The Missouri Life and Health Insurance Guaranty Association Annual Report

Transcription

1 The Missouri Life and Health Insurance Guaranty Association 2016 Annual Report

2 ANNUAL REPORT OF THE MISSOURI LIFE AND HEALTH INSURANCE GUARANTY ASSOCIATION FOR FISCAL YEAR ENDING DECEMBER 31, 2016 Prepared for The Director of the Missouri Department of Insurance, Financial Institutions and Professional Registration Prepared by Charles F. Renn, Executive Director Missouri Life and Health Insurance Guaranty Association April 30, 2017

3 Life & Health rzi 94 I)iAM011) RIDOB, SUITE 102 PIIONB: JRTPHRSON CITY, MISSOURI VAX April 30, 2017 Honorable Cblora Lindley-Myers, Director Missouri Department of Insurance, Financial Institutions and Professional Registration 301 W. High St. P.O. Box 690 Jefferson City, MO Dear Director Lindley-Myers: On behalf of the Missouri Life and Health Insurance Guaranty Association (the. "Association"), it is a pleasure to submit the Association's Annual Report for the year ending December 31, 2016 This report has been prepared in accordance with the provisions of Section , of the Revised Statutes of Missouri. As 2016 came to a close, the Association was: actively engaged in litigation involving the insolvency of a Missouri domiciled pre-need funeral contract seller and its related insurer, Lincoln Memorial Life Insurance Company. The significant jury award is on appeal in the Eighth District Federal Court of Appeals Additionally, the pending liquidation of the long term care insurance writers, Penn Treaty/American Network Insurance Company, appeared to be a certainty after the end of the year. The Association has prepared to address the numerous decisions that this liquidation will require. The Association continues to support the National Organization of Life and Health Guaranty Associations ("NOLHCA") As a member of NOLHGA, the Association serves on various committees and insolvency task forces. This participation provides for an exchange of expertise among individual state guaranty associations and facilitates meeting the challenges of a multi-state insolvency. We would like to express our appreciation to the staff of the Missouri Department of Insurance for their cooperative, professional support. Along with the other members of the Board and the staff of the Association, we look forward to the continued positive working relationship that exists with the Department. Sincerely, / SonyaiE'kart, Board Chair Allstate Life insurance Company Charles F. Ret-tn, Executive Director Missouri Life and Health Insurance Guaranty Association

4 TABLE OF CONTENTS BOARD OF DIRECTORS. iv GENERAL MEETINGS... 1 OFFICE OF THE EXECUTIVE DIRECTOR...2 FINANCIALREPORTS CLASS A ASSESSMENT CLASS B INSOLVENCY ASSESSMENT...3 OPENINSOLVENCIES...3 INSOLVENCIESLISTING...4 SUMMARY COMMENTS ON ESTATES WITH SIGNIFICANT AND MATERIAL ACTIVITY...4 Continental Security (Peoples Mutual Assessment Business)...4 LincolnMemorial Life Insurance Company...4 NationalStates Insurance Company...6 PennTreaty/American Network...7 LITIGATION...10 FINANCIAL REPORTING AND AUDIT AS OF DECEMBER 31, INDEPENDENTAUDITOR'S REPORT...11 FINANCIALSTATEMENTS...12 NOTES TO FINANCIAL STATEMENTS

5 MISSOURI LIFE & HEALTH INSURANCE GUARANTY ASSOCIATION MEMBER COMPANY Allstate Life Insurance Company 2940 S. 801 St., 1B3 Lincoln, NE Phone (402) Fax (877) TERM EXPIREs: 2019 BOARD OF DIRECTORS as of 8/10/2016 Executive Committee Members REPRESENTATIVE Sonya Ekart (Chair) Senior Attorney, Financial & Law Department Alternate: American Family Life Insurance Company David Monaghan (Vice-Chair) 3216 N. Ten Mile Drive, Suite A Governmental Affairs Counsel Jefferson City, MO Alternate: Phone (573) ext Fax (877) Mailing Address: P0 Box 1925, Jefferson City, MO DMONAGHA@amfam.com TERM ExPIRES: 2018 Farm Bureau Life Insurance Co. of Missouri Carol Gilmore (Secretary-Treasurer) 701 South Country Club Drive Accounting Director-Life Company Jefferson City, MO Alternate: Phone (573) Fax (573) Mailing Address: P0 Box 658, Jefferson City, MO cgilmoremoth.com TERM ExPIRES: 2019 Board Members Blue Cross/Blue Shield of Kansas City Coni K. Fries One Pershing Square Vice President and Deputy General Counsel 2301 Main - 8th Floor Alternate: Bryan Miller Kansas City, MO Phone (816) Fax (816) Mailing Address: P0 Box , Kansas City, MO Coni.Fries@BlueKC.com TERM ExPIREs: 2018 General American Life Insurance Co th Street NW, 7th Floor Washington, DC Office: Mhickeymetlife.com TERM ExpiREs: 2019 Michael Hickey Assistant Vice President, State Government Relations Alternate: Tim Ring

