STATE OF CONNECTICUT

Transcription

1 STATE OF CONNECTICUT INSURANCE DEPARTMENT ORDER ADOPTING REPORT OF EXAMINATION I, Anne Melissa Dowling, Deputy Insurance Commissioner of the State of Connecticut, having fully considered and reviewed the Examination Report (the "Report") of CBIA Compo Services, Inc. ("the Company") as of December 31, 2011, do hereby adopt the findings and recommendations contained therein based on the following findings and conclusions, TO WIT: 1. I, Anne Melissa Dowling, Deputy Insurance Commissioner of the State of Connecticut, and as such is charged with the duty of administering and enforcing the provisions oftitle 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 January 2,2013, the verified Report ofthe Company was filed with the Connecticut Insurance Department (the "Department"). 4. In accordance with CGS 38a-14(e) (3), the Company was afforded a period of thirty (30) days within which to submit to the Connecticut Insurance Department a written submission or rebuttal with respect to any matters contained in the Report. 5. On January 11, 2013, the Company filed a written submission indicating that they were in agreement with all of the recommendations contained in 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 all of the recommendations set forth in the Report, and that the failure of the Company to so comply shall result in sanctions or administrative action as provided by Title 38a of the cas. Dated at Hartford, Connecticut this 22nd day of January, 2013

3 Exhibit A EXAMlNATION REPORT OF CBIA COMPo SERVICES, INC. ASOF DECEMBER 31, 2011 BY THE CONNECTICUT INSURANCE DEPARTMENT

4 TABL"~ OF CONTENTS Salutation 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 Statement of Income Capital and Surplus Account Losses Loss Adjustment Expenses Unassigned Funds (Surplus) Conclusion Signature

5 January 2, 2013 The Honorable Thomas Leonardi Insurance Commissioner State of Connecticut Insurance Department 153 Market Street, 6 th Floor 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 ha~ conducted a financial examination of the condition and affairs of: CBIA COMPo SERVICES, INC. (hereinafter referred to as the Association), an Employers' Mutual Association (EMA), organized under the laws of the State of Connecticut and having its statutory home office located at 350 Church Street, Hartford, Connecticut. The report of such examination is submitted herewith.

6 CBIA CaMP. SERVICES, INC. SCOPE OF EXAMINA~ION The previous examination of the Association was conducted as of December 31, The current examination covers the subsequent five year period through December 31, The examination was conducted at the primary location of the books and records of the Association. The examination was conducted on a full scope, comprehensive basis in accordance with the procedures outlined in the National Association of Insurance Commissioners (NAIC) Financial 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 Association by obtaining information about the Association, including corporate governance and inherent risks within the Association, 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, and management compliance with Statutory Accounting Principles and the Annual Statement Instructions (Instructions). All accounts and activities of the Association were considered in accordance with the risk-focused surveillance examination process. As a part of the examination planning procedures, the Financial Regulation Division of the Connecticut Insurance Department (the Department) reviewed the following documentation submitted by the Association: Annual Statements filed with the Department; Statutory audit reports prepared by Deloitte & Touche, LLP (D&T), the Association's independent certified public accountants; Statements of actuarial opinion; Minutes ofthe Board of Directors (Board); Affiliate and custodial agreements and other documents related to significant transactions that require prior approval or requests for deviations from the NAIC Accounting Practices and Procedures Manual (Manual); and The 2007 through 2011 statutory basis audit opinions. A comprehensive review was made of the financial analysis files and documents submitted to the Financial Analysis Unit of the Department as well as Examination Jumpstart and Financial Analysis and Solvency Tracking System reports obtained from the NAIC database. Work papers prepared by D&T for the year ending December 31,2011, in connection with its annual statutory audit, were reviewed and relied upon to the extent deemed appropriate. American Actuarial, LLC (AA) was engaged by the Department to assist in the review of the Association's actuarial computed loss reserves and ceded reinsurance treaty. 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. 2

