Building Blocks for. Success. Teamwork Stability. Goal Orientation. Creativity. Commitment. Integrity. Quality Transparency Respect.

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1 Building Blocks for Success Success Teamwork Stability Creativity Goal Orientation Commitment Integrity Quality Transparency Respect 2010 Annual Report 1

2 MISSION VISION VALUES MISSION VISION To be the industry leader in promoting value and accessibility of LTCi through innovation. VALUES To assure security and peace of mind through simple, innovative long term care financing solutions. Integrity Quality Respect Teamwork Goal Orientation Creativity Transparency 2 BUILDING BLOCKS FOR SUCCESS

3 COMPANY PROFILE MedAmerica Insurance Company, MedAmerica Insurance Company of New York, MedAmerica Insurance Company of Florida, MIG Assurance (Cayman) Ltd., and Excellus Insurance Agency, Inc., comprise The Long Term Care Business of MedAmerica. The MedAmerica Companies are subsidiaries of Excellus Health Plan, Inc., which is part of The Lifetime Healthcare Companies, Inc., a $5 billion not-for-profit health care company headquartered in Rochester, New York, that finances and delivers health care to more than 2 million people in New York State. MedAmerica insurers have a Standard & Poor s rating of A-, Strong, and an A.M. Best s rating of B++, Good. These long term care insurance companies are recognized nationally for financial and rate stability attributable to responsible underwriting and risk management disciplines. With long term care insurance as its singular focus, MedAmerica has brought a high level of expertise and commitment to the challenging issue of long term care financing. Throughout its 24 years in the industry, the company has grown to be a leader in delivering innovative long term care financing solutions having inforce contracts in every state and the District of Columbia. As a company that embraces continuous innovation, anticipates the future needs of consumers and producers, and responds with leading-edge products and services, MedAmerica continues to lead the evolution of long term care with its pioneering spirit. MedAmerica s success in product innovation is evident in its cutting-edge Simplicitybranded products, first introduced in 2004 as the highest independently-rated long term care insurance product on the market.* The brand s second generation product further enhanced the brand s reputation as Simplicity ii SM earned an even higher rating. In 2010, MedAmerica expanded its product portfolio with FlexCare, an innovative reimbursement model LTC insurance product that will enter the market in With this powerful combination of LTCi financing soluctions, MedAmerica has set the new standard for quality long term care insurance. MedAmerica consistently stands out amongst the giants of the long term care industry. The heart, soul and passion we bring to long term care insurance has solidified MedAmerica s position as an industry leader in fulfilling our mission to assure security and peace of mind through simple, innovative long term care financing solutions. We are accomplishing our goal of helping families keep promises. * SellingLTC.com * SellingLTC.com 3

4 A LETTER FROM THE PRESIDENT Commitment. Stability. Integrity. Quality. Transparency. Teamwork. Growth. These are the words that come to the forefront of my mind every morning when I walk into the MedAmerica home office. These words represent the guiding principles by which we run our business. They represent the building blocks to MedAmerica s success. They are at the root of how we have earned and continually work to maintain your trust. Merriam-Webster defines trust as reliance on the character, ability, strength, or truth of someone or something. Each and every year, we put our energy into living that definition. We are keenly aware that we are in the business of trust. Our policyholders trust that when they have a long term care need, MedAmerica will be there to provide them with the means necessary to get the care they deserve. They trust that we will be by their side every step of the way, guiding them through their LTC crisis. Often times, we have earned that trust by virtue of a person s employer or association placing their trust in us. And, those employers or association leaders put their trust in us because our distribution partners trust us enough to promote our product because they believe that we will keep our promises. They trust that we are committed not just to our policyholders, but to the industry as a whole. One way we earn trust is by committing to be fully transparent in everything we do. As you can see in this report, we are sharing with you the full picture of our financial strength. These are our numbers, raw and real not obscured by any other line of business. What you see in these pages is pure, 100% LTCi sales and profit. 4 Another way we demonstrate trust and ensure continued growth is by listening to the needs and desires of both consumers and producers, and then acting on that feedback. What we have been hearing recently is a desire for MedAmerica to fill a gap by offering more LTCi choices. In response, we spent much of 2010 developing FlexCare.