6 MISSOURI LIFE & HEALTH INSURANCE GUARANTY ASSOCIATION MEMBER COMPANY Healthy Alliance Life Insurance Company 3210 S Winding Trail Court Columbia, MO Phone (573) Smithda@wellpoint.com TERM EXPIRES: 2017 BOARD OF DIRECTORS as of 8/10/2016 REPRESENTATIVE David Smith RVP, Governmental Affairs Kansas City Life Insurance Company Timothy Langland 3520 Broadway Assistant General Counsel, Compliance Kansas City, MO Alternate: Craig Mason Phone (816) ext Fax (816) Mailing Address: P0 Box , Kansas City, MO tlang1andkclife.com TERM ExPIRES: 2017 Ozark National Life Insurance Company David R. Melton 500 E. Ninth Street Vice President and Legal Counsel Kansas City, MO Alternate: S. Alan Weber Phone (816) Fax (816) Mailing Address: P0 Box 15688, Kansas City, MO david.melton@ozark-national.com TERM ExPIRES: 2017 Shelter Life Insurance Company 1817 West Broadway Columbia, MO Phone (573) Fax (573) tmagarudershe1terinsurance.com TERM ExPIRES: 2018 Teresa Magruder Vice President and General Manager Alternate:

7 ANNUAL REPORT OF THE MISSOURI LIFE AND HEALTH INSURANCE GUARANTY ASSOCIATION FOR THE YEAR ENDING DECEMBER 31, 2016 The Annual Report of the Missouri Life and Health Insurance Guaranty Association (the "Association) for the year ending December 31, 2016 is herewith submitted to the Director of the Missouri Department of Insurance, Financial Institutions and Professional Registration ("DIFP") and the Board of Directors. GENERAL As of December 31, 2016, there were 839 companies licensed to sell life, health, or annuity contracts and by the terms of sections to , Revised Statutes of Missouri, are deemed to be members of the Association. Of the member companies, 484 had authority to sell life insurance, 435 had authority to sell health insurance, and there was one health service corporation MEETINGS The Annual Meeting of the Membership was held on May 26, As a course of business for this meeting, three members were elected to serve on the Board of Directors for a term that will expire in Those members are: Allstate Life Insurance Company Sonya Ekart Farm Bureau Life Insurance Company Carol Gilmore General American Life Insurance Company Michael Hickey On the same date, the Board of Directors elected the following officers to serve for a term of one year, or until a successor is duly elected: COMPANY Sonya Ekart, Chair David Monaghan, Vice-Chair Carol Gilmore, Secretary-Treasurer Allstate Life Insurance Company American Family Life Insurance Company Farm Bureau Life Insurance Co. of Missouri In accordance with Article III, B, 2, of the Plan of Operation (the "Plan"), the officers of the Association constitute the Executive Committee. A full roster of the Board of Directors accompanies this report. 11

8 Also during 2016, the Executive Committee continued the practice of meeting regularly on a quarterly basis. Under Article III, B, 2, of the Plan, it is contemplated that the Executive Committee will be involved with the ongoing functions and the administrative duties of the Association as may occur between meetings of the Board of Directors. Minutes of all meetings of the Member Insurers, the Board of Directors, and the Executive Committee are on file at the office of the Association in Jefferson City, Missouri. OFFICE OF THE EXECUTIVE DIRECTOR During 2016, the Association coordinated with a court appointed special deputy receiver and other affected life and health guaranty associations in other states. The purpose of this effort was to support outside counsel in preparing for the defense of the appeal of a significant favorable jury verdict. If successful, the outcome will greatly alter the financial impact of the insolvency on the guaranty association system. Oral arguments were made before the panel of three judges in September of All parties were awaiting a ruling by the appeals court at year end. The Association also took steps to assume responsibility for the administration of approximately three hundred long term care policies that were part of the business of National States Insurance Company. This company was a Missouri domiciled insurer. At year end, the Association had established policies and procedures for the provision of ongoing policyholder service. Part of that effort involved the development of a policy administration system. This automated system handles claims processing, premium billings, and ongoing policy administration. The Association is an active member of National Organization of Life and Health Insurance Guaranty Associations and the Executive Director has represented the Association by serving on the following technical task forces and committees: Accounting Issues Committee Assessment Data Task Force (Chair) MPC Task Force Guidelines Committee In addition to these groups, the Association has also been active on the following task forces that are dealing with specific insolvencies: Benicorp Insurance Company (Chair) Lincoln Memorial Life Insurance Company National States Insurance Company

