The Consent Order
The opening sentence of the consent order says DFS conducted a targeted examination of WPNY's reinsurance operations and related financial reporting. The consent order refers to reinsurance arrangements with Legal & General Assurance Society (LGAS), a WPNY affiliate. The consent order says DFS found that some of those arrangements had not been approved by DFS and were in violation of New York law. The consent order also says WPNY made materially inaccurate statements to DFS in response to requests for information about the reinsurance arrangements. Here is one of the findings in the consent order:
[WPNY] on March 31, 2017, filed with [DFS] its Annual Statement as of December 31, 2016, which included an Exhibit of Captive and Offshore Affiliated Reinsurance Transactions which inaccurately certified that [WPNY] was not ceding reinsurance to LGAS, an affiliated entity.
My Public Records Request
I immediately submitted to DFS a public records request for the report of the targeted examination. On June 19, after almost seven weeks, DFS denied my request. Here is the DFS explanation:
[WPNY] desired to settle the issues cited in the May 3rd consent order prior to the rest of the examination being completed. At this time, the examination is still ongoing and no report has been generated. Accordingly, because no report currently exists, the Department has no record responsive to your request.
I think the response means there will never be a report of the targeted examination, and there will not be any details of the targeted examination until the public release of the ongoing regular financial examination of WPNY. I think the public release date of the next regular financial examination of WPNY is June 30, 2019.
The Statutory Annual Statements
I obtained WPNY's statutory annual statements for the years ended December 31, 2016 (the 2016 statement) and December 31, 2017 (the 2017 statement). The 2017 statement was executed on February 16, 2018. I reviewed the "Notes to Financial Statements" in the 2016 and 2017 statements. I found no mention of the reinsurance arrangements that are at the heart of the consent order. I also reviewed the reinsurance exhibits in the 2016 and 2017 statements. Although there are indications of reinsurance ceded to LGAS, I found no information relating to the findings in the consent order.
The Amended 2017 Statement
Shortly after reviewing the 2017 statement, I learned that WPNY filed an amended 2017 statement. The amended 2017 statement was executed on May 24, 2018. It includes two changes relevant to the reinsurance arrangements that are at the heart of the consent order.
First, a two-paragraph statement appears at the top of a separate page that precedes the jurat page (normally the first page) of the 2017 statement. Here are the two paragraphs, which were not in the original 2017 statement:
The New York State Department of Financial Services has undertaken a targeted examination of William Penn Life Insurance Company ("WPNY") and identified violations by the company in failing to obtain approval for certain affiliate reinsurance agreements from 2014-2018 from the Department. WPNY, its ultimate shareholder (Legal & General Group Plc) and the Department have engaged in discussions on these matters, and as a result WPNY has executed a Consent Order to resolve these issues in which it agreed, among other things, to pay a civil penalty in the amount of $6,300,450.
Since the conditions were present during 2017 that resulted in the execution of the Consent Order and remittance of the civil penalty, the most appropriate accounting treatment was to amend the 2017 Blue book to include an accrual of the penalty within the 2017 financial statements.
Second, a few relevant comments appear in the "Notes to Financial Statements" on page 19.9 of the amended 2017 statement, under paragraph 22 entitled "Events Subsequent." Here are the comments, which were not in the original 2017 statement:
The Company has performed an evaluation of subsequent events through May 24, 2018, which is the date that these financial statements were available to be issued. The following Type 1 recognized subsequent event was identified:
The Company accrued and subsequently remitted a $6,300,450 civil penalty related to reinsurance transactions with affiliates imposed by and paid to DFS in connection with a Consent Order executed on May 3, 2018.
I also reviewed the reinsurance exhibits in the amended 2017 statement. Although there are indications of reinsurance ceded to LGAS, I found no information relating to the findings in the consent order.
The Quarterly Statement
When I obtained the 2017 statement, I also obtained the statutory statement for the quarter ended March 31, 2018. The quarterly statement was executed on May 14, 2018. In the quarterly statement I found no information relating to the findings in the consent order.
The Amended Quarterly Statement
I subsequently learned that WPNY filed an amended quarterly statement for the first quarter of 2018. The amended quarterly statement was executed on May 24, 2018. The amended quarterly statement includes the same note quoted above on the page preceding the jurat page of the quarterly statement. The amended quarterly statement also includes the second paragraph quoted above under "Events Subsequent."
The New York Supplement for 2017
Companies doing business in New York file an annual "New York Supplement" to the annual statement. I reviewed WPNY's New York Supplement for 2017, which was executed on February 22, 2018. I found no information in the Supplement for 2017 relating to the findings in the consent order.
I believe that WPNY later filed an exhibit to the Supplement for 2017, and that the exhibit contains information relating to the findings in the consent order. I have filed a public records request with DFS seeking the exhibit. When and if I receive the exhibit, and if it contains information relating to the findings in the consent order, I will prepare a follow-up to this post.
The press release and the consent order suggest that WPNY was using phony reinsurance with an affiliate to improve the appearance of WPNY financial statements. It reminds me of "shadow insurance," about which I have written extensively. Much of my writing on the subject has focused on certain accounting practices that are "permitted" for companies domiciled in Iowa and certain other states, but which would never be permitted for companies domiciled in New York.
I delayed preparing this post until I received a response to my May 2018 public records request to DFS. When my request was denied, I decided not to wait another year until the regular examination report on WPNY hopefully will become available. I also decided not to wait another two months for the response to my June 2018 public records request to DFS for the exhibit I think WPNY filed as an addendum to the New York Supplement for 2017. Instead, I plan to write a follow-up post when and if any useful additional information appears in public documents.
I am frustrated by the lack of information relating to the findings in the consent order. Unlike the situation in No. 275, where the examination report provided detailed information, no details have yet been made public about the findings in the consent order. Furthermore, I am not optimistic that detailed information will ever be made public. In other words, WPNY's decision to enter into the consent order before completion of the targeted financial examination resulted in delaying and possibly forever shielding the details from public scrutiny. I am not surprised by that result, because I know companies take a hard line about what they consider (wrongly in my view) confidential trade secret information that should be exempt from public disclosure.
I am offering a complimentary 27-page package consisting of the DFS press release (1 page), the consent order (8 pages), and selected pages from the 2016 statement, the original 2017 statement, and the amended 2017 statement (18 pages). Email firstname.lastname@example.org and ask for the July 2018 package about the DFS/WPNY consent order.