7 CBIA COf\.-1P. ~ERVICES, INC. ~IISTORY In November 1980, the Association was tormed as a non-profit employers' mutual insurance association in accordance with Sections through of the CGS. Its first policy was issued as of January 1, The Association, licensed in the state of Connecticut, is engaged in providing workers' compensation insurance for certain qualified members (members) of its affiliate, Connecticut Business and Industry Association (CBIA). CBIA is a trade association with thousands ofmembers (primarily businesses) in the state ofconnecticut. The Association is an EMA, not an insurance company. The organizing statutes give the Department the power to regulate EMAs. From its inception through December 31, 2001, the Association filed with the Department, audited financial statements prepared under Generally Accepted Accounting Principles. Beginning March 31, 2002, and subsequently, all financial statements have been filed on a statutory basis. Under an EMA, similar businesses with similar risks can join together to self-insure their workers' compensation insurance risks. The members of the EMA are severally liable for the obligations of the Association and are subject to assessments if additional amounts are needed to pay the losses and operating expenses of the Association. As an EMA, the Association is different from an insurance company in the following ways: Policyholders elect the Board; The workers' compensation policies are assessable, and the member companies are jointly and severally liable for the obligations of the Association; The equity of the member companies supports the equity of the Association. If the Association becomes insolvent, it will not be covered by the State Guaranty Fund; The Association is not part of the 'voluntary' market and does not participate in the assigned risk pool; The Association must obtain a Certificate of Solvency on an annual basis from the Connecticut Workers' Compensation Commission (the Commission). The Commission applies the same criteria to the Association as it does to self-insured companies; The Association is restricted to offering insunmce to similar businesses with similar risks. The Association primarily insures labor classes in the metal trades and in electronics fabrication and cannot offer any other types of insurance coverage; and The Association cannot insure any risks outside of Connecticut.

8 CBIA CaMP. SERVICES, INC. ORGANIZATIONAL CHART An organizational chart of the holding company system at the end of the examination period is as follows: Connecticut Business and Industry Association, Inc. I-- - I I CBIA Education Foundation, Inc. - CBIA Service Corporation I- ~ I MANAGEMENT AND CONTROL Under an agreement with an affiliate, CBIA Service Corporation (Service Corp.) provides operating facilities and managerial services (including accounting) to the Association for an administrative fee. The bylaws provide that the business and affairs of the Association shall be managed by the Board, comprised of not less than ten, nor more than fifteen directors. The Members present and voting at the annual meeting of Members shall elect directors. An annual meeting of Members shall be held on such date and at such time as shall be determined by the Board. The presence in person or by proxy of at least 20% of the Members shall constitute a quorum. The Board shall convene immediately following the annual meeting of Members to elect officers and to transact any other business properly brought before them. The presence, in person or by telephone, of directors constituting a majority of the directorships at the time shall constitute a quorum. The Board shall appoint from its members, an executive committee that shall exercise the authority ofthe Board in the management of the Association between meetings ofthe Board. 4

9 CBIA COMP. SERVICES, INC. The Board may appoint such standing committees and/ol' special committees of directors and/or Members as it deems advisable and shall prescribe the duties and functions thereof. To be elected to the Board, the owner, president, general manager or the top financial person of the Company must be a member of the Association. Directors have one year terms and are elected at the Annual Membership meeting. Currently, three directors are employees of CBIA and affiliates, and eight directors are independent of management. Directors serving the Association at December 31,2011, are as follows: Name Thomas Andersen Thomas Bunk Joseph Carlson, III Robert 1. Lieberman Rick Mankus Stephen J. Marcoux John R. Rathgeber Rachel Sabetta Robert Sorenson, Jr. Philip J. Vogel Mark A. Wendell Title and Principal Business Affiliation Vice President Finance and Administration, Lyman Products Corporation, Middletown, CT President United Aviunics, Inc., Naugatuck, CT President G & R Manufacturing, Naugatuck, CT Treasurer and Chief Financial Officer Turbotec Products, Inc., Windsor, CT Vice President D & D Carbide Grinding, Inc., Berlin, CT Senior Vice President and Chief Financial Officer CBIA, Hartford, CT President and CEO CBIA, Hartford, CT Controller Carpin Manufacturing Company, Inc., Waterbury, CT Vice President Sorenson Lighted Controls Inc., Hartford, CT Senior Vice President CBIA Service Corporation, Hartford, CT Vice President Dell Manufacturing, Farmington, CT 5