9 FINANCIAL REPORTS The Association's financial records are the subject of an annual independent audit. Interim financial reports and transactions are reviewed by the Board of Directors and committees of the Board. The audited financial statements as of and for the year ending December 31, 2016 are included with this report. Further, the notes to the financial statements are also included as an integral part of the report. The accounting firm of Williams-Keepers, LLC, Jefferson City, Missouri, conducted the independent audit of the financial records of the Association CLASS A ASSESSMENT The Board is authorized under Section , Revised Statutes of Missouri to make either a pro-rata or a non-pro-rata Class A assessment of the membership for the purpose of providing the funding to cover administrative expenses. The Association allocates administrative expenses among all insolvencies. It was not necessary to levy a Class A assessment during CLASS B INSOLVENCY ASSESSMENT The Association is authorized under section , Revised Statutes of Missouri, to assess its membership for the purpose of providing the funding necessary to meet the Association's requirements with respect to insolvent and impaired insurers. The Association did not find it necessary to levy a Class B assessment during the year of OPEN INSOLVENCIES Article V. C, of the Plan, requires that the Annual Report contain a review of the activities of the Association during the preceding year. The following vignettes are intended to fulfill that requirement and to update the membership with regard to the status of each estate that had significant and material activity during the calendar year Also, a listing of all open estates is included for the memberships' reference. 3

10 1989 American Mutual Liability Ins. Co. (MA) 1991 Executive Life Ins. Co. (CA) 1995 National Heritage Life Ins. Co. (DE) INSOLVENCIES LISTING 2001 Reliance Insurance Co. (PA) 2003 Legion Insurance Co. (PA) 2006 Shelby Casualty Insurance Company (TX) 2009 Medical Savings Insurance Company (IN) 2010 Imerica Life and Health Insurance Co. (AR) National States Insurance Company (MO) Universal Life Insurance Company (AL) 1998 Centennial Life Ins. Co. (KS) Benicorp Insurance Company Lumbermens Mutual Casualty (IN) Co. (IL) First National Life Ins. Co. of Lincoln Memorial Life SeeChange Health Insurance America (MS) Insurance Co. (TX) Co. (GA) SUMMARY COMMENTS ON ESTATES WITH SIGNIFICANT AND MATERIAL ACTIVITY Continental Security (Peoples Mutual Assessment Business) The Association continues to handle all the administration of this block of business. As of the end of 2016, there were 199 active policies that represented approximately 318 insured lives. The total number of death claims paid was 31. The block of life association business continues to decline. Administrative expenses for handling this block of business exceed the policy holder assessments. Lincoln Memorial Life Insurance Company Lincoln Memorial Life Insurance Company and its parent company Memorial Service Life Insurance Company are Texas domiciled insurance companies. Both companies sold life insurance policies to fund pre-need funeral home service arrangements. The pre-need funeral contracts were marketed primarily through an affiliated company -National Prearranged Services, Inc. ("NPS"). 11

11 NPS was a Missouri domiciled corporation operating under the Missouri pre-need contract laws as a pre-need contract seller. NPS was also brought under the oversight of the Texas Department of Insurance as part of the 2008 rehabilitation and liquidation orders. NPS was included under the liquidation order as an integral affiliate and agent of the defunct insurance companies. As of the liquidation date, the insurance companies were owned directly or indirectly by Forever Enterprises, Inc. All of these entities were part of a larger corporate conglomerate formed and ultimately controlled by Doug Cassity and his family. Doug Cassity and his son, Brent were indicted by the federal authorities along with four other individuals. The indictments alleged 50 counts against those defendants and also sought recoupment of their assets. Prior to commencement of the trial, five of the defendants (including the Cassitys) accepted plea agreements. One defendant went to trial and was convicted on all counts. A Liquidation Plan was developed for the guaranty associations to essentially run off the insurance business using the Special Deputy Receiver ("SDR") as their TPA. The plan was approved by the Texas Receivership Court and became effective on September 22, It calls for the policies to be allocated between Standard Policies and Disputed Policies. The distinction being that Disputed Policies are defined as policies where NPS and various trusts associated with NPS listed themselves as the owner or where those entities took policy loans, issued replacement term policies for whole-life policies or where certain other specified questionable activities took place. At liquidation, the insurance companies combined had approximately 200,000 policies in force, with $600 million (not including assumption treaties discussed below) in face amounts as of the liquidation date. A request for proposal was undertaken during the summer of 2010 for the in-force blocks of both Lincoln Memorial Life Insurance Company and Memorial Service Life Insurance Company. Solicitation letters were mailed to 235 entities, with 2 companies submitting proposals. This resulted in the assumption of the Memorial Service Life Insurance Company block of business by Investors Heritage Life Insurance Company. That transaction closed on July 6, Assumption funding for this transaction by the Texas Life & Health Insurance Guaranty Association was approximately $94.6 million. The only proposal received on the Lincoln Memorial block was not accepted. In late 2016, efforts were again made to market the Lincoln Memorial Life Insurance Company block of business. The challenge with this block of business is that it will require the successful bidder to be able to provide administration for both the life insurance policies and the associated pre-need contracts. There are companies with that unique capability. At the close of the year, the final refinements were being made to the proposal requests with hopes that a transaction can be consummated during