5 This reimbursement-style long term care insurance product with a rich cash rider and innovative inflation options allows ultimate flexibility. Agents can guide their clients to the right plan at the right price point for their circumstances. Couple FlexCare with Simplicity, the number-one rated LTCi product on the market, and you can see that MedAmerica offers a powerful product portfolio was an exciting year for MedAmerica. It was my first chance to work toward the simple but powerful mission I was given when I was appointed president: Grow profitably. In an economy that is still struggling from the 2008 downturn, and in a marketplace that is dwindling as carriers begin to pull away from the long term care insurance market, I m pleased to report that MedAmerica bucked the trend with 20% growth in total sales in Though I am proud of our success and growth, I believe we have only just begun our journey. With the building blocks for our success firmly in place, MedAmerica will continue to achieve profitable growth and will continue to demonstrate our unwavering commitment to LTCi each and every day. As a monoline company a long term care insurance specialist MedAmerica lives and breathes LTCi. It is our lifeblood. Commitment to LTCi is survival at MedAmerica, so you can count on us to be here for the long haul. The point I m making here is that the products we offer, who we are, and how we do business are the keys to our expansion. We care. We listen. We trust. Commitment. Stability. Integrity. Quality. Transparency. Teamwork. Growth. Those are the principles that drive our behavior. We will continue to grow, and we will continue to do so profitably. We will continue to support our agents and to take care of our policyholders as though they are a part of our own family because to us, they are a part of our family. I d like to thank all of the folks who have already joined us on this amazing journey. We truly value the trust you have placed in us, and you can rest assured that we are committed to maintaining that trust. It is your support and belief in us that has been integral to our success. And for those of you who are just learning about us or have not yet embraced MedAmerica, we do hope you will allow us to help you with your long term care insurance needs. You can trust we will do our best for you. William E. Jones, Jr. President, MedAmerica 5

6 IN THEIR OWN WHY DO YOU CHOOSE MEDAMERICA? WORDS Peter S. Gelbwaks, chairman of Gelbwaks Executive Marketing Corp., recently shared his thoughts on what makes MedAmerica different, and why his organization does business with MedAmerica. Commitment MedAmerica lives and dies by long term care. It breathes long term care and doesn t just manufacture it. When you live and die LTCi like MedAmerica does, you turn an idea over numerous times before making a decision to change or reposition what you re selling. It is a huge difference because as an agency, we don t have to worry what MedAmerica s next move might be. Stability MedAmerica is big enough to feel comfortable with and small enough to feel an identity with. I feel secure in offering MedAmerica products to my clients because I know the company is stable, and yet is small enough that agents and clients are more than just a number. Teamwork With MedAmerica, I feel like I am part of the team, and I get that sense throughout the company, from the president on down. I have a sense of belonging at MedAmerica. MedAmerica is one of the few carriers out there that asks for input from the field and then actually does things based on that input. I know by MedAmerica s actions that my agency s input means something to them. Believe it or not, choosing a carrier is a very analytical process for sales people. Commission and underwriting are not the sole basis for that choice. Rather, agents choice of who to sell is driven by relationships, and MedAmerica is a great relationship company. 6

7 2010 TESTIMONIALS Real stories from those who have worked with us speak much louder than our words of reassurance. That s why we asked two of our business partners to share why they choose to do business with MedAmerica. This is just a snapshot of how and why MedAmerica is different. We hope these testimonials serve as a building block toward earning and maintaining your trust, and gaining your business. Jonas Roeser, VP of Marketing & Operations for LTC Financial Partners, LLC (LTCFP) has seen his agency s production of MedAmerica business grow over 100% in We asked him what LTCFP likes most about working with MedAmerica. Innovation MedAmerica is innovative with its cash product and we simply just believe in the product. A Simplicity plan is owned by many of our leadership, employees and a number of our producers. The new FlexCare product is also very attractive for the worksite market. Couple these products with MedAmerica s commitment to being a forerunner in technology by providing tools such as online applications, and you have a winning combination that makes it easier to do business I find that doing business with MedAmerica is pretty close to hassle-free. Commitment One of the things that LTCFP really loves about MedAmerica is their commitment to raising awareness of some of the social issues that surround long term care. MedAmerica s elder abuse awareness initiative championed under medical director Dr. Patricia Bomba is a great example of how the company truly cares about long term care issues and not exclusively about sales. MedAmerica was also the first carrier to support the 3 in 4 Need More campaign to help raise awareness for long term care planning not the need to purchase LTCi, but the need to have a plan. 7

8 2010 A YEAR IN REVIEW Earned premium revenues of $143.4 million. Grew assets to over $1.4 billion. Earned pre-tax income of $7.2 million. In-force policies of 122,000. Increased new policy sales by more than 21%, adding $7 million in annualized premium. Paid $71 million in claims by managing 2,950 claimants annually. Maintained average days to pay for claims of less than 14 days. Diversified product portfolio with the development and filing of FlexCare, a new reimbursement LTCi product featuring a cash rider. The product was filed in 33 states in Filing in the remaining 17 states is ongoing. The product will be released throughout 2011 as it is approved by each state s department of insurance. Implemented Simplified Application Processing for Employer Program & Association Business. 8