10 CBIA catv. P. SERVICES, INC. Committees Pursuant to the corporate bylaws, the Association's business operations may be monitored through various advisory committees approved by the Board. The committee appointed by the Board during the examination period is as follows: Audit Committee The Board of the Association does not have an audit committee. Instead, the full Board meets with the auditors periodically, and performs the same functions that would be delegated to an audit committee. In discharging its responsibilities, the Board has direct access to financial management and the independent auditors. For at least part of one meeting each year, the Board shall meet in closed session with the independent auditors. Officers At December 31,2011, the officers of the Association were as follows: Name John R. Rathgeber Stephen J. Marcoux Sam S. Caligiuri Title President and Chief Executive Officer Treasurer and Chief Financial Officer Secretary RELATED PARTY TRANSACTIONS Administrative Agreement The Association has an administrative agreement with Service Corp., a wholly owned subsidiary of CBIA. The Association has no employees, facilities, or equipment of its own. Service Corp. provides operating facilities and managerial services to the Association in exchange for a sliding scale management fee which is based upon a percentage of premiums. INSURANCE COVERAGE The Association is covered for employee dishonesty and computer crime by a crime policy issued by Travelers Casualty and Surety Company of America. The policy covers the Association and CBIA as named insureds. The Association has $2 million of coverage for employee dishonesty which exceeds the suggested minimum limits of insurance per the Handbook. In addition to fidelity bond insurance coverage, the Association maintains primary and excess coverages for the following lines, with the respective companies: 6

11 CBIA COMPo SERVICES, INC. Company The Travelers Indemnity Company Travelers Casualty and Surety Company of America - Coverage Commercial property, commercial general liability, employee benefits liability, business/commercial automobile liability, commercial excess umbrella Employment practices liability, directors and officers and miscellaneous professional liability TERRITORY AND PLAN OF OPERATIONS Plan of Operations The Association utilizes independent insurance agents to sell workers' compensation insurance to the members of CBIA. Marketing and Agency System Future Comp, a subsidiary of TD Insurance, Inc., works with independent agents in Connecticut to provide workers' compensation insurance coverage to qualifying members ofcbia. REn~SURANCE General Summary As a condition of receiving a Certificate of Solvency that authorizes the Association to self insure its members as a group, the Association is required to purchase stop-loss coverage. The Commission requires that statutory limits be obtained on an occurrence basis with aggregate basis coverage. Assumed Reinsurance The Association does not assume any reinsurance business. Ceded Reinsurance The Association has a reinsurance agreement in place with Midwest Employers Casualty Company. The coverage provides statutory limits on an occurrence basis, with a $750,000 retention and an aggregate coverage limit of $5 million, calculated with an aggregate loss limitation of$500,000 each accident. INFORMAnON TECHNOLOGY CONTROLS The Department performed an evaluation of the Information Technology (IT) controls in accordance with the guidelines and procedures set forth in Exhibit C, Evaluation of Controls in Information Technology (Exhibit C) of the Handbook. The objectives of the evaluation were to determine whether IT resources align with the Association's strategies and objectives and to ensure that significant risk associated with its IT environment is appropriately mitigated by strategies and controls as outlined in Exhibit C. 7

