STATE OF CONNECTICUT

Transcription

1 STATE OF CONNECTICUT INSURANCE DEPARTMENT ORDER ADOPTING REPORT OF EXAMINATION I, Katharine L. Wade, Insurance Commissioner of the State of Connecticut, having fully considered and reviewed the Examination Report (the "Report") of the Covenant Insurance Company (the "Company") as of December 31, 2015, do hereby adopt the findings and recommendations contained therein based on the following findings and conclusions. TO WIT: 1. I, Katharine L. Wade, Insurance Commissioner of the State of Connecticut, and as such is charged with the duty of administering and enforcing the provisions of Title 38a of the Connecticut General Statutes ("C.G.S."). 2. The Company is a domestic insurer authorized to transact the business of insurance in the State of Connecticut. 3. On April 25, 2017, the verified Report of the Company was filed with the Connecticut Insurance Department (the "Department"). 4. In accordance with C.G.S. 38a-14(e)(3), the Company was afforded a period of thirty (30) days within which to submit to the Department a written submission or rebuttal with respect to any matters contained in the Report. 5. On May 10, 2017, the Company notified the Department of certain responses and comments relating to matters contained in the Report. 6 Following review of the Report, it was deemed necessary and appropriate to modify the Report. A copy of the Report is attached hereto and incorporated herein as Exhibit A. P.O. Box 816 Hartford, CT An Equal Opportunity Employer

2 NOW, THEREFORE, it is ordered as follows: 1. That the Report of the Company hereby is adopted as filed with the Department. 2. That the Company shall comply with the recommendations set forth in the Report, and that failure by the Company to so comply shall result in sanctions or administrative action as provided by Title 38a of the C.G.S. 3. Section 38a-14(e)(4)(A) of the CGS requires that: "The secretary of the Board of Directors or similar governing body of the entity shall provide a copy of the report or summary to each director and shall certify to the Commissioner, in writing, that a copy of the report or summary has been provided to each director. " Please address the certification to the Commissioner, but send said certification to the care/attention of Mark Murphy, Supervising Examiner, of the Financial Regulation Division. 4. Section 38a-14(e)(4)(B) of the CGS requires that: "Not later than one hundred twenty days after receiving the report or summary. the chief executive officer or the chief financial officer of the entity examined shall present the report of summary to the entity's Board of Directors or similar governing body at a regular or special meeting. " This will be verified by the Insurance Department either through analysis or examination follow-up. Dated at Hartford, Connecticut, this 22nct day of May, ~l.\ajjt, Katharine L. Wade Insurance Commissioner

3 EXHIBIT A EXAMINATION REPORT OF THE ASOF DECEMBER 31, 2015 BY THE CONNECTICUT INSURANCE DEPARTMENT

4 TABLE OF CONTENTS Salutation Scope of Examination History Organizational Chart Management and Control Related Party Agreements Insurance Coverage Territory and Plan of Operation Reinsurance Information Technology Controls Accounts and Records Financial Statements: Assets Liabilities, Surplus and Other Funds Statement of Income Premiums Receivable Losses and Loss Adjustment Expenses Common Stock Gross Paid In and Contributed Surplus Unassigned Funds (Surplus) Recommendation Conclusion Signature

5 April 25, 2017 The Honorable Katharine L. Wade Commissioner of Insurance State of Connecticut Insurance Department 153 Market Street, Hartford, Connecticut Dear Commissioner: In compliance with your instructions and pursuant to the requirements of Section 38a-14 of the Connecticut General Statutes (CGS), the undersigned has made a financial examination of the condition and affairs of the (hereafter referred to as the Company) a corporation with capital stock, incorporated under the laws of the State of Connecticut and having its statutory home office and administrative office located at 1100 Crown Colony Drive, Quincy, Massachusetts. The report of such examination is submitted herewith. SCOPE OF EXAMINATION The previous examination of the Company was conducted by the Financial Regulation Division of the Connecticut Insurance Department (Department), as of December 31, The current examination, which covers the period from January 1, 2011 to December 31, 2015, was conducted at the home office of the Arbella Insurance Group (the Group). As part of the examination planning procedures, the Department reviewed the following materials submitted by the Company: Board of Director (Board) minutes from 2010 through the latest 2016 meeting; Statutory audit reports, completed by the Company's independent certified public accountants, Ernst & Young LLP (E&Y) from 2011through2015; Management's Discussion and Analysis from 2011 through 2015; Statement of Actuarial Opinion from 2011 through 2015; Annual Statement from 2011 through 2015; and reports from the Company's Internal Audit Department from 2014 through A comprehensive review was made of the financial analysis files and documents submitted to the Financial Analysis Unit of the Department, reports from the National Association of Insurance Commissioners (NAIC) database, as well as the independent audit reports which indicated no material concerns with respect to financial condition or regulatory compliance issues.

