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 Aetna Health and Life 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, as the 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 ("CGS"). 2. The Company is a domestic insurer authorized to transact the business of insurance in the State of Connecticut. 3. On February 17, 2017, the verified Report of the Company was filed with the Connecticut Insurance Department ("Insurance Department"). 4. In accordance with Section 38a-14(e)(3) of the CGS, the Company was afforded a period of thirty (30) days within which to submit to the Insurance Department a written submission or rebuttal with respect to any matters contained in the Report. 5. On April 20, 2017, the Company notified the Insurance Department of certain responses and comments on certain items 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 Insurance Department. 2. That the Company shall comply with all of 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 CGS. 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(ing] to the care/attention of William Arfanis, 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 or 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 day of May 5th, Katharine L. Wade Insurance Commissioner

3 Exhibit A EXAMINATION REPORT OF THE AETNA HEALTH AND LIFE INSURANCE COMPANY (NAIC #78700) ASOF DECEMBER 31, 2015 BY THE CONNECTICUT INSURANCE DEPARTMENT

4 TABLE OF CONTENTS Salutation 1 Scope of Examination History Organizational Chart Management and Control Related Party Transactions Insurance Coverage Territory and Plan of Operations Reinsurance Information Technology Controls Accounts and Records Financial Statements Assets Liabilities, Surplus and Other Funds Summary of Operations Capital and Surplus Account Aggregate Reserve for Life Contracts Aggregate Reserve for Accident and Health Contracts Contract Claims - Accident and Health Common Capital Stock Gross Paid in and Contributed Surplus Unassigned Funds (Surplus) Subsequent Event Conclusion Signature

5 February 17, 2017 The Honorable Katharine L. Wade Insurance Commissioner State of Connecticut Insurance Department 153 Market Street, 6th Floor Hartford, CT Dear Commissioner: In compliance with your instructions and pursuant to the requirements of Section 3 Sa-14 of the Connecticut General Statutes (CGS), the undersigned has conducted a financial examination of the condition and affairs of: AETNA HEALTH AND LIFE INSURANCE COMP ANY (hereinafter referred to as the Company or AHLIC), a capital stock corporation incorporated under the laws of the State of Connecticut and having its statutory home office and main administrative office located at 151 Farmington A venue, Hartford, CT. 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 subsequent five year period through December 31, 2015, was conducted at the statutory home office of the Company. As the lead state, the Department coordinated the examination of multiple Aetna entities comprised of three subgroups and seventeen states (Aetna Group). The other Connecticut domiciled entities examined concurrently were: Aetna Life Insurance Company (ALIC); Aetna Better Health Inc. (A Connecticut corporation); Aetna Insurance Company of Connecticut; and Aetna Health Inc. (a Connecticut corporation).

6 AETNA HEAL TH AND LIFE INSURANCE COMPANY As part of the examination planning procedures, the Department reviewed the following materials from 2011 through 2015: Board of Director (Board) and other committee minutes; statutory audit reports completed by the Company's independent certified public accountants, KPMG LLC (KPMG); Management's Discussion and Analysis; Statements of Actuarial Opinion; documentation supporting Section 404 of the Sarbanes-Oxley Act of 2002 (SOX); Form 10-K reports filed with the Securities and Exchange Commission; Annual Statements filed with the Department; and reports of the Internal Audit Department (IA). 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, all of which indicated no material concerns with respect to financial condition or regulatory compliance issues. Work papers prepared by KPMG, as of December 31, 2015, in connection with its annual statutory audits were reviewed and relied upon to the extent deemed appropriate. Lewis & Ellis, Inc. (L&E) was engaged by the Department to conduct a risk-focused actuarial analysis of the Aetna Group's reserving, pricing and underwriting and liquidity risks. Risk & Regulatory Consulting, LLC (RRC) was engaged by the Department to assist in the review of the Aetna Group's investment holdings. Examination Resources, Inc. (ERC) and Cyence, Inc. (Cyence) were engaged by the Department to assist in the review of the Aetna Group's information technology (IT) general controls. 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 Annual Statement Instructions. 2

