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 Aetna Insurance Company ofconnecticut (the "Company") as of December 31, 2010, do hereby adopt the findings and recommendations contained therein based on the following findings and conclusions: TO WIT: 1. I, Anne Melissa Dowling, as the Deputy Insurance Commissioner of the State ofconnecticut, and as such is charged with the duty of administering and enforcing the provisions oftitle 38a of the Connecticut Oeneral Statutes ("COS"). 2. The Company is a domestic insurer authorized to transact the business of insurance in the State of Connecticut. 3. On February 27,2012, the verified Report ofthe Company was filed with the Connecticut Insurance Department (the "Department"). 4. In accordance with COS 38a-14(e)(3), the Company was afforded a period of thirty (30) days within which to submit to the Department a written submission or rebuttal with respect to any matters contained in the Report. 5. On March 27,2012, the Company notified the Department ofcertain 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 ofthe Report is attached hereto and incorporated herein as Exhibit A. P.O. Box 816 Hartford, cr 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 ofthe 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 ofthe COS. Dated at Hartford, connecticut;a;;~~ Anne Melissa Dowling Deputy Insurance Commissioner

3 Exhibit A ASSOCIATION EXAMINATION REPORT OF THE AS OF DECEMBER 31,2010 BY THE CONNECTICUT INSURANCE DEPARTMENT

4 TABLE 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 Investments Losses Unearned Premiums COrrlmon Capital Stock Gross Paid in and Contributed Surplus Aggregate Write-ins For Special Surplus Funds Unassigned Funds (Surplus) Subsequent Event Conclusion Signature

5 February 27,2012 The Honorable Thomas B. Leonardi Insurance Commissioner State of Connecticut Insurance Department 153 Market Street, 6 th Floor Hartford, CT Dear Commissioner: In compliance with your instructions and pursuant to the requirements of Section 38a-14 of the Connecticut General Statutes (CGS), the undersigned has conducted a Financial Examination of the condition and affairs of the: (hereinafter referred to as the Company or AICC), 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 Avenue, Hartford, CT. The report of such examination is submitted herewith.

6 SCOPE OF EXAMINATION The previous examination ofthe Company was conducted as of December 31, The current examination, which covers the subsequent five year period through December 31, 2010, was conducted under the zone plan of the National Association ofinsurance Commissioners (NAIC) at the primary location of the books and records of the Company. The examination was conducted on a full scope, comprehensive basis in accordance with the procedures outlined in the 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 Company by obtaining information about the Company, including corporate governance and 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, and management compliance with Statutory Accounting Principles and the Annual Statement Instructions (Instructions). All accounts and activities of the Company were considered in accordance with the risk-focused surveillance examination process. Concurrent examinations were also conducted on Aetna Life Insurance Company (ALIC), Aetna Health and Life Insurance Company (AHLIC), Aetna Health Inc. (AHI), and Aetna Better Health Inc. (ABH), which are members ofthe Aetna Group of companies (the Group). As part of the examination planning procedures, the Financial Regulation Division of the Connecticut Insurance Department (the Division) reviewed the following materials submitted by the Company: Annual Statements filed with the Division; The 2009 and 2010 audit reports by the Company's independent certified public accountants, KPMG, LLP (KPMG); The 2009 and 2010 statutory audit opinions which indicated no material concerns with respect to financial condition or regulatory compliance issues; Statements of actuarial opinion; Annual reports to shareholders; Form 10-K reports filed with the Securities and Exchange Commission; Reports ofthe Company's Internal Audit Department; and Minutes of the 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). 2

7 A comprehensive review was made of the financial analysis files and documents submitted to the Financial Analysis Unit of the Division, as well as Examination Jumpstart, and Financial Analysis and Solvency Tracking System reports obtained from the NAIC database. Work papers prepared by KPMG, the Company's independent public accountants, as of December 31, 2010, in connection with their annual statutory audits, were reviewed and relied upon to the extent deemed appropriate. Lewis & Ellis, Inc. (L&E) was engaged by the Division to assist in the review of the Company's actuarial computed loss reserves and significant ceded reinsurance treaties. CCR, LLP (CCR) was engaged by the Division to assist in the review of the Company's loss and benefit accounts. RSM McGladrey, Inc. (McGladrey) was engaged by the Division to assist in the review of the Company's information technology (IT) general controls; 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, originally named Aetna Casualty Company, was issued a Certificate of Incorporation by the State of Connecticut's Secretary of State on January 3, It was formed pursuant to Section of the CGS. In accordance with this section, the Company was formed by certificate of formation issued by the Commissioner of Insurance, rather than by Special Act of the State Legislature. This option is only available to a company that is in existence and wishes to form a subsidiary. The Company is a direct wholly-owned subsidiary of AHP Holdings, Inc., (AHP) and an indirect wholly-owned subsidiary of ALlC, whose ultimate parent is Aetna, Inc. (Aetna). The Company changed its name to Aetna Insurance Company of Connecticut, effective May 31,1996. The Division approved ALlC's filing for exemption from change in control to transfer the Company to AHP on May 6, AICC is a wholly-owned subsidiary of AHP, a Connecticut corporation, whose ultimate parent is Aetna. 3