6 Workpapers prepared by E&Y in connection with its annual statutory audit were reviewed and relied upon to the extent deemed appropriate. Baker Tilly Virchow Krause, LLP (Baker Tilly) was engaged by the Massachusetts Division of Insurance (MDI) to conduct an evaluation of the Group's Information Technology (IT) controls and items related to reserves. Lewis & Ellis, Inc. (L&E) was sub-contracted by Baker Tilly to evaluate the Group's reserving processes. A coordinated examination was performed with the MDI as the Company is a member of the Arbella Pool (Pool). The examination was conducted on a full scope, comprehensive basis in accordance with the procedures outlined in the NAIC Financial Condition Examiners Handbook (the Handbook). The Handbook requires that we plan and perform the examination to evaluate the financial condition and identify prospective risks of the Company by obtaining information about the Company, including corporate governance, identifying inherent risks within the Company, and evaluating system controls and procedures used to mitigate those risks. An examination also includes assessing the principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation, management compliance with the NAIC Accounting Practices & Procedures Manual and the NAIC Property and Casualty Annual Statement Instructions. All accounts and activities of the Company were considered in accordance with the risk-focused examination process. Comments in this report are generally limited to exceptions noted or to items considered to be of a material nature. Failure of items in this report to add to totals or for totals to agree with captioned amounts is due to rounding. HISTORY The Covenant Group, Inc. (CGI), a Delaware holding company, purchased the Company's common stock from the Covenant Mutual Liquidating Trust (the Trust) on May 23, The Trust was formed by the Connecticut Insurance Department on March 1, 1993, under a plan of rehabilitation of the Covenant Mutual Insurance Company (CMIC). On May 23, 1995, Hellmann & Friedman, LP, a subsidiary of H&F Investors III, a General Partnership, was granted approval by the Department to purchase CGI. On July 21, 1995, CGI was granted approval by the Department to transfer all of the outstanding common stock of the Company to Constitution Holdings, Inc. (CHI), a Connecticut holding company. 2

7 COVENANT INSURANCE COMP ANY In September 1995, the Company commenced writing personal lines property and casualty business exclusively in Connecticut. In June 2000, Arbella Inc., a Massachusetts holding company, acquired all of the issued and outstanding shares of common stock of CGI. The ultimate parent of Arbella Inc. is Arbella Mutual Insurance Company (Arbella Mutual), a mutual property and casualty insurance company domiciled in Massachusetts. In 2001, Connecticut Managers Inc., a dormant non-insurance management service subsidiary of CHI, was consolidated into CHI, which in tum was merged into CGI, the surviving company. During the second quarter 2015, CGI was dissolved into its parent, Arbella, Inc., at which time Covenant and CGl's other subsidiaries, Bearingstar Insurance Agency (Bearingstar) and Commonwealth Reinsurance Company became wholly-owned subsidiaries of Arbella, Inc. In April 2015, Bearingstar was merged into the Harrington Insurance Agency, Inc. and was renamed Bearingstar Insurance Agency, Inc. Bearingstar is 100% owned by Arbella Inc. Effective January 1, 2015, the following are the participants and corresponding participation percentages in the Arbella underwriting Pool: Arbella Mutual Insurance Company Arbella Protection Insurance Company Covenant Insurance Company Arbella Indemnity Insurance Company 76% (Lead Company) 16% 5% 3% All other companies in the Pool are domesticated in the Commonwealth of Massachusetts. 3