7 AETNA HEAL TH AND LIFE INSURANCE COMPANY The examination considered prospective risks, those risks that existed at the balance sheet date that will impact future operations or risks associated with future business plans of the Company. Examination procedures were performed as deemed appropriate to evidence actions that the Company had taken to mitigate these risks. These risks were communicated to individuals in the Department responsible for continued monitoring. All accounts and activities of the Company were considered in accordance with the riskfocused 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 Company was originally incorporated on August 19, 1971, under the provisions of the Illinois Insurance Code, as a legal reserve life insurance company. It commenced business on October 18, 1971, as the Aetna Life Insurance Company of Illinois. Effective February 2, 1996, the Company redomesticated from Illinois to Connecticut, adopted its current name and became licensed to transact business in Connecticut. The Company is a wholly-owned subsidiary of Aetna Inc. (Aetna), a Pennsylvania corporation. 3

8 AETNA HEAL TH AND LIFE INSURANCE COMPANY ORGANIZATIONAL CHART The following is a partial organizational chart that identifies the relationship of the Company and its parent and affiliates as of December 31, 2015: Aetna Inc. (Pennsylvania) I Aetna Life Insurance Company (Connecticut) I I Aetna Health and Life Insurance Company (Connecticut) Aetna Health Holdings, LLC (Delaware) I AHP Holdings, Inc. (Connecticut) I Aetna Insurance Company of Connecticut (Connecticut) Aetna Health Inc. (a Connecticut corporation) (Connecticut) I Aetna Better Health Inc. (a Connecticut corporation) (Connecticut) MANAGEMENT AND CONTROL According to the bylaws, the annual meeting of shareholders, for the election of the directors and for the transaction of such other business as properly may come before such meeting, shall be held each year on such date and at such time, within or without the State of Connecticut, as may be determined by the Board. Special meetings of the shareholders may be called at any time by the Board, or the president, any vice president, or the secretary. That meeting shall be called by the president or the secretary at the written request of any shareholder or shareholders 4

9 AETNA HEAL TH AND LIFE INSURANCE COMPANY owning at least ten percent of the outstanding shares entitled to vote, or as otherwise required by law. At the meetings of shareholders, the presence in person or by proxy of shareholders holding a majority of the total number of shares shall constitute a quorum. The Board shall be responsible for the control and management of the affairs, property and interests of the Company. The bylaws provide that the number of directors shall be fixed, from time to time, by resolution of either the Board or the shareholders. The directors are elected at the annual meeting of the shareholders, with each director to hold office until the annual meeting of the shareholders next succeeding his election, and until his successor is elected and qualified, or until his earlier death, resignation, or removal. At all meetings of the Board, the presence of a majority of the entire Board shall be necessary to constitute a quorum for the transaction of business. Special meetings of the Board shall be held whenever called by the president, any vice president, the secretary or any shareholder owning at least ten percent (10%) of the outstanding shares. The Board, by resolution, may from time to time designate an executive committee and such other committees as may be provided in such resolution. Directors serving the Company at December 31, 2015, were as follows: Name Sandra K. Callahan Sheryl B. Adkins Brad E. Shelton Title & Principal Business Affiliation President, Group Insurance, Aetna President, AHLIC Chief Financial Officer, Senior Supplemental Insurance, Aetna Officers serving the Company at December 31, 2015, were as follows: Name Sheryl B. Adkins Elaine R. Cofrancesco Edward Chung-I Lee Joseph A. Alfano Title President Treasurer Secretary Controller 5