12 On August 6, 2009, the SDR, NOLHGA, and certain individual guaranty associations filed an action in the federal district court in St. Louis, Missouri. The original complaint asserted more than 30 claims for relief (including a federal RICO claim) and named over 40 defendants, including Cassity family members, related companies, professional advisors, banks, and an accounting firm. In July 2011, the court granted the federal government's request for a partial stay of the civil proceedings in light of thenpending criminal indictments against a number of individuals who were also named defendants in the civil suit. As a result of the stay, all testimonial discovery (except written discovery between the plaintiffs and the Bank Defendants) was postponed until the criminal proceedings were completed. The criminal proceedings concluded in late Documentary discovery involving any defendants was unaffected by the stay and remained ongoing throughout 2012 and On April 16, 2013, the court issued the Case Management Order, setting a jury trial to begin on February 2, The trial was scheduled to last up to 11 weeks. Prior to the 2015 trial, the plaintiffs settled with all Defendants except for two: PNC Bank and Forever Enterprises. The trial with the remaining Defendants began on February 2nd and lasted almost six weeks. The jury awarded the plaintiffs damages of $355 million plus punitive damages of $35.55 million against PNC Bank and $100 million against Forever Enterprises (because Forever has no assets, the latter judgment is considered uncollectable). Post-trial, PNC Bank successfully moved to reduce the damage award against it by $101.6 million due to settlements entered into by the plaintiffs with other defendants in the case. PNC Bank appealed the judgment to the Eighth Circuit Court of Appeals. The plaintiffs in turn cross-appealed on several issues. Activity during 2016 involved briefings in the appeals and related responses to the defendants. On September 20, 2016 oral arguments were made before the three judge panel of the Eighth District Court of Appeals. At the close of the year, the matter remained pending before the court. The Association has been funding claims since mid-november As of December 30, 2016, the Association has paid over $80 million in covered contractual obligations under life insurance policies used to fund the related pre-need contracts. This amount has been offset by amounts received as early access distributions from the estate, recoveries from the litigation settlements and ongoing premium collected under the policies. National States Insurance Company On April 1, 2010, the Circuit Court of Cole County, Missouri, issued a consent Judgment of Rehabilitation based on the hazardous financial condition of National States Insurance Company. The company was based in St. Louis, Missouri and was licensed in 37 states. It wrote life, accident and health, long-term-care (LTC), home health-care, and Medicare Supplement insurance policies. A large part of the LTC business was concentrated in Florida.

13 An assumption transaction with United Security Assurance (USA) covering approximately 5,700 non-florida, non-return-of-premium LTC policies was executed and approved pre-receivership. On August 31, 2010, the receiver filed his First Semiannual Report with the supervising court and advised the court that rehabilitation was not feasible. In September the receiver accepted a bid from Oxford Life Insurance Company for the Medicare Supplement block and proceeded to negotiate a deal, which was approved by the supervising court on October 8, On October 28, 2010, the receiver filed a petition for the liquidation of the company. On November 15, the court entered an order of liquidation with a finding of insolvency and approved the Early Access Agreement and Service Agreement between NOLHGA and the receiver. The task force executed a Joint and Common Interest Agreement with the receiver on January 21, NOLHGA filed an appearance in the receivership proceedings. On May 23, 2011, the affected guaranty associations authorized the signing of an Assumption Reinsurance Agreement with Family Life Insurance Company and the receiver for the defunct company. The agreement provided that the life policies would be assumed by Family Life Insurance Company. The life block comprised approximately 60,000 simple-issue burial life policies. The agreement was approved by the receivership court on July 15, During 2016, it was determined that the monthly premium collections and biweekly claims funding had fallen to a point where it would be feasible to try and move the administration of the business to another source. The affected guaranty associations successfully completed a request for proposal to transfer administration of the remaining in-force business to a third party administrator, TriPlus Services, Inc. The effective date of the transfer was set for January 1, The Association was one of four states that opted out of participating in the transfer of the administration and chose to administer their policies in house instead of using TriPlus. As of the end of 2016, the Association was assuming responsibility for 299 active long term care policies and 9limited medical/ surgical policies. The Association has developed a policy administration system to handle the ongoing responsibilities of administering to these policies. Penn Treaty/American Network Penn Treaty Network America Insurance Company and its wholly owned subsidiary, American Network Insurance Company (ANIC), both Pennsylvania domestic life insurance companies, were placed in rehabilitation on January 6, The rehabilitator filed a detailed Preliminary Report (see below) in April 2009 and filed petitions for the liquidation of Penn Treaty and ANIC on October 2, The ensuing seven year period has been a series of contentious efforts to demonstrate the financial insolvency of the companies to the court over the objections of various parties. 7

