIC SAP would not allow the admissibility of such an asset.
- If the Company [Riverwood] had not been permitted to include the parental guarantee in surplus, the Company's [Riverwood's] risk-based capital would have been below the mandatory control levels of $27,105 and $28,119 at December 31, 2013 and 2012, respectively.
- This report is intended solely for the information and use of the Company [Riverwood] and state insurance departments to whose jurisdiction the Company [Riverwood] is subject and is not intended to be and should not be used by anyone other than these specified parties.
My Comments on the Ernst & Young Report
Several of the points quoted above say Riverwood's accounting conforms to Iowa's accounting rules but does not conform to GAAP and does not conform to the NAIC's SAP. Thus E&Y's opinion is very limited in value because it is favorable only in relation to Iowa's rules.
E&Y says in number 2 above that the variances from GAAP "are not reasonably determinable." I disagree. I think E&Y is capable of calculating the size of the variances from GAAP and showing how "material" those variances are.
E&Y says in number 7 above that "The parental guarantee is valued at the net assumed liability held by the Company [Riverwood]." That astounding language apparently means the value at which Aegon USA's parental guarantee is carried as an asset on Riverwood's balance sheet is derived from the liabilities carried by Riverwood relating to reinsurance that Riverwood assumed from Transamerica Life.
E&Y says in number 9 above that if the parental guarantee had not been included in Riverwood's surplus, Riverwood's RBC ratio would have been below the mandatory control level. That is correct, but it would have been more meaningful to say that, without the parental guarantee, Riverwood would have been insolvent by $1.086 billion.
E&Y's statement in number 10 above is intriguing. It would be regrettable if its purpose is to prevent interested parties—such as Aegon NV shareholders and prospective shareholders, Transamerica Life policyholders and prospective policyholders, financial analysts, rating firms, and regulators other than in Iowa—from seeing E&Y's opinion. The last time I saw such a sentence was in an elaborate legal opinion about a "too-good-to-be-true" life insurance scheme.
My Letter to Gerhart
Nick Gerhart is the Iowa insurance commissioner. As soon as this blog item is posted, I will write to him and ask several questions. I will send a copy of the letter to Adam Hamm; he is the North Dakota insurance commissioner and the NAIC president. I will also send a copy to Senator Ben Nelson; he is the NAIC chief executive officer. Here are some but not all of the questions I will ask:
E&Y says in number 2 above that the variances from GAAP "are not reasonably determinable." I disagree. I think E&Y is capable of calculating the size of the variances from GAAP and showing how "material" those variances are.
E&Y says in number 7 above that "The parental guarantee is valued at the net assumed liability held by the Company [Riverwood]." That astounding language apparently means the value at which Aegon USA's parental guarantee is carried as an asset on Riverwood's balance sheet is derived from the liabilities carried by Riverwood relating to reinsurance that Riverwood assumed from Transamerica Life.
E&Y says in number 9 above that if the parental guarantee had not been included in Riverwood's surplus, Riverwood's RBC ratio would have been below the mandatory control level. That is correct, but it would have been more meaningful to say that, without the parental guarantee, Riverwood would have been insolvent by $1.086 billion.
E&Y's statement in number 10 above is intriguing. It would be regrettable if its purpose is to prevent interested parties—such as Aegon NV shareholders and prospective shareholders, Transamerica Life policyholders and prospective policyholders, financial analysts, rating firms, and regulators other than in Iowa—from seeing E&Y's opinion. The last time I saw such a sentence was in an elaborate legal opinion about a "too-good-to-be-true" life insurance scheme.
My Letter to Gerhart
Nick Gerhart is the Iowa insurance commissioner. As soon as this blog item is posted, I will write to him and ask several questions. I will send a copy of the letter to Adam Hamm; he is the North Dakota insurance commissioner and the NAIC president. I will also send a copy to Senator Ben Nelson; he is the NAIC chief executive officer. Here are some but not all of the questions I will ask:
- Does Aegon USA have a liability on its financial statement for its $1.837 billion parental guarantee to Riverwood? If so, does Aegon USA have financial assets (such as cash, bonds, preferred and common stock, mortgages, and real estate) on its financial statement backing that liability? If Aegon USA does not have financial assets backing that liability, from what entity does Aegon USA have a parental guarantee?
- What regulatory agency has responsibility for supervising the financial condition of Aegon NV, the ultimate parent of Riverwood, Transamerica Life, and Aegon USA? Please provide me contact information for an appropriate person in that agency.
- Do you have in the Iowa Insurance Division documentary proof that Aegon NV and its subsidiaries have sufficient financial assets to meet their financial obligations? If so, please send me the documentary proof. If you do not have such documentary proof, please explain how you can assure the public that Aegon NV and its subsidiaries have sufficient financial assets to meet their financial obligations.
Available Documents
Meanwhile, I am offering a complimentary 146-page PDF that consists of Riverwood's 100-page financial statement for 2013 and the 46-page E&Y report on Riverwood dated May 30, 2014. I considered providing only selected pages, but decided to provide the documents in their entirety because of the importance of the subject. Send an e-mail to jmbelth@gmail.com and ask for the Riverwood documents.
===================================
Email: jmbelth@gmail.com
Blog: www.josephmbelth.com