10 AETNA HEALTH AND LIFE INSURANCE COMPANY RELATED PARTY TRANSACTIONS The Company is party to numerous related party transaction agreements. The agreements that are material in nature are as follows: Administrative Services Agreement (ALIC Agreement) Effective May 1, 2013, the Company entered into the ALIC Agreement whereby ALIC provides the Company with certain administrative services including accounting, cash management, human resources, and legal services. The ALIC Agreement obligates the Company to pay ALIC the cost of providing such services. Investment Advisory Services Agreement Effective December 1, 2004, the Company entered into an agreement with Aetna Capital Management, LLC (ACM), whereby ACM provides investment advisory services to the Company. Commercial Revolving Promissory Note Aetna executed a Commercial Revolving Promissory Note (Aetna Note) dated April 1, 2015, approved by the Department, pursuant to which the Company could advance to Aetna, and Aetna was required to repay the Company on demand, advances of up to $50 million together with any related interest on the unpaid principal balance. The entire unpaid principal balance of the Aetna Note, together with interest thereon and all other amounts payable were due and payable on March 31, There were no advances under the Aetna Note made during the year ended December 31, In addition, the Company executed a Commercial Revolving Promissory Note (Company Note) dated April 1, 2015, approved by the Department, pursuant to which Aetna could advance to the Company, and the Company was required to repay Aetna on demand, advances of up to $50 million together with any related interest on the unpaid principal balance. The entire unpaid principal balance of the Company Note, together with interest thereon and all other amounts payable were due and payable on March 31, There were no advances under the Company Note made during the year ended December 31, Consolidated Tax Allocation Agreement (Agreement) The Company is included in the consolidated federal tax return of Aetna and Aetna's other wholly-owned subsidiaries pursuant to the terms of the Agreement. In accordance with the Agreement and also a supplemental tax sharing agreement, both effective January 1, 2006, the Company's current federal income tax provisions are generally computed as if the Company was filing a separate federal income tax return. Current income tax benefits, including those resulting from net operating losses, are recognized to the extent realized in the consolidated return. Pursuant to the Agreement, the Company has the enforceable right to recoup federal income taxes paid in prior years in the event of future net losses, which it may incur, or to recoup its net losses carried forward as an offset to future net income subject to federal incomes taxes. 6

11 AETNA HEALTH AND LIFE INSURANCE COMPANY INSURANCE COVERAGE The Company is covered by multiple financial institution bonds. In the first policy, the Company is insured along with affiliates of Aetna Health Holdings, LLC by St. Paul Fire & Marine Insurance Company, on a $5 million single loss limit of liability with no deductible. In the event that the loss exceeds $5 million, the Company is also insured with affiliates of Aetna on policies with various carriers up to $60 million. The aggregate limit of liability provides fidelity coverage above the prescribed minimum set forth by the Handbook's schedule of suggested minimum amounts. In addition to fidelity bond insurance coverage, the Company maintains primary and excess coverages for the following lines, with the respective insurance companies: Company ACE American Insurance Company The Factory Mutual Insurance Company Commerce & Industry Insurance Company ACE Global Markets (Lloyd Syndicate) and Illinois Union Insurance Company Ironshore Specialty Insurance Company Self Insured Coverage Commercial general liability and Business automobile Commercial property Commercial umbrella liability Directors & officers liability and Corporate reimbursement Managed care errors and omissions Workers' compensation TERRITORY AND PLAN OF OPERATIONS The Company is licensed to write business in all states in the United States except for New York. Group long-term disability (LTD) insurance is the Company's major line of business, which is assumed from ALIC. The Company also writes Medicare Supplement Insurance. REINSURANCE The Company does not cede any reinsurance business, and its only assumed reinsurance is LTD business from ALIC. INFORMATION TECHNOLOGY CONTROLS ER and Cyence performed an evaluation of IT controls which was conducted in accordance with the guidelines and procedures set forth in Exhibit C of the Handbook (Exhibit C). The objective of the evaluation was to determine whether IT resources were properly aligned with Aetna's objectives to ensure that significant risks (strategic, operational, reporting, and compliance) arising from the IT environment were appropriately mitigated by strategies or controls as outlined in Exhibit C. 7

12 AETNA HEALTH AND LIFE INSURANCE COMPANY The objectives were achieved through a combination of reviewing Aetna's policies and procedures, testing in key areas related to Exhibit C, interviewing Aetna's senior IT management, reviewing IT risk assessment processes, and leveraging the risk assessment procedures performed by KPMG, IA and SOX test work. In accordance with the Handbook, specific areas of review included: IT governance and organization structure; strategic planning, systems architecture and project oversight; leadership development and succession planning; IT risk management; development and maintenance of policies; budgeting; physical and logical security; E-Business; business continuity and disaster recovery planning; End User or Business Developed Applications; and cybersecurity and incident response. Based upon the risk-based assessment and review, the IT general controls were determined to be effective. ACCOUNTS AND RECORDS The Company uses the Integrated Financial System, the Aetna Group's general ledger system, resident on the Oracle network system to process and maintain its financial accounting records. The Company uses The Complete Package (TCP) software to prepare its statutory statements. There is no direct feed from the general ledger to the annual statement reporting software. Reports are generated from the general ledger in the annual statement format and then manually input into TCP. General ledger account balances were reconciled and traced to appropriate asset, liability and income statement lines of the Annual Statement. Adjusting entries are posted on a quarterly basis. 8