14 The rehabilitator's focus in 2016 was on two fronts: (1) resolving disputes with the shareholder interests, eventually resulting in a $10 million shareholder settlement brokered by the court, and (2) getting ready to file liquidation conversion petitions with the Commonwealth Court and preparing for liquidation orders. Those liquidation conversion petitions were filed by the rehabilitator with the Commonwealth Court on July 27, By this point, due to the rapid deterioration of the prospects of the companies' ability to meet future cash flow needs, the liquidation of both companies was deemed inevitable. It became an accepted conclusion that the liquidation of both companies would be in early 2017 which would trigger the 50 affected guaranty associations to protect the remaining 78,000 policyholders. Starting in the first quarter and accelerating in the second quarter of 2016, the NOLHGA Task Force began the daunting task crafting an orderly liquidation plan that would fulfill the statutory requirements of the affected guaranty associations. The plan was presented to and approved by the affected guaranty associations in November of The affected guaranty associations were given the opportunity to individually accept or reject certain aspects of the plan by the December 19, 2016 deadline. The key elements of the resolution plan were (1) Early Access Agreements with the receiver for Penn Treaty and ANIC, (2) a national premium rate increase strategy, (3) a Settlement Agreement with the intervening health insurers, (4) Reinsurance Agreements with the captive for the coordinated discharge of guaranty associationcovered liabilities, and (5) an Interim Services Agreement with the receiver through Penn Treaty's Allentown, Pennsylvania, operations platform Liquidation in the first quarter of 2017 is likely. Subsequent to the preparation of this report, the Commonwealth Court of Pennsylvania issued Orders of Liquidation for Penn Treaty and ANIC with an effective date of March 1, This will trigger the Association and planning will begin to provide the necessary funding of the covered contractual obligations. The funding will be consistent with the approved liquidation plan and the elections made by the Association. The unresolved issues are claim valuation and asset allocation. The health insurers have intervened for the limited purpose of objecting to the allocation of any portion of the estate assets to the claims of insureds that will not be covered by the affected guaranty associations. These uncovered claims will be almost exclusively comprised of claims for benefits that exceed the respective limits of the individual guaranty associations' statutes. The financial obligation of the Association in terms of funding the covered contractual obligations will be approximately $14 million. This amount will be provided in increments over time to allow for adjustments due to any rate increases and/or shifts in claim frequency and severity. rs

15 As background, Penn Treaty and ANIC had been in the business of writing longterm-care (LTC) insurance since Penn Treaty experienced rapid growth in its LTC business in the late 1990's. Based on financial information as of December 31, 2001, the company was required to file a Corrective Action Plan with the Pennsylvania Insurance Department due to financial stress. On April 6, 2009, the rehabilitator filed a Preliminary Report and Plan of Rehabilitation with the Commonwealth Court. The rehabilitator's initial plan described in the Preliminary Report was for the continued rehabilitation of both Penn Treaty and ANIC and included a nationwide rate increase on all business written prior to After evaluating several rehabilitation alternatives throughout 2009, the Commissioner filed petitions for liquidation on October 2, 2009 and filed a subsequent amended petition on October 23, The amended petitions reflected a financial condition that was worse than the original filing based on establishing the necessary reserves. The board of directors of Penn Treaty, through its Chairman, and Penn Treaty's sole shareholder, Penn Treaty American Corporation (PTAC), objected to the liquidation of Penn Treaty and ANIC in A hearing on the liquidation petitions began on January 31, On May 3, 2012, the court issued an order denying the liquidation petitions and ordering the rehabilitator to file a plan of rehabilitation that addresses and eliminates the inadequate and discriminatory premium rates for the pre-2002 business. Judgment on the court's order was entered on September 28, 2012, triggering the start of the 30-day notice of appeal period. On October 26, 2012, the rehabilitator filed a notice of appeal of the court's May 3 order. The rehabilitator filed Applications for Approval of the Plans of Rehabilitation for Penn Treaty and ANIC with the Commonwealth Court on April 30, The 2013 Plans were based largely on the reduction of policy benefits as a first step with the possibility of further benefit reductions or rate increases in the future. The rehabilitator filed an Amended Plan of Rehabilitation on August 8, 2014, and a Second Amended Plan of Rehabilitation on October 8, On December 3, 2014, the court issued a Case Management Order outlining notice and comment procedures. The hearing on the 2014 Plan was scheduled to begin on July 13, On August 5, 2013, the rehabilitator filed his brief in support of the appeal of the Commonwealth Court's 2012 order denying the liquidation petitions. The National Association of Insurance Commissioners and NOLHGA (with the Pennsylvania guaranty association) filed arnicus briefs in support of the rehabilitator. The Intervenors in the Commonwealth Court proceedings filed a brief in opposition to the appeal. Briefing continued through the end of 2013, and the oral argument was held on September 10, I,J