8 ORGANIZATIONAL CHART The following is a partial organizational chart of the Company and its parents, subsidiaries and affiliated companies as of December 31, 2015: Arbella Mutual Insurance Company (MA),, Arbella, Inc. (MA) i l l l l l Arbella Protection Arbella Indemnity Arbclla Service Covenant Arbella Capital AMIC Insurance Insurance Company, Inc. Insurance Corporation Insurance Company Company (MA) Company (MA) Agency, Inc. (MA) (MA) (CT) (MA) i 1 Arbella Specialty Insurance Brokerage, Inc. ('.1A) Arbella Service Center, Inc. (MA) J Bearin gs tar lnsura nee Agency. Inc. (M A) MANAGEMENT AND CONTROL The bylaws of the Company require an annual meeting of shareholders of the Company for the election of directors and for the transaction of such other business as may properly come before the meeting. Special meetings of shareholders may be called at any time by the Board or the President. The holders of a majority of the voting power of shares entitled to vote in person or by proxy at any meeting of the shareholders shall constitute a quorum. The bylaws provide that the business and affairs of the Company be managed by the Board. The number of directors serving the Company is determined by vote of the shareholders or directors. Directors are elected at the annual meeting of shareholders and may hold office until the next annual meeting of the shareholders and until a successor has been duly elected and qualified. Regular meetings of the Board are held at periodic intervals at any place and date designated by the Board. Special meetings of the Board may be called by the Chairman, the President or the 4

9 Secretary. A majority of the number of directors at the time shall constitute a quorum for the transaction of business. The members of the Board serving the Company at December 31, 2015, were: Name John F. Donohue Patricia P. Bailey Francis X. Bellotti Title and Principal Business Affiliation Chairman, President and Chief Executive Officer, Arbella, Inc. Consultant Legal Consultant, Bellotti Law Group Committees Committees appointed by the Board of Arbella, Inc. are authorized to act as advisory committees to the subsidiaries of Arbella, Inc., including the Company. The committees of the Board of Arbella, Inc. are as follows: Audit Committee Compensation Committee Executive Committee Investment Committee Planning Committee Technolo~y Committee The officers serving the Company at December 31, 2015, were: Name John F. Donohue Christopher E. Hall Beverly J. Tangvik Gail Eagan Lynellen M. Ramirez James S. Hyatt Eileen S. Currie Title President, Chairman and Chief Executive Officer Executive Vice President, Chief Financial Officer and Treasurer Secretary Senior Vice President and General Counsel Chief Actuary and Vice President, Actuarial and Research Analytics Senior Vice President, Personal Lines Senior Vice President, Commercial Lines RELATED PARTY AGREEMENTS Administrative and Management Agreement The Company is a participant in a services agreement with Arbella Service Company (Arbella Service) whereby Arbella Service provides underwriting, billing, claims, data processing, actuarial, investment, accounting, and legal services to all members of the Group. All members of the Group participate in the services agreement whereby each company's expenses are allocated based on the expense arrangement. Additionally, Arbella Capital Corporation formerly provided all members of the Group with property rental and related property management services, which subsequently transitioned to Arbella Service. 5

10 Consolidated Tax Allocation Agreement The Company files a consolidated tax return with the Group. The method of allocation of taxes among its members is based on a written agreement and is based on separate return calculations with current credit for net losses incurred by one of the companies to the extent those losses are used in the consolidated return. INSURANCE COVERAGE The Company is covered for employee dishonesty by a commercial crime policy issued by Travelers Casualty and Surety Company of America. The policy covers Arbella Mutual and its subsidiaries. The limit of liability on the policy is $3,000,000 for a single loss in excess of the $25,000 deductible, which exceeds the suggested minimum limits of insurance pursuant to the Handbook. In addition to the fidelity insurance policy, Arbella Mutual and its subsidiaries maintain, with various insurance carriers, insurance coverage including but not limited to; property, personal property, EDP equipment, business and rental income, general liability, forgery, and directors and officers. TERRITORY AND PLAN OF OPERATION The Company is licensed in Connecticut, Massachusetts, New Hampshire; and Rhode Island, but the material lines of business currently written are personal auto and homeowners policies in Connecticut. The Company conducts its operations through Bearingstar. REINSURANCE The Company has a pooling arrangement with its insurance affiliates for its insurance operations by line of business. After processing its external reinsurance, the companies within the Pool cede the remaining net underwriting activity to the lead company, Arbella Mutual, which subsequently retrocedes the pooled result to the participants based on their designated percentage of the Pool. The Company assumes 5% of the Pool. The Company's external reinsurance consists of property and casualty treaties on a quota share, excess of loss, umbrella, and catastrophic basis with a limited number of insurance companies. Reinsurance accounts are settled quarterly. INFORMATION TECHNOLOGY CONTROLS Baker Tilly performed a risk-based assessment and review of the Group's IT General Controls (ITGCs) in accordance with NAIC requirements as outlined in the Handbook. The guidance and direction used to perform the review of the Group's ITGCs was derived from Exhibit C Part 1 - Information Technology Planning Questionnaire (ITPQ) and Exhibit C Part 2 - Information Technology Work Program (collectively, Exhibit C). The Group's responses to the ITPQ were evaluated, and certain controls within the IT control environment were tested to assess whether 6