13 AETNA HEAL TH AND LIFE INSURANCE COMPANY 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 Account Description Assets Nonadmitted Net Admitted Assets Assets Bonds $1,758,264,211 $1,758,264,211 Common stocks 5,199,774 5,199,774 Mortgage loans on real estate: First liens 256,808, ,808,480 Other than first liens 671, ,227 Cash, cash equivalents and short-term investments 31,100,797 31,100,797 Other invested assets 177,259, ,259,074 Receivables for securities 3,402,391 3,402,391 Investment income due and accrued 21,608,903 21,608,903 Premiums and considerations: Uncollected premiums and agents' balances in course of collection 37,280,874 $6,418,694 30,862, 180 Accrued retrospective premium 426, ,174 Current federal and foreign income tax recoverable and interest thereon 4,959,731 4,959,731 Net deferred tax asset 1,371,054 1,371,054 Receivables from parent, subsidiaries and affiliates 115, ,667 Aggregate write-ins for other than invested assets 8,940,751 8,940,751 Totals $2!307!409!108 $16!846! 166 $2)90!562!942 9

14 AETNA HEAL TH AND LIFE INSURANCE COMPANY LIABILITIES, SURPLUS AND OTHER FUNDS Aggregate reserve for life contracts $401,414 Aggregate reserve for accident and health contracts 1,861,064,897 Contract claims: Accident and health 12,598,754 Premiums and annuity considerations for life and accident and health contracts received in advance 2,921,661 Interest Maintenance Reserve 6,135,269 Commissions to agents due or accrued 67,942 Commissions and expense allowances payable on reinsurance assumed 52,335,806 General expenses due or accrued 1,368,553 Taxes, licenses and fees due or accrued 1,403, 169 Amounts withheld or retained by company as agent or trustee 6,339 Remittances and items not allocated 450,279 Miscellaneous liabilities: Asset valuation reserve 36,706,879 Payable to parent, subsidiaries and affiliates 15,144,839 Drafts outstanding 5,668 Aggregate write-ins for liabilities 22,268 Total liabilities 1,990,636, 737 Common capital stock 2,500,000 Gross paid in and contributed surplus 99,010,000 Unassigned funds (surplus) 198,416,205 Surplus 297,426,205 Total capital and surplus 299,926,205 Total liabilities and surplus $2)90!562!942 IO

15 AETNA HEAL TH AND LIFE INSURANCE COMPANY SUMMARY OF OPERATIONS Premiums and annuity considerations for life and accident and health contracts $655,807,104 Net investment income 95,435,856 Amortization of Interest Maintenance Reserve (IMR) (896,719) Aggregate write-ins for miscellaneous income 213,214 Totals 750,559,455 Death benefits 186,013 Disability benefits and benefits under accident and health contracts 469,566,058 Interest and adjustments on contracts or deposit-type contract funds 2,243 Increase in aggregate reserves for life and accident and health contracts 47,849,338 Totals 517,603,651 Commissions on premiums, annuity considerations and deposit-type contract funds 12,378,103 Commissions and expense allowances on reinsurance assumed 123,874,660 General insurance expenses 4,328,877 Insurance taxes, licenses and fees, excluding federal income taxes 1,676,110 Totals 659,861,401 Net gain from operations before dividends to policyholders and federal income taxes 90,698,054 Net gain from operations after dividends to policyholders and before federal income taxes 90,698,054 Federal and foreign income taxes incurred (11,417,240) Net gain from operations after dividends to policyholders and federal income taxes and before realized capital gains or (losses) 79,280,814 Net realized capital gains (losses) (2,444,607) Net income $76,836,207 CAPITAL AND SURPLUS ACCOUNT Capital and surplus, December 31, prior year $319,736,987 Net income 76,836,207 Change in net unrealized capital gains (losses) 5,808,647 Change in net deferred income tax 4,176,276 Change in nonadmitted assets (12, 182,826) Change in asset valuation reserve (6,649,086) Dividends to stockholders (87,800,000) Net change in capital and surplus for the year (19,810,782) Capital and surplus, December 31, current year $299,926)05 11