12 CBIA CC\1P. SERVICES, INC. The objectives of this review were achieved through a combination of reviewing the Association's policies and procedures, testing in key areas related to Exhibit C, interviewing the Association's IT senior management, and reviewing IT risk assessment processes prepared by management. The scope ofthe review included the following administrative system: System Group Billing and Administrative System (GBAS) Description Premium billing and cash remittances The internal control structure of the Association and selected accounting procedures were reviewed and discussed with management through questionnaires, observation, and attribute testing. The reconciliation of accounts and the internal control review concluded that the operating environment was conducive to producing reliable accounting information and did not disclose any material data integrity issues. ACCOUNTS AND RECORDS The Association utilizes the Great Plains Dynamics System (GPDS) for general ledger and accounts payable processing and reporting and utilizes the GBAS for premiums and The Complete Package software to prepare its annual statement. The Association contracts the services of outside firms to maintain and manage its policy issuance, claim processing and investment portfolio management. General ledger account balances were reconciled and traced to appropriate asset, liability, and income statement lines on the annual statement.

13 CBIA CuiV\P. SERVICES, INC. FINANCl/.. t STATEMcl-..JTS The following statements, as filed by the Association and as detennined by the examination, reflect the assets, liabilities, surplus and 011,er fund:" anc1 "t-:tement ofincome ofthe Association as of December 31, 2011 : Non-admitted Net Admitted Account Description Ass(Cts Assets Assets Bonds $12,867,316 $12,867,316 Common stocks 4,8~ 'l,736 4,819,736 Cash, cash equivalents and short-tenn investments ,169 Investment income due and accrued 199, ,260 Premiums and considerations: Uncollected premiums and agents' balances in the course ofcollection 5,333 $1,559 3,774 Deferred premiums, agents' balances and installments booked but deferred and not yet due 14,525 14,525 Reinsurance: Amounts recoverable from reinsurers 31 '5, ,989 Net deferred tax asset 1,L.i c,848 Aggregate write-ins for other than invested assets: Prepaid insurance 35,000 Due from third party administrator 26,992 Income tax prepayment L-. 3,560 Total assets excluding Separate Accounts, segregated accounts and protected cell accounts From Separate Accounts, segregated accounts I ~_-='4" '_'7_2_:+and protected cell accounts 1,274,848 o 35,000 o 26,992 3,560 1_,3_1_1'_40_7-+- 1_9_'0_92_'_32_:--l I_T_o_ta_l_s j $2_0~0_3,_72_9 '_ $_1._3_11_.4_0_7 ' $_1_9_,0_9_2,_32_2----' 9

14 CBIA CO\1P. SERVICES, INC. LIABILITIES, SURPLUS AND OTHER FUNDS Account Description Liabilities Losses $10,741,042 Loss adjustment expenses 3,436,390 Commissions payable, contingent commissions and other similar charges 11,236 Other expenses 204,762 Taxes, licenses and fees 462,100 Unearned premiums 9,618 Advanced premium 221,069 Ceded reinsurance premiums payable 29,439 Payable to parent, subsidiaries and affiliates 1,127 Aggregate write-ins for liabilities: Premium deficiency reserve 190,000 Total liabilities excluding protected cell liabilities 15,306,783 Protected cell liabilities 0 Total Liabilities 15,306,783 Unassigned funds (surplus) 3,785,537 Surplus as regards policyholders 3,785,537 Totals $19,

15 CBIA COMPo SERVICES, INC. STATEMENT OF INCOME UNDERWRITNG INCOME Premiums earned $3,319,036 DEDUCTIONS Losses incurred 2,473,236 Loss adjustment expenses incurred 581,095 Other underwriting expenses incurred 1,185,351 Aggregate write-ins for underwriting deductions 138,000 Total underwriting deductions 4,377,682 Net underwriting gain (loss) (1,058,646) INVESTMENT INCOME Net investment income earned 827,689 Net realized capital gains (losses) 88,622 Net investment gain (loss) 916,311 OTHER INCOME Finance and service charges not included in premiums 17,488 Total other income 17,488 Net income before dividends to policyholders, after capital gains tax and before all other federal and foreign income taxes (124,847) Dividends to policyholders 125,000 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 (249,847) (159,326) Net income $(90,521) CAPITAL AND SURPLUS ACCOUNT Surplus as regards policyholders, December 31, prior year $4,087,017 Net income (90,521 ) Change in net unrealized capital gains or (losses) (51,833) Change in nonadmitted assets (159,126) Change in surplus as regards policyholders for the year (301,480) Surplus as regards policyholders, December 31, current year $3,785,537 11