8 ORGANIZATIONAL CHART A partial organizational chart of the insurance holding company system as of December 31,2010, is as follows: Aetna, Inc. (Pennsylvania) I Aetna Life Insurance Company (Connecticut) I Aetna Health and Life Insurance Company (Connecticut) Aetna Health Holdings, LLC (Delaware) I AHP Holdings, Inc. (Connecticut) Aetna Health Inc. (Connecticut) Aetna Better Health Inc. (Connecticut) I Aetna Insurance Company of Connecticut (Connecticut) MANAGEMENT AND CONTROL The Company is a member of an insurance holding company system as defined in Sections 38a to 38a-138.1b of the Connecticut Insurance Regulations and Section 38a-135 of the CGS. The revised bylaws of the Company require the annual meeting of the shareholders for the election of directors for the for transaction of such other business should by held each year on such date and such time, within or without the State of Connecticut, as may be detennined 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 and shall be called by the president or the 4

9 secretary at the written request of any shareholder or shareholders owning at least ten percent (10%) of the outstanding shares entitled to vote. The number of directors which shall constitute the entire Board shall be fixed from time to time by resolution of either the Board or shareholders. Each directors shall 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. Regular meetings of the Board may provide by resolution for the holding of regular meetings of the Board, and may fix the time and place thereof. 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 entitled to vote, or by one of the directors, at such time and place as may be specified in the respective notices or waivers of notice thereof. 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. The Board may, by resolution or resolutions passed by a majority of the entire Board, designate an executive committee and such other committees, with such powers and authority as may be provided in such resolution. Directors serving the Company at December 31, 2010, were as follows: Name Michael W. Fedyna Mark W. Hill Title and Principal Business Affiliation Chief Actuary, AICC Director, AICC Officers At December 31, 2010, the officers of the Company were as follows: Name Margaret A. Sparm Elaine R. Cofrancesco Edward Chung-I Lee Michael W. Fedyna Joseph A. Alfano William 1. Kramer Title President Treasurer Secretary Chief Actuary Controller Vice President and Assistant Secretary 5

10 RELATED PARTY TRANSACTIONS The Company is party to numerous related party transaction agreements. The agreements that are material in nature are as follows: Expense Allocation Agreement Effective January 1,2004, the Company entered into an Expense Allocation Agreement with ALIC to allocate costs relating to their stop loss insurance business, in proportion to the premiums derived from that business, by each entity. Consolidated Tax Allocation Agreement Effective January 1, 2006, the Company entered into a tax sharing agreement and a supplemental tax sharing agreement with Aetna for the filing of consolidated federal income tax returns. The income tax obligation of the Company is apportioned in accordance with the result of its tax returns, applied on an individual basis. Aetna renders payment to the appropriate tax authority on behalf of itself and each subsidiary member of the affiliated group that is included in the consolidated income tax return. If the Company generates a separate tax loss, a tax benefit is allocated to the Company to the extent the loss is utilized against Aetna's consolidated taxable income. INSURANCE COVERAGE The Company is insured with affiliates on a $60 million forgery or alteration, single loss limit of liability, financial institution bond issued by Travelers Casualty & Surety Company of America. The Company maintains a single loss deductible of $1 0 million on this coverage. 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 Twin City Fire Insurance Company Hartford Fire Insurance Company The Factory Mutual Insurance Company Underwriters at Lloyds Aetna Insurance Company of Connecticut Hartford Fire Insurance Companies Coverage Commercial general liability Commercial automobile liability Commercial property and boiler & machinery Directors & officers liability Managed care professional liability Workers compensation and employers liability 6