16 AETNA HEAL TH AND LIFE INSURANCE COMPANY AGGREGATE RESERVE FOR LIFE CONTRACTS AGGREGATE RESERVE FOR ACCIDENT AND HEAL TH CONTRACTS CONTRACT CLAIMS - ACCIDENT AND HEAL TH $401,414 $ $ L&E performed a risk-focused actuarial analysis of reserving, pricing and underwriting, and liquidity risk of the LTD business, which included a review that: the reserve computations were performed correctly and the selected estimates were reasonable; the assumptions and methodologies used were accurate and appropriate; and the pricing and/or underwriting practices were sufficiently established for risks assumed. Information reviewed included the following: SOX controls for claim liability and reserving processes; KPMG workpapers; interviews with Company reserving and pricing actuaries m order to gam an understanding of the processes and procedures in place; management reports, rate filing documentation and underwriting guidelines; 2015 Annual Statement; 2015 Actuarial Memorandum; and A.M. Best Reports L&E analysis of reserving risk analysis included: interviews with Company staff responsible for reserving and asset adequacy analysis; review of the Actuarial Opinion and Memorandum regarding the cash flow testing, asset adequacy analysis, assumptions, and methodologies provided by the Company; and a review of experience studies. L&E analysis of pricing and underwriting risks included: interviews with Company pricing actuaries in order to gain an understanding of the processes and procedures in place for ensuring pricing is reasonable; management reports, rate filing documentation and underwriting guidelines to verify the processes are working properly; and a review of select pricing data and processes. Conclusion Based upon the risk focused assessment and review, no material findings were noted which affected the Company's reserving, pricing and underwriting, or liquidity risks. 12

17 AETNA HEALTH AND LIFE INSURANCE COMPANY COMMON CAPITAL STOCK $ At December 31, 2015, the Company reported 50,000 shares of common stock authorized, with 25,000 shares issued and outstanding, having a par value of $100 per share. All issued shares are owned by Aetna. GROSS PAID IN AND CONTRIBUTED SURPLUS $ There were no changes to the captioned account during the period under examination. UNASSIGNED FUNDS (SURPLUS) $ The following exhibit reflects the balance of this account during the period under review: 2015 $198,416, $218,226, $179,048, $154,797, $145,387,612 Fluctuations during the examination period primarily related to various amounts of dividend payments, change in nonadmitted assets and changes in net deferred income tax. SUBSEQUENT EVENT On July 3, 2015, Aetna announced its proposed $37 billion acquisition of Humana, Inc. (Humana). On July 21, 2016, the United States Department of Justice (DOJ) sued to block the proposed acquisition which in tum prompted Aetna and Humana to appeal the DOJ's ruling. On December 5, 2016, the appeal trial against the DOI commenced with the DOI issuing a final decision to block the merger on January 23, On February 14, 2017, Aetna and Humana mutually ended their merger agreement following the DOJ ruling. CONCLUSION The results of this examination disclosed that, as of December 31, 2015, the Company had admitted assets of $2,290,562,942, liabilities of $1,990,636,737, and capital and surplus of $299,926,205. During the period under examination, admitted assets increased $384,477,234, liabilities increased $336,297,067, and capital and surplus increased $48, 180,

18 AETNA HEALTH AND LIFE INSURANCE COMPANY SIGNATURE In addition to the undersigned, the following members of the State of Connecticut Insurance Department participated in the examination: William Arfanis, CFE; Edna Bosley; Daniel Levine, AFE, CPA; Lisa Pagliaro, AFE; Kenneth Roulier, AFE, AES, CISA; William Tacy, CFE, CISA; Michael Estabrook, AFE; Kent Krajick, CFE; Cecilia Arnold, CFE; Keith Kleindienst, CFE; Michael Colburn, FSA, MAAA; the consulting firms of RRC, ER, Cyence, and L&E. I, Jeffrey Prosperi, CFE, 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, I Insurance Department State of Connecticut ss. Hartford County of Hartford Subscribed and sworn to before me, e Qt<~ c LL ('2:J u.+- Ce.r Notary Public on this ~ day of [Y\Q.rcb, I Notary Public I My Commission Expires ~ e {.).\e '"""' b-e. r '3> ()I &. 0 \ ~ 14