9 MANAGEMENT S REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING The management of MedAmerica Insurance Company of New York, MedAmerica Insurance Company, MedAmerica Insurance Company of Florida, MIG Assurance (Cayman) Ltd., and Excellus Insurance Agency, Inc. (the Company), are responsible for preparing the combined financial statements and other financial information in this Annual Report. This responsibility includes maintaining the integrity and objectivity of financial data and the presentation of the Company s results of operations, financial position, and cash flows in accordance with accounting principles generally accepted in the United States of America. The financial statements include amounts that are based on management s best estimates and judgments. The Company s combined financial statements have been audited by Deloitte & Touche LLP, whose report appears in this Annual Report. The Company maintains a system of internal controls that provides reasonable assurance that its records reflect its transactions in all material respects and that significant misuse or loss of assets is prevented. There are limits inherent in all systems of internal control based on the recognition that the cost of such systems should be related to the benefits to be derived. Management believes that the costs of internal control systems do not exceed the benefits obtained and are adequate to accomplish its objectives on a continuous basis. The Company maintains a strong internal auditing program that independently assesses the effectiveness of internal controls and takes appropriate actions to respond to these recommendations. The Board of Directors, acting through its Audit Committee composed solely of non-employee directors, is responsible for determining that management fulfills its responsibilities in the preparation of the combined financial statements and the maintenance of internal controls. In fulfilling its responsibility, the Audit Committee recommends independent auditors to the Board of Directors for appointment. The committee also reviews the combined financial statements and adequacy of internal controls. The Audit Committee meets regularly with management, Corporate Internal Audit, and the independent auditors. Both the independent auditors and Corporate Internal Audit have full and free access to the Audit Committee, without management representatives present, to discuss the scope and results of their audits and their views on the adequacy of internal controls and the quality of financial reporting. William E. Jones, Jr., President Emil D. Duda, Chief Financial Officer 9

10 MANAGEMENT DISCUSSION AND ANALYSIS overview 2010 was marked with positive operating results, with net income before tax of $7.2 million. Total revenues during 2010 increased from $213.3 million to $221.1 million and assets grew from $1.25 billion to $1.42 billion. Based on its strong financial position and proven business strategy, The Long Term Care Business of MedAmerica (the Company) maintained an A- rating from Standard and Poor s and a B++ rating from A.M. Best during The A.M. Best outlook improved to stable. The Company continues to focus on underwriting, servicing and reinsuring long term care insurance and related products. The Company sells long term care insurance products in 50 states and the District of Columbia. RESULTS OF OPERATIONS Sales Premium revenue decreased 2.2% from $146.6 million in 2009 to $143.4 million in 2010, primarily due to the sale of a block of business during Contracts inforce were 122,949 by the end of 2010, and new policy sales increased by more than 21%, adding $7.0 million in annualized premium. Premiums were directly written in all 50 states during New York continues to be the main source of sales, accounting for 30% of new premiums, with Florida (8%), Texas (5%) and California (5%) comprising other areas of focused sales activity. Asset Growth (in millions) Sales increased while at the same time agent appointments decreased from 8,906 to 3,646 by the end of 2010, reflecting the Company s efforts to focus on productive agents. Distribution channels include Supervising General Agencies (SGA s), general brokerage agencies, and long term care dedicated agents. The Company continues to expand its sales capacity by contracting other forms of distribution, including financial planners and group brokers. The Company is selling its 14th generation of long term care insurance products. Simplicity ii is an innovative product that is strategically focused on the needs of baby boomers. The product is rated number one (1) by and is uniquely designed to provide consumers with cash and control over service delivery. Market feedback on the product affirms the Company s high expectations for the Simplicity product. In response to market demands, the Company plans to offer two (2) new products during The Company continues to be a leader in the worksite long term care insurance market. Group business accounts for 27% of MedAmerica s inforce premiums. Product sales in the worksite continue to grow in line with expectations. Sales (Annualized Premium) $1,247.6 $1,420.4 $5.8 $