16 CBIA COMPo SERVICES, INC. LOSSES $10,741,042 LOSS ADJUSTMENT EXPENSES $3,436,390 The Department retained AA to assist in reviewing the accuracy and theoretical correctness of reserve calculations and analysis perfonned by the Association's appointed actuary as of December 31, Consistent with the risk focused surveillance approach to the examination, AA relied upon analyses and tests documented by the Association and in the working papers of the Association's independent auditors. A review of the Association's workers' compensation line of business was conducted to detennine whether the Company's reserves were established in accordance with minimum standards for the valuation of liabilities specified in the Connecticut Standard Valuation Law, Actuarial Guidelines, and applicable Actuarial Standards of Practice. In performing the reserve review and analysis, AA conducted the following: Analysis and review of the statutory Annual Statements from 2007 through 2011; Discussed with Association management the Association's line of business, its procedures governing actuarial calculations, its approach to risk management, and its likely areas of financial and business risk; Analysis and review of the Association's Statements of Actuarial Opinion and the Actuarial Memorandums from 2007 through 2011; Evaluation and review of the Association's Schedule P reconciliation to the data used in the actuarial analysis of loss and loss adjustment expense liabilities; Reviewed tests performed by the Association's appointed actuary and its independent auditors and perfonned independent reserve calculation tests; A qualitative review of the workpapers and documentation supporting the estimates of the Association's loss reserve liabilities and assessed the appropriateness of methodologies and the quality of assumptions used to detennine expected loss ratios, claim emergence patterns, and anticipated recoveries; A qualitative review of the Association's workpapers supporting the premium deficiency reserve; A high level evaluation of the actuarial process and methodologies for development of rate indications and price monitoring processes and controls; Evaluation ofthe Association's ability to meet contractual obligations; and Evaluation of the Association's ability to liquidate assets or obtain adequate funding without incurring unacceptable losses. It was determined that the Association's liabilities for loss and loss adjustment expenses make adequate provision for Connecticut minimum statutory reserves, and are consistent with actuarial guidelines. 12

17 CBIA COJl.,1P. SERVICES, INC. UNASSIGNED FUNDS (SURPLUS) $3,785,537 The following exhibit reflects the balance of this account during the period under review: 2010 $4,087, $3,308, $3,117, $4,903,137 CONCLUSION The results ofthis examination disclosed that, as of December 31, 2011, the Association had admitted assets of$19,092,322, liabilities of$15,306,783, and surplus of$3,785,537. During the period under examination, admitted assets decreased $2,633,674, liabilities decreased $1,516,074, and surplus as regards policyholders decreased $1,117,600. It was determined that the Association's asset~ were fairly stated in accordance with guidance outlined in the Manual and were acceptable under Section 38a-l02 ofthe CGS. The liabilities established were adequate to cover the Association's obligations to policyholders. 13

18 CBIA COl'-vfP. SERVICES, INC. SIGNATURE In addition to the undersigned, the following members of the Department participated in the examination: Susan Gozzo Andrews, FCAS, MAAA, RPLU+; Ronald Jankoski, CFE; Richard Marcks, FCAS, MAAA; Mark Murphy, CFE; Kenneth Roulier, AFE, AES, CISA; William Tacy, CFE, CISA; and the actuarial consulting firm ofaa. I, Thomas H. Corrigan, 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, 2011, to the best ofmy information, knowledge and belief. Respectfully submitted, Thoma ~H. Corrigan, CFE Exafi er-in-charge State f Connecticut Insurance Department State of Connecticut ss. Hartford County of Hartford Subscribed and sworn to before me, ----'---p-""'c"'-'.l~a,' '.-l' -_" lc'"'"""' i...lc""" ",-'----.L("",,::X..L!o-">'"---.:..)---'\'-(.:...:.,_- Notary Public on this second day of January, _ 14