Monday, July 13, 2015

No. 109: Iowa's Frightening Accounting Rules—An Update

In Nos. 71, 72, and 73 posted November 6, 12, and 19, 2014, I discussed Iowa's frightening accounting rules. Iowa statutes allow for limited purpose subsidiaries (LPSs), which are reinsurance entities created by Iowa-domiciled insurance companies. Iowa allows the LPSs to treat as assets items that are not treated as assets under generally accepted accounting principles (GAAP) and under statutory accounting practices (SAP) adopted by the National Association of Insurance Commissioners. This update is based on May 2015 independent auditor reports on the Iowa LPSs as of December 31, 2014. The reports are filed only in Iowa, and I obtained them in accordance with Iowa's Open Records Law.

The LPSs and Their Auditors
The eight Iowa LPSs are Cape Verity I Inc. (CV I), Cape Verity II Inc. (CV II), Cape Verity III Inc. (CV III), MNL Reinsurance Company (MNL Re), Solberg Reinsurance Company (Solberg Re), Symetra Reinsurance Corporation (Symetra Re), TLIC Oakbrook Reinsurance Inc. (Oakbrook), and TLIC Riverwood Reinsurance Inc. (Riverwood). CV I, CV II, and CV III are subsidiaries of Accordia Life and Annuity Company. MNL Re and Solberg Re are subsidiaries of Midland National Life Insurance Company. Oakbrook and Riverwood are subsidiaries of Transamerica Life Insurance Company. Symetra Re is a subsidiary of Symetra Life Insurance Company. (See No. 44 posted April 22, 2014 for a discussion of Symetra's redomestication from Washington State to Iowa.)

The reports for seven of the Iowa LPSs were prepared in the Des Moines office of PricewaterhouseCoopers LLP (PwC). The other, for Symetra Re, was prepared in the Seattle office of Ernst & Young LLP.

The Dubious Assets
All eight reports include an adverse opinion with regard to GAAP, and most of them also identify differences between SAP and practices permitted by Iowa. The reports on MNL Re and Solberg Re do not state whether the LLC note guarantee and the irrevocable standby letters of credit are treated as assets under SAP.

The differences among GAAP, SAP, and Iowa relate to items that are not treated as assets under GAAP or SAP but are treated as assets by Iowa. Here is a list of the dubious assets as of December 31, 2014 (the parenthetical figures are to the nearest million):
CV I: Contingent note ($459) is not an asset under GAAP or SAP, but is treated as an asset by Iowa.
CV II: Parental guarantee ($688) by Global Atlantic Financial Group Ltd. is not an asset under GAAP or SAP, but is treated as an asset by Iowa.
CV III: Contingent note ($223) is not an asset under GAAP or SAP, but is treated as an asset by Iowa.
MNL Re: LLC note guarantee ($705) is not an asset under GAAP, but is treated as an asset by Iowa.
Solberg Re: Irrevocable standby letters of credit ($514) are not assets under GAAP but are treated as assets by Iowa.
Symetra Re: Variable funding note ($71) is not an asset under GAAP or SAP but is treated as an asset by Iowa.
Oakbrook: Credit linked note ($884) is not an asset under GAAP or SAP, but is treated as an asset by Iowa.
Riverwood: Parental guarantee ($1,930) by Aegon USA is not an asset under GAAP or SAP but is treated as an asset by Iowa.
General Observations
Several reports mention a high risk-based capital (RBC) ratio if the item in question is treated as an asset, but say the LPS would be below the RBC mandatory control level if the item is not treated as an asset. The fact is that the LPS would be insolvent if the item is not treated as an asset.

In some of the reports the dubious assets are described briefly, and in some they are not described. Also, documents associated with those assets are not available under Iowa's Open Records Law. The Iowa Insurance Division says each item in question is part of the LPS's "plan of operation," which is confidential under the Iowa LPS law and regulations. The secrecy associated with those assets is one reason why I describe the LPSs as part of a shell game that eventually will collapse, with dire consequences for policyholders and the life insurance business.

Available Material
As an example of the reports, I am offering a complimentary 48-page PDF of the PwC report on Riverwood. It refers to the $1.93 billion parental guarantee by Aegon USA. See especially PDF page numbers 3, 4, 5, 9, 12, 14, 16, 17, and 35. E-mail jmbelth@gmail.com and ask for the PwC report on Riverwood dated May 29, 2015.

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