11 TERRITORY AND PLAN OF OPERATIONS The Company is licensed to transact business in all fifty states. Prior to July 1,2008, the Company provided stop loss coverage in connection with administrative services only contracts for self-insured group health plans. Effective July 1,2008, all of the Company's existing stop loss policies terminated. The Company, in conjunction with an exclusive relationship established between Pets Best Insurance Service, LLC, an Idaho limited liability company (Pets Best), and the American Veterinary Medical Association Group Health and Life Insurance Trust (AVMA-GHLIT), is the exclusive insurer ofthe Pets Best pet insurance product, reported as inland marine business. In addition, the Company entered into an occurrence professional liability policy for the policy periods February 1,2010 through February 1,2011 and February 1,2009 through February 1, 2010, respectively, with Aetna and its subsidiaries and affiliates. That business is 100% ceded to Aetna Risk Indenmity Company, Ltd., (ARlC), an affiliate. REINSURANCE The Company's only ceded reinsurance is other liability insurance to ARlC. The Company's only assumed reinsurance business is an immaterial auto liability reserve from Travelers Casualty & Surety Company of America. INFORMATION TECHNOLOGY CONTROLS McGladrey performed an evaluation ofthe 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. McGladrey's objectives were to determine whether IT resources align with the Company's strategies and objectives and to ensure that significant risk associated with its IT environment was appropriately mitigated by strategies and controls as outlined in Exhibit C. The objectives of this review was achieved through a combination of reviewing the Company's policies and procedures, testing in key areas related to Exhibit C, interviewing the Company's IT senior management, reviewing IT risk assessment processes, and leveraging the risk assessment procedures performed by KPMG. 7

12 The scope of the review for the companies under examination (Companies) included the following administrative systems: System Aetna Administration System (AAS) AES Billing System (AES) Claim Reporting System (CRS) QNXT HMO Claims Description Policy administration and premium processing system Premium billing system. Death, disability and accident and health loss and benefit processing system ABH administrative system AHI claim processing system The internal control structure of the Company 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 is conducive to producing reliable accounting information, and the review did not disclose any material data integrity issues. ACCOUNTS AND RECORDS The Company uses the Integrated Financial System (IFS), the 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 annual statement. 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 monthly basis. 8

13 FINANCIAL STATEMENTS The following statements as filed by the Company, and as detennined by the examination, reflect the assets, liabilities, surplus and other funds, and statement of income, as of December 31, 2010: ASSETS Account Description Assets Nonadmitted Assets $10,522,914 9,168, ,771 Bonds Cash, cash equivalents and short-term investments Investment income due and accrued Premiums and considerations: Uncollected premiums and agents' balances in course of collection Current federal and foreign income tax recoverable and interest thereon Net deferred tax asset Aggregate write-ins for other than invested assets 10,146,716 69,910 1,064, ,736 $155, , ,999 Net Admitted Assets $10,522,914 9,168, ,771 9,991,316 69, ,544 11,737 Total assets excluding Separate Accounts, Segregated Accounts and Protected Cell Accounts 31,354, ,446 30,877,245 Totals $31 354,691 $ $30,877,245 LIABll.JTIES, SURPLUS AND OTHER FUNDS Losses $1,564,225 Other expenses 56,943 Taxes, licenses and fees 151,057 Unearned premiums 10,668,689 Payable to parent, subsidiaries and affiliates 892,033 Total liabilities 13,332,947 Aggregate write-ins for special surplus funds 50,816 Common capital stock 3,000,000 Gross paid in and contributed surplus 11,736,150 Unassigned funds (surplus) 2,757,332 Surplus as regards policyholders 17,544,298 Total liabilities and surplus $30,

14 STATEMENT OF INCOME Premiumsearned $12,431,165 Losses incurred 7,439,478 Loss adjustment expenses incurred 742,728 Other underwriting expenses incurred 4,642,773 Total underwriting deductions 12,824,979 Net underwriting gain (loss) (393,814) Net investment income earned 721,005 Net realized capital gains (losses) 2,495 Net investment gain 723,500 Net income before dividends to policyholders, after capital gains tax and before all other federal and foreign income taxes 329,686 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 329, ,604 Net income $(225,918) CAPnAL AND SURPLUS ACCOUNT Surplus as regards policyholders, December 31, prior year $17,130,262 Net income (225,918) Change in net deferred income tax 321,947 Change in nonadmitted assets 289,511 Aggregate write-ins for gains and losses in surplus 28,496 Change in surplus as regards policyholders for the year 414,036 Surplus as regards policyholders, December 31, current year $17, INVESTMENTS The Division examined the Companies investment and general risk management practices. The scope of the review included the following: Gain an understanding of the investment strategy and portfolio composition to assess the investment strategy and initiatives compared to the business objectives; Assess the investment risk management function and practices to identify, measure, manage, and monitor/report risks; Assess the valuation and price verification process; and Review the watch list and impairment processes. 10