11 2010 FINANCIAL REPORT Expenses Benefits expenses are actuarially determined based upon assumptions as to utilization, mortality, lapses and investment yields. Liabilities for policy and contract claims are computed using the net level premium method. Incurred claims continue to be lower than expected. Operating expenses, including commissions, decreased from 27.8% of premium in 2009 to 27.2% of premium in The Company manages expenses to pricing assumptions and has recognized administrative efficiencies as a result of sustained growth and third party administration business. Investments The Company s cash and investments, consisting of bonds, stocks and cash, ended the year at $1.3 billion, an increase of $185.7 million or 16.7% over the $1.1 billion held at the end of Interest and dividend income, net of investment expense, totaled $58.8 million, an increase of $20.5 million, or 53.7% over the $38.3 million recorded in Realized gains decreased from $28.4 million in 2009 to $18.9 million in The investment portfolio s total 2010 return was 6.4% compared to 6.8% in The asset allocation of the Company s portfolio at year end 2010 was 82.6% bonds, 12.9% mutual closed funds and 4.5% cash, including cash utilized for operating purposes. The fixed income GAAP Equity (in millions) $198.7 portion of the portfolio was held in U.S. Treasury securities (2.0%) and corporate bonds (98.0%). It is the Company s policy to invest only in investment grade bonds as identified by a nationally recognized rating agency. The Company does not invest in real estate and has no significant exposure to investments backed by non-prime mortgages. It is the opinion of Management that the Company has no significant concentration of credit risk. During 2010, the Company took advantage of high interest rates and restructured the portfolio by replacing its equity portfolio with fixed income investments with an expected yield of 6.8%. Liquidity and Capital Resources The Company s liquidity position remained strong. The Company has no outstanding debt and ended the year with stockholders equity of $198.7 million. Insurance law requires that the Company maintain a minimum statutory surplus which complies with the Risk-Based Capital Formula promulgated by the National Association of Insurance Commissioners (NAIC). The formula includes components for asset risk, liability risk, interest rate exposure and other factors. The Company exceeded the authorized control level for Reinsurance agreements remain in place, which cede up to 50% of the risk on inforce policies. These agreements strengthen the Company s capital position. $

12 Combined Balance Sheets As of December 31, 2010 and 2009 Assets (Dollar amounts in thousands) Cash and cash equivalents $ 59,069 $ 61,061 Investments 1,241,498 1,053,834 Receivables 57,286 70,165 Deferred policy acquisition costs 55,597 55,700 Other assets 6,976 6,842 TOTAL ASSETS $ 1,420,426 $ 1,247,602 Liabilities and Stockholders Equity Aggregate liability for policy and contract claims $ 1,118,803 $ 1,018,666 Premium deposits and unearned premiums 38,603 38,631 Deferred income taxes 47,251 27,931 Accounts payable and accrued expenses 17,068 16,029 Total Liabilities 1,221,725 1,101,257 Stockholders Equity Common stock 9,653 9,653 Additional paid-in capital 144, ,454 Accumulated other comprehensive income (loss) 49,928 22,152 Accumulated deficit (5,334) (9,914) Total stockholders equity 198, ,345 TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $ 1,420,426 $ 1,247,602 See notes to combined financial statements. Combined Statements of Operations As of December 31, 2010 and 2009 (Dollar amounts in thousands) Revenue: Premiums earned $ 143,371 $ 146,600 Investment income net of investment expenses 58,810 38,269 Net gain on investments 18,924 28,441 Total Revenue 221, ,310 Expenses: Benefits 174, ,025 Operating 39,008 40,819 Total Expenses 213, ,844 Income before income taxes 7,200 15,466 Income tax expense 2,620 5,504 Net income $ 4,580 $ 9,962 See notes to combined financial statements. 12 See notes to combined financial statements.

13 Combined Statements of Changes in Stockholders Equity For the years ended December 31, 2010 and 2009 Common Stock Additional Paid-in Capital Accumulated Other Comprehensive (Loss) Income Comprehensive Income (Dollar amounts in thousands) Accumulated Deficit Total Stockholder s Equity Balance January 1, 2009 $ 7,788 $ 105,819 $ (54,214) $ (19,876) $ 39,517 Comprehensive income: Net income $ 9,962 9,962 9,962 Unrealized gain on investments: Unrealized holding gains during period net of tax 94,852 94,852 94,852 Less: reclassification adjustment for gain included in net income net of tax (18,486) (18,486) (18,486) Paid-in capital 1,865 18,635 20,500 TOTAL COMPREHENSIVE INCOME $ 86,328 Balance December 31, , ,454 22,152 (9,914) 146,345 Comprehensive income: Net income $ 4,580 4,580 4,580 Unrealized gain on investments: Unrealized holding gains during period net of tax 40,077 40,077 40,077 Less: reclassification adjustment for gain included in net income net of tax (12,301) (12,301) (12,301) Paid-in capital 20,000 20,000 TOTAL COMPREHENSIVE INCOME $ 32,356 Balance December 31, 2010 $ 9,653 $ 144,454 $ 49,928 $ (5,334) $ 198,701 Combined Statements of Cash Flows For the years ended December 31, 2010 and 2009 (Dollar amounts in thousands) 2010 Operating activities: 2009 Net income $ 4,580 $ 9,962 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of bond discount and other (16,657) (15,090) Deferred income taxes 19,320 28,504 Net realized gain on investments (18,924) (28,441) Decrease in receivables 12,879 34,527 Decrease in deferred policy acquisition costs 103 8,882 (Increase) decrease in other assets (134) 1,282 Increase in aggregate liability for policy and contract claims 100,137 92,404 Decrease in premium deposits and unearned premiums (28) (1,571) Increase in accounts payable and accrued expenses 1,039 3,690 N et cash provided by operating activities 102, ,149 Investing activities: Proceeds from sales and maturities of investments 525, ,797 Purchases of investments (649,706) (904,785) N et cash used by investing activities (124,307) (418,988) Financing activities Paid-in capital 20,000 20,500 Net decrease in cash and cash equivalents (1,992) (264,339) Cash and cash equivalents Beginning of year 61, ,400 Cash and cash equivalents End of year $ 59,069 $ 61,061 See notes to combined financial statements. 13