16 Interested parties, including NOLHGA, submitted formal and informal comments on the Second Amended Plan in February The court held a pre-hearing conference on February 20, Various motions were filed by the rehabilitator and interested parties regarding discovery and certain elements of the Second Amended Plan. In May, the court heard argument on, and subsequently denied, PTAC's application seeking an immediate rejection of the Second Amended Plan. The court also heard argument on the health insurers' applications challenging the use of estate assets to pay benefits in excess of guaranty association limits and the payment of commissions under the Second Amended Plan. The court reserved judgment on both issues. The first phase of the Second Amended Plan confirmation hearing began on July 13-14, Special Deputy Receiver gave direct testimony, and each of the limited intervenors gave opening statements. The court issued a Case Management Order on July 30, 2015, setting out the process and timing for discovery and stating that the second phase of the hearing would begin on November 30, A lengthy document discovery process ran through the end of 2015, and a number of fact and expert witnesses were scheduled for deposition. On October 13, 2015, after conferences with the parties and due to the extended discovery, the court issued a new scheduling order moving the start of the second phase of the hearing to February 16, The rehabilitator's witnesses and representatives were deposed in December 2015; depositions for the other parties' witnesses and representatives were scheduled for January On July 20, 2015, the Supreme Court of Pennsylvania issued a per curium opinion holding that the Commonwealth Court applied an incorrect standard of review when reviewing the rehabilitator's petition for liquidation. The Supreme Court found the appropriate standard of review is abuse of discretion. However, the Supreme Court upheld the Commonwealth Court's denial of the liquidation petitions and sent everything back to the Commonwealth Court. LITIGATION As of December 31, 2016, there was no active litigation where the Association is a defendant. The Association is a plaintiff along with other guaranty associations affected by the insolvency of Lincoln Memorial Life Insurance Company, Memorial Services Life Insurance Company and National Pre-Arranged Services, Inc. The Special Deputy Receiver for this insolvency is also a joint plaintiff. As of the end of 2016, the litigation was pending in the Federal Court of Appeals for the Eighth Circuit. 10

17 Financial IReportingi for the year'ending December 31, 2016

18 CERTIFIED PUBLIC ACCOUNTANTS & CONSULTANTS 2005 West Broadway, Suite 100, Columbia, MO OFFICE (573) FAX (573) West Edgewood, Suite E,Jefferson City, MO OFFICE (573) FAX (573) I II O 2 KI WIII I) (S) 1 IS]? To the Board of Directors of the Missouri Life and Health Insurance Guaranty Association We have audited the accompanying financial statements of the Missouri Life and Health Insurance Guaranty Association (the "Association"), which comprise the statement of financial position as of December 31, 2016, and the related statements of activities and cash flow for the year then ended, and the related notes to the financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error, Auditors' Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with U.S. generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Association's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Association's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Missouri Life and Health Insurance Guaranty Association as of December 31, 2016, and the changes in its net assets and its cash flow for the year then ended, in conformity with U.S. generally accepted accounting principles. March 10, 2017 American Institute of Certified Public Accountants I Missouri Society of Certified Public Accountants 11 j Member, Allinial Global

19 MISSOURI LIFE AND HEALTH INSURANCE GUARANTY ASSOCIATION STATEMENT OF FINANCIAL POSITION December 31, 2016 (with comparative totals for December 3, 2015) (Memorandum 'Class A Class B Total Only) ASSETS Cash and cash equivalents Investments Accounts receivable Interclass receivable (payable) Unbilled assessments Furniture and equipment, net of accumulated depreciation of $43,205 and $34,092, respectively Other assets Total assets $ 119,331 $ 5,485,936 $ 5,605,267 $ 9,071,063-18,207,022 18,207,022 22,294,630 44,563 55, ,391 1,983;580 84,592 (84,592) ,686,975 88,686,975 89,248,401 17,400-17,400 25,121 3,196, 39,043 42,239 8,597 $ 269,082 $ 112,390,212 $112,659,294 $ 122,631,392 LIABILITIES AND NET ASSETS LIABILITIES Accounts payable Accrued liabilities Reserves for claims payable Total liabilities NET ASSETS - UNRESTRICTED Total liabilities and net assets $ 17,676 $ 4,065 $ 21,741 $ 22, , , , ,365, ,365, ,612, , ,369, ,538, ,761, ,353 7,020,760 7,121,113 7,869,938 $ 269,082 $ 112,390,212 $112,659,294 $122,631,392 The notes to financial statements are an integral part of these statements. 12

20 MISSOURI LIFE AND HEALTH INSURANCE GUARANTY ASSOCIATION STATEMENT OF ACTIVITIES For the Year Ended December 31, 2016 (with comparative totals for the year ended December 31, 2015) (Memorandum Class Class B Total Only) SUPPORT AND REVENUES Liquidation distributions Net investment return Allocations to the Missouri Property and Casualty Insurance Guaranty Association Litigation recoveries Premium income Miscellaneous income (expense) Total support and revenues CHANGE IN UNBILLED ASSESSMENTS EXPENSES Claims benefits and processing, net of changes in reserves Assumption reinsurance ceding costs General and administration National Organization of Life and Health Insurance Guaranty Associations Total expenses, net of changes in reserves Change in unrestricted net assets Unrestricted net assets, beginning of year Unrestricted net assets, end of year $ - $ 417,224 $ 417,224 $ 84, ,512 65, , , , , ,421, , , , (3,878) 195,015 1,121,288 1,316,303 18,467,172 - (561,426) (561,426) (17,984,947) - 241, ,174 (618,517) - 46,485 46,485 48, , , ,066 3,129, , , , ,013 1,308,689 1,503,702 2,997,816 2 (748,827) (748,825) (2,515,591) 100,351 7,769,587 7,869,938 10,3 85,529 $ 100,353 $ 7,020,760 $ 7,121,113 $ 7,869,938 The notes to financial statements are an integral part of these statements. 13