11 the selected controls were designed effectively and were functioning properly. Baker Tilly's objectives were to obtain reasonable assurance about whether: the Group had a process in place to effectively identify, mitigate and manage its IT risks; the Group's control structure and policies and procedures were suitably designed to achieve the control objectives specified in Exhibit C; and the Group was complying with those policies and procedures. The objectives above were achieved through a combination of reviewing the Group's policies and procedures, testing in key areas related to Exhibit C, interviewing the Group's IT senior management, reviewing IT risk assessment processes, and leveraging relevant risk assessment procedures performed by E&Y. Based upon the risk-based assessment and review, the Group's ITGCs were determined to be effective. ACCOUNTS AND RECORDS The Company utilizes Workday General Ledger System to maintain the Company's financial statements, the Phoenix system for its direct premium and loss processing and the Sungard System for investments. The StoneRiver efreedom application is used to prepare the statutory financial statements. The Phoenix system is operated by Blue Cod Technologies, Inc. pursuant to a Master Processing Services Agreement between Blue Cod and Arbella Service. General ledger account balances were reconciled and traced to the amounts reported in the Annual Statement for Further detail analyses were performed on the individual accounts throughout the examination. 7

12 FINANCIAL STATEMENTS The following statements represent the Company's financial position, as filed by the Company as of December 31, No adjustments were made to surplus as a result of the examination. ASSETS Nonadmitted Net Admitted Assets Assets Assets Bonds $51,298,789 $51,298, 789 Cash (($115,406), cash equivalents ($0) and shortterm investments S 1, 757,314) 1,641,908 1,641,908 Investment income due and accrued 501, ,791 Premiums and considerations: Uncollected premiums and agents' balances in course of collection 1,908,681 $343,992 1,564,689 Deferred premiums, agents' balances and installments booked but deferred and not yet due 17,178,130 17,178,130 Reinsurance: Amounts recoverable from reinsurers 7,337,861 7,337,861 Current federal and foreign' income tax recoverable and interest thereon 780, ,303 Net deferred tax asset 2,713,804 90,041 2,623,763 Receivables from parent, subsidiaries and affiliates 1,094,592 1,094,592 Aggregate write-ins for other-than-invested assets 1,503,165 1,503,165 Totals $85,959,,.oi5 $434,033 $85,524,992 8

13 LIABILITIES, SURPLUS AND OTHER FUNDS Losses $18,448,454 Reinsurance payable on paid losses and loss adjustment expenses 6,328,782 Loss adjustment expenses 3,630,741 Commissions payable, contingent commissions and other similar charges 1,653,737 Other expenses 1,363,200 Unearned premiums 21,546,059 Advance premium 387,325 Ceded reinsurance premiums payable 7,062,220 Funds held by company under reinsurance treaties 4,379 Drafts outstanding 881,644 Aggregate write-ins for liabilities 68,176 Total liabilities $61,374,716 Common capital stock 2,000,000 Gross paid in and contributed surplus 14,995,185 Unassigned funds (surplus) 7,155,090 Surplus as regards policyholders $24, 150,275 Total liabilities, capital and surplus $85,524,991 9

14 ST A TEMENT OF INCOME Premiums earned UNDERWRITING INCOME $38,655,897 Losses incurred Loss adjustment expenses incurred Other underwriting expenses incurred 27,823,135 3,954,999 12,533,382 Total underwriting deductions 44,311,516 Net underwriting gain (loss) Net investment income earned Net realized capital gains (losses) Net investment gain (loss) INVESTMENT INCOME OTHER INCOME (5,655,619) 1,390,886 7,565 1,398,451 Net gain (loss) from agents' or premium balances charged off Finance and service charges not included in premium Aggregate write-ins for miscellaneous expense Total other income Net income before dividends to policyholders, after capital gains tax and before all other federal and foreign income taxes Dividends to policyholders Net income, after dividends to policyholders, after capital gains tax and before all other federal and foreign income taxes Federal and foreign income taxes incurred Net income CAPITAL AND SURPLUS ACCOUNT Surplus as regards policyholders, December 31 prior year GAINS AND (LOSSES) IN SURPLUS Net income Change in net deferred income tax Change in nonadmitted assets Change in surplus as regards policyholders for the year Surplus as regards policyholders, December 31 current year (72,100) 601,299 (193, 194) 336,005 (3,921, 164) 0 (3,921,164) (784,098) $(3,137,066) 26,540,117 (3,137,066) 858,950 (111,726) (2,389,842) $

