After placing Applied Underwriters’ subsidiary California Insurance Company under supervision in November 2019, the California regulator allowed the company to continue operating under the day-to-day direction of its own management team. That proved to be a mistake.
RSM US LLP has now withdrawn as auditor of Applied Underwriters’ CIC and its affiliates. It says the withdrawal is the result of an inability to obtain “timely and accurate information regarding significant related-party transactions, including information necessary to determine if receivables with related parties are collectible and admissible,” and “continuing with the engagement would have violated [RSM’s] client acceptance and retention standards.” That is according to a filing made by the California Department of Insurance.
The court-appointed Conservator overseeing operations at Applied Underwriters’ California Insurance Company provided the court with a letter to CIC demanding new financial and operational controls over the carrier’s operation effective September 12th.
“The Conservator’s adoption of the following prohibitions, conditions, and procedures is prompted in significant part by the recent resignation of the auditor engaged by you to audit the books and records of CIC and produce its financial statements, your failure to file appropriate affiliated investments and agreements required for Form D regulatory review, and unresolved and persistent concerns and questions relating to certain unauthorized investments made by CIC,” says the California Conservator in a letter to Applied’s Jeff Silver.
The new controls imposed include limits on:
- Making any payment to any affiliated or otherwise related person or entity if the cost to CIC of such payment, either individually or in the aggregate with related payments, exceeds $100,000.
- Entering into any transaction or agreement with any affiliated or otherwise related person or entity if the cost of such transaction or agreement to CIC, individually or in the aggregate with related payments, exceeds $100,000.
- Payment of any dividend of any amount from CIC funds or property.
- Making any loans of CIC funds or property to affiliates, officers, directors, shareholders, employees, or third parties.
- Incurring on behalf of CIC any debt, obligation, or liability greater than $100,000.
- Entering into on behalf of CIC any new reinsurance contract or treaty or amending any existing reinsurance contract or treaty.
- Making any material changes in CIC’s management or essential staffing.
- Increasing salaries or benefits of officers, directors, or managing agents acting on behalf of CIC or the CIC estate or making any payment of discretionary bonuses or other discretionary compensation to such persons.
- Making any other material changes in CIC’s normal course of operations, including but not limited to entering into new lines of business or making corporate restructuring decisions.
California also demanded that it receive copies of all bank and investment account statements within ten days of the close of each month.
The Conservator objected to Applied’s chosen replacement for RSM, Armanino LLP. The CDI “determined that Armanino LLP is not independent of CIC and its affiliates. Instead, CDI directed Applied to hire either Deloitte, PricewaterhouseCoopers, Ernst and Young, or KPMG.
What can be inferred by the nature of the new controls is one question.
But fundamental questions remain. Even though CIC has (or did have) plenty of surplus, it now becomes evident that management got away with seriously impacting the carrier’s financials and failing to file material data for some time. One question is, how was CIC management able to affect changes they shouldn’t have under the noses of the Conservation and Liquidation office? More importantly, one has to wonder if the time has come for CDI to get tired of bad acting and move from conservation allowing the carrier’s management control to either assuming total control of the carrier or even to liquidation.