21 MISSOURI LIFE AND HEALTH INSURANCE GUARANTY ASSOCIATION STATEMENT OF CASH FLOW For the Year Ended December 31, 2016 (with comparative totals for the year ended December 31, 2015) Total (Memorandum Class A Class B Total Only) CASH FLOWS FROM OPERATING ACTIVITIES Change in net assets Adjustments to reconcile change in net assets to net cash provided (used) by operating activities: Depreciation Realized loss on investments, net of change in unrealized gain/loss Change in accounts receivable Change in unbilled assessments Change in other assets Change in interclass receivable and payable Change in accounts payable Change in accrued liabilities Change in reserves for claims payable Net cash provided (used) by operating activities: CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales and maturities of investments Purchases of investments Purchase of equipment Net cash provided (used) by investing activities Net change in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year $ 2 $ (748,827) $ (748,825) $ (2,515,591) 9,113 9,113 1, , ,805 89,339 10,156 1,873,033 1,883,189 6,954, , ,426 17,984,947 5,401 (39,043) (33,642) (5,265) (13,857) 13, (5,234) 4,065 (1,169) 7,938 24,778-24,778 26,569 - (9,246,882) (9,246,882) (10,408,987) 30,359 (7,344,566) (7,314,207) 12,134,656-38,299,525 38,299,525 34,205,000 - (34,449,722) (34,449,722) (40,092,144) (1,392) - (1,392) (26,527) (1,392) 3,849,803 3,848,411 (5,913,671) 28,967 (3,494,763) (3,465,796) 6,220,985 90,364 8,980,699 9,071,063 2,850,078 $ 119,331 $ 5,485,936 $ 5,605,267 $ 9,071,063 The notes to financial statements are an integral part of these statements. 14

22 MISSOURI LIFE AND HEALTH INSURANCE GUARANTY ASSOCIATION NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization: The Missouri Life and Health Insurance Guaranty Association Act ("Act") was passed by the Missouri Legislature in 1988 to protect policy owners, beneficiaries, annuitants, payees and assignees of life insurance policies, health insurance policies, annuity contracts and supplemental contracts, subject to certain limitations, against failure in the performance of contractual obligations due to the impairment or insolvency of the insurer issuing such policies or contracts. To provide this protection, the Missouri Life and Health Insurance Guaranty Association (the "Association") was created by Missouri Revised Statute to guarantee payment of benefits and continuation of coverage. Any insurer or health services corporation licensed or holding a certificate of authority to transact in Missouri any kind of insurance for which coverage is provided under Missouri Revised Statute is a member insurer of the Association. All member insurers are and must remain members of the Association as a condition of their authority to transact business in Missouri. Members of the Association are subject to assessments to provide funds to carry out the purpose of the Act. The Association performs its functions under a plan of operation approved by the Missouri Director of Insurance and exercises its powers through a Board of Directors. The Association is subject to the immediate supervision of the Missouri Director of Insurance and the insurance laws of the State of Missouri. Basis of accounting: The financial statements of the Association have been prepared on the accrual basis of accounting. Therefore, revenues are recognized when earned and expenses arerecognized when incurred. Financial statement presentation: The Association uses the American Institute of Certified Public Accountants' not-for-profit model for accounting and financial reporting. The Association reports information regarding its financial position and activities according to three classes of net assets: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. The Association had only unrestricted net assets during 2016 and Summarized comparative total: The financial statements include prior year summarized comparative information in total, but not by fund. Such information does not include sufficient detail to constitute a presentation in conformity with U.S. generally accepted accounting principles. Accordingly, it should be read in conjunction with the Association's financial statements for the year ended December 31, 2015, from which the summarized information was derived. Use of estimates: Management uses estimates and assumptions in preparing these financial statements in accordance with U.S. generally accepted accounting principles. Those estimates and assumptions affect the reported amount of assets and liabilities and the reported revenues and expenses. Actual results could vary from the estimates that were used. Cash and cash equivalents: Cash and cash equivalents include certain interest bearing bank accounts and overnight repurchase agreements, which invest in various highly liquid investments. The Association considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. 15