15 PREMIUMS RECEIVABLE During our review it was noted that the Company is unable to consistently reconcile the related premiums receivable within the various premium systems, to the general ledger system. This is due to the timing differences that exist between the general ledger and premium systems sub-ledger feeds. The Company is aware of this issue, and its remediation plan is well underway, with the first phase expected to be completed by the second quarter of It is recommended that the Company continue these remediation efforts to research and develop procedures and controls to gain a complete understanding of these system variances. LOSSES AND LOSS ADJUSTMENT EXPENSES (LAE) $22.079' 195 The following items were included in the captioned accounts: Losses LAE $18,448,454 3,630,741 $ The actuarial review was conducted in accordance with the risk focused approach as detailed in the Handbook. L&E based its review on the following information provided by the Company which included but was not limited to: o the Group's Statements of Actuarial Opinion (SAO) for December 2014 and 2015; o the Group's Actuarial Report supporting the SAOs; o the Annual Statements; o the Group's reinsurance treaties including an assessment of risk transfer; o the Group's 2015 Annual Statement, Schedule P reconciliations; o the 2014 Actuarial Summary Review Memorandum by E & Y; and o other information requested and obtained during the course of the review through s, discussions and meetings with key personnel of the Company. L&E performed a review of the Pool's losses and LAE reserves as of December 31, Their review focused on evaluating the assumptions and methodologies used to estimate the reserves and the reasonableness of the reserves computation. L&E recalculated the estimated reserve for the Group and concluded that the carried loss and LAE reserves were reasonable and within the range calculated. Based on the review by MDI and the Department actuary it was concluded the reported reserves of the Pool were reasonable and that the Pool's procedures in place to test reserves were actuarially sound. 11

16 COVENANT INSURANCE COMP ANY COMMON STOCK $ At December 31, 2015, the Company reported 2,000,000 shares of common stock outstanding, having a par value of $1.00 per share. All of the issued shares of common stock are owned by Arbella, Inc. GROSS PAID IN AND CONTRIBUTED SURPLUS $ On May 31, 2012, the Company received a $2,400,000 capital contribution from its sole stockholder CGI, and on December 31, 2011, the Company paid ordinary dividends of $2,400,000 to its shareholders. UNASSIGNED FUNDS (SURPLUS) $7.155,090 During the period under examination changes to the balance of this account were due primarily to net income. RECOMMENDATION 11 PREMIUMS RECEIVABLE It is recommended that the Company continue remediation efforts to research and develop procedures and controls to gain a complete understanding of system variances. CONCLUSION The results of this examination disclosed that as of December 31, 2015, the Company had admitted assets of $85,524,992, liabilities of $61,374,716, and surplus as regards policyholders of $24,150,275. During the period under examination, admitted assets increased $21,929,053, liabilities increased $21,977,430, and surplus as regards policyholders decreased $48,

17 COVENANT INSURANCE COMP ANY SIGNATURE In addition to the undersigned, the following members of the Department participated in the examination: Mark Murphy, CFE; Wanchin Chou, Department Chief Actuary, FCAS, MAAA, CPCU; Kenneth Roulier, AFE, CISA, AES; Susan Pulaski, CPA; and the professional services firms of L&E and Baker Tilly. I, Wayne Shepherd, CFE, do solemnly swear that the foregoing report on examination is hereby represented to be a full and true statement of the condition and affairs of the subject insurer as of December 31, 2015, to the best of my information, knowledge and belief. Respectfully submitted,, u 81 r.e s1+1j, Wayne Shepherd, CFE Examiner-In-Charge State of Connecticut Insurance Department State of Connecticut SS. County of Hartford Subscribed and sworn to before me, o_ +r l C (c1 A /3L-Z +l -f / Notary Public on this ;)'5\!_, ~ day of A,p,., I, I Pct-z ~ c.. C\ f2:x-t::t,(/o--. ('. ) o-'\ 0 r '- \ P lt ~'l l, C c ()YV\ (Y'I I -'.SS \.(IY\ f_-"< p I rf? _s 13