15 The focus ofthe review and analysis included the following risk areas: Asset pricing and fair val ue detennination; Other-than-temporary impainnent (OTTI) detenninations; Commercial mortgage backed securities (CMBS) and other securitized assets; and Liquidity and funding risks. The Division's approach to conducting the risk review included the following: Reviewed investment policy and guideline documentation; Reviewed investment strategy documentation for a sample of product lines; Reviewed audited statutory financial statements as of December 31, 2010; Interviewed key senior staff; Reviewed operating plan and key priorities; Reviewed investment management monthly operating reports; Analyzed investment portfolio by asset class, bond type, credit ratings, and other similar characteristics; Reviewed problem asset and impainnent review meeting materials, including underwater securities report and problem bond report; Reviewed accounting policy on OTTI; and Reviewed documentation of valuation policies and methodology for each asset class. The Company's investment strategy appears to be fundamentally sound and portfolio strategies exist at the product level, which recognize the product liability and liquidity needs. The Company employs numerous reports used to manage investment risk and perfonnance and analyzes investment perfonnance relative to plan. Internal committees and senior management review committees focus on risk management and provide for a disciplined impainnent review process. LOSSES $1, UNEARNED PREMIUMS $10,668,689 The Division retained L&E to assist in reviewing the accuracy and theoretical correctness of reserve calculations, and analysis perfonned by the Company's appointed actuary as of December 31,2010. Consistent with the risk focused surveillance approach to the examination, L&E relied upon analyses and tests documented by the Company and in the working papers ofthe Company's independent auditors. Reviews of the Company's primary lines of business were 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 ofpractice. In perfonning the reserve review and analysis, L&E conducted the following tests: 11

16 Reviewed and analyzed statutory Annual Statements for 2009 and 2010, and inquired into other recent years covered under the examination period; Met with Company management to understand the business of the Company, its procedures governing actuarial calculations, its approach to risk management, and its likely areas of financial and business risk; Reviewed tests performed by the Company's actuaries and its independent auditors, and performed independent supplemental reserve calculation tests; Reviewed experience study information compiled and provided by the Company in support of the major assumptions used in the asset adequacy analysis; and Reviewed and analyzed the Company's Statement of Actuarial Opinion, including the 2010 Actuarial Memorandum, and inquired into other recent years covered under the examination period. It was determined that the Company's cited reserve base and methods make adequate provision for Connecticut minimum statutory reserves, and are consistent with actuarial guidelines. COMMON CAPITAL STOCK $3,000,000 At December 31,2010, the Company reported 10,000 shares of common stock authorized, with 1,500 shares issued and outstanding, having a par value of $2,000 per share. All issued shares are owned by AHP, which is wholly-owned by ALIC. The ultimate parent is Aetna. The Company paid $10 million as an extraordinary dividend to its parent on December 6, 2007, all of which constituted a return of capital. The Division approved the dividends paid to its parent. GROSS PAID IN AND CONTRIBUTED SURPLUS $ The following exhibit reflects the balance of this account during the period under review: 2009 $11,736, $11,736, $11,736, $21,736,150 12

17 AGGREGATE WRITE-INS FOR SPECIAL SURPLUS FUNDS $50,816 The following exhibit reflects the balance of this account during the period under review: 2009 $22, $ $ $0 UNASSIGNED FUNDS (SURPLUS) $2,757,332 The following exhibit reflects the balance of this account during the period under review: 2009 $2,371, $2,860, $2,941, $267,397 SUBSEQUENT EVENT In 2011, the Company notified Pets Best of its intention to terminate the exclusive relationship it had with them. On February 14, 2012, Pets Best announced that Independence American Insurance Company (laic) will become the new underwriter of pet insurance plans offered by Pets Best. As a result, the Company's pet insurance business will begin to runoff as laic files and gets approval in states and begins to underwrite new policies. CONCLUSION The results of this examination disclosed that, as of December 31, 2010, the Company had admitted assets of $30,877,245, liabilities of $13,332,947, and surplus of $17,544,298. During the period under examination, admitted assets increased $3,020,922, liabilities increased $11,004,650, and surplus as regards policyholders decreased $7,983,728. It was determined that the Company's assets were fairly stated in accordance with guidance outlined in the Manual. Assets were acceptable under Section 38a-l 02 of the CGS. The liabilities established were adequate to cover the Company's obligations to policyholders. 13

18 SIGNATURE In addition to the undersigned, the following members of the State of Connecticut Insurance Department participated in the examination: William Arfanis, CFE; Kevin Beaudoin, CFE; Edna Bosley; James Jakielo, FSA, MAAA; Daniel Levine, CPA; Robert Linnell, CFE; Richard Marcks, FCAS, MAAA; Kenneth Roulier, AFE, AES, CISA; William Tacy, CFE, CISA; the CPA firrn of CCR; the consulting firrn of McGladrey; and the actuarial consulting firrn of L&E. 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, 2010, to the best of my inforrnation, knowledge and belief. / Respectfulljj sub,'tted, State of Connecticut ss, Hartford County of Hartford Subscribed and sworn to b~ae me, -----'---~--'(~.L..J.;=;~r---~-'-----_' ' I_"'_C!-1~-C--'-\'<01-",,-~---- Notary Public on this c!j1 -' day of_l---'=i~l...w--=::"=::~-i:::-~_' n(j/71 tiel Yh!J1 f!.;~ Notary Publi0 ' = My Commission Expires It IJo & /e; 14