23 Concentration of credit risk: Financial instruments that potentially subject the Association to concentration of credit risk consist primarily of cash on deposit, overnight repurchase agreements and investments. The Association maintained no balances in excess of FDIC coverage at December 31, 2016 or The Association held an overnight repurchase agreement balance of approximately $5,500,000 at December 31, 2016 and $9,000,000 at December 31, Overnight repurchase agreements are not secured. However, the Association requires that U.S. government and agency securities underlying the repurchase agreements must have a fair value of at least 100% of the cost of the repurchase agreement. The fair values of U.S. government and agency securities underlying repurchase agreements are determined daily. Investments.' Investments consist primarily of U.S. Government backed securities and are reported on the statement of financial position at fair value, as described more fully in Note 2. Accounts receivable. AcQounts receivable consist of litigation recoveries due from the National Organization of Life and Health Guaranty Associations ("NOLHGA"), amounts due from Missouri Property and Casualty Insurance Guaranty Association, and investment interest receivable. The Association considers all receivables at December 31, 2016 and 2015 to be fully collectible and has not recorded an allowance for doubtful accounts. Unbilled assessments: Unbilled assessments represent an accumulation of all future assessments that may be made in order to cover the estimated claims and loss adjustment expenses of current insolvencies. The potential future assessment amount is estimated at the beginning of the liquidation of an insurer and is subsequently reduced as assessments are billed, as changes occur to estimated claims and loss adjustment expenses, or when an insolvency is purchased by a third party. Furniture and equipment: Purchases of furniture and equipment are recorded at cost. The costs of normal maintenance and repairs are expensed as incurred, Renewals and betterments are capitalized and depreciated over the remaining useful lives of the related assets on a straight-line basis over three to ten years. Depreciation expense for the years ended December 31, 2016 and 2015 totaled $9,113 and $1,406, respectively. Assessments: For purposes of assessment, the Association maintains three accounts: (1) the accident and health insurance account; (2) the life insurance account; and (3) the annuity account. In order to provide funds necessary to carry out the powers and duties of the Association, the Board of Directors (Board) is authorized to assess the member insurers, in a combined assessment or separately for each account, at such time and for such amounts as the Board deems necessary. Class A assessments are made for the purpose of meeting administrative costs and other general expenses and examinations not related to a particular impaired or insolvent insurer. The amount of any Class A assessment is determined by the Board and may be made on either a non-pro rata or pro rata basis. Non-pro rata assessments may not exceed $150 per member company in any one calendar year. Class A assessments are made to the extent necessary to carry out the powers and duties of the Association. Class B assessments against member insurers for each account are in the proportion that the average premiums received on business in Missouri by each assessed member insurer on policies covered by each account for the three calendar years preceding the insolvent company's date of insolvency bears to the average of such premiums received on business in the state for the three calendar years preceding the insolvent company's date of insolvency by all assessed member insurers. There were no assessments made during

24 Expense classification: The Association classifies expenses as Class A or Class B based upon the statutory provisions of the Act. Class A expenses are administrative costs, legal costs and other costs not allocated to a particular impaired or insolvent insurer. Class B expenses are costs incurred to the extent necessary to carry out the powers and duties of the Association as it relates to the payment of the obligations of an impaired or an insolvent insurer. Income taxes. The Association is exempt from income tax under Section 501(c) (6) of the Internal Revenue Code. Interest and penalties incurred, if any, related to annual Form 990 are reported within general and administration expenses on the statement of activities. Subsequent events: Events that have occurred subsequentto December 31, 2016 have been evaluated through March 10, 2017, which represents the date the Association's financial statements were approved by management and, therefore, were available to be issued. 2. INVESTMENTS Investments consisted of the following at December 31, 2016 and 2015: Unrealized 2016 Cost Gain (Loss) Fair Value Class B Fund U.S. agency bonds and notes $18,390,093 $ (183,071) $ 18,207,022 Total Class B investment securities $18,390,093 $ (183,071) $18,207,022 Unrealized 2015 Cost Gain (Loss) Fair Value Class B Fund U.S. agency bonds and notes $22,076,010 $ (84,731) $ 21,991,279 U.S. treasury bond 300,000 3, ,351 Total Class B investment securities $ 22,376,010 $ (81,380) $ 22,294,630 Contractual maturities of investment securities at December 31, 2016 are as follows, based on the expected call date. Unrealized Cost (Loss) Fair Value Class B Fund Due in one year or less $ 5,002,500 $ (3,300) $ 4,999,200 Due in one to five years 13,387,593 (179,771) 13,207,822 Total Class B investment securities $18,390,093 $ (183,071) $18,207,022 Fair Value Disclosures - Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy is used that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are 17

25 classified within Levels 1 and 2 of the hierarchy) and the reporting entity's own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). The fair value hierarchy is as follows: Level 1 Level 2 Level 3 Valuation is based upon quoted prices (unadjusted) in active markets for identical assets or liabilities that the Association has the ability to access. Valuation is based upon quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Valuation is generated from model-based techniques that use at least one significant assumption based on unobservable inputs for the asset or liability, which are typically based on an entity's own assumptions, as there is little, if any, related market activity. The following is a description of valuation methodologies used for assets disclosed at fair value. Fair value measurement is based upon quoted prices, if available, If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security's credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. treasury securities that are traded by dealers or brokers in active overthe-counter markets, and money market funds. Level 2. securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets. The table below presents the Association's assets measured at fair value as of December 31, 2016 and 2015, aggregated by the level in the fair value hierarchy within which those measurements fall: 2016 Assets Investment securities 2015 Assets Investment securities Level 1 Level 2 Level 3 Total $ - $18,207,022 $ - $18,207,022 Level 1 Level 2 Level 3 Total $ - $ 22,294,630 $ - $ 22,294,630 18