14 NOTES TO COMBINED FINANCIAL STATEMENTS As of and for years ended December 31, 2010 and 2009 (Dollar amounts in thousands) 1. Description of business and summary of significant accounting policies Organization The combined financial statements include MedAmerica Insurance Company of New York ( MedAmerica NY ), MedAmerica Insurance Company ( MedAmerica ), MedAmerica Insurance Company of Florida ( MedAmerica FL ), MedAmerica, Inc., MIG Assurance (Cayman), Ltd., ( MIG ), and Excellus Insurance Agency, Inc. (the Agency ), (together, the Company ). The Company underwrites and reinsures long term care insurance, which provides coverage for chronically ill individuals. The Company is licensed to issue policies for long term care coverage in 50 states and the District of Columbia. MedAmerica NY and MedAmerica are subsidiaries of MedAmerica, Inc., which in turn, is wholly owned by Excellus Health Plan, Inc. ( Excellus ), an entity that provides health and medical insurance coverage to subscribers. MedAmerica FL is a wholly owned subsidiary of MedAmerica. MIG, a captive reinsurer, and the Agency are wholly owned subsidiaries of Excellus Ventures, Inc. ( Ventures ). MIG reinsures policies issued or reinsured by MedAmerica and an unaffiliated insurer. Excellus and Ventures are members of Lifetime Healthcare, Inc. ( Lifetime ), a holding company. Ventures also owns stock in MedAmerica. Basis of Combination The combined financial statements have been prepared on the basis of accounting principles generally accepted in the United States of America (GAAP), which vary from statutory accounting practices prescribed or permitted by insurance regulatory authorities (see Note 10). All significant intercompany balances and transactions have been eliminated in combination. Cash and Cash Equivalents Cash and cash equivalents include cash and short-term investments with a maturity of three months or less at the time of purchase. The Company s banking arrangements allow for the Company to fund outstanding checks when presented to the financial institution for payment. This cash management practice frequently results in a net cash book overdraft position, which occurs when total issued checks exceed available cash balances at a single financial institution. The Company has recorded its cash disbursement accounts with a net cash book overdraft position in accounts payable. At December 31, 2010 and 2009, the Company had net cash book overdrafts of $2,766 and $2,305 respectively, classified in accounts payable and accrued expenses in the accompanying combined balance sheets. Included in cash and cash equivalents is a restricted cash deposit in the State of Florida of $113 and $110 as of December 31, 2010 and 2009 respectively. Investments The Company classifies its investments in debt and equity securities as either trading or available-for-sale, and accordingly, such securities are carried at fair value. The net unrealized holding gain or loss on trading securities is included in net gain on investments in the accompanying statements of operations. The net unrealized holding gain or loss on available-for-sale securities is excluded from the accompanying statements of operations and reported as a component of comprehensive income, net of deferred income taxes. The Company follows the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic , Recognition and Presentation of Other-Than-Temporary Impairments, for recording impairment charges on investments in debt securities. Topic requires companies to evaluate investments in debt securities for impairment considering a company s intent to sell the security or the likelihood that it will be required to sell the security before recovery of the entire amortized cost basis or maturity of the security. If a company either intends to sell or determines it will more likely than not be required to sell a debt security before recovery of the 14

15 2010 FINANCIAL REPORT entire amortized cost basis or maturity of the security, the entire impairment must be recognized in the results of operations. If a company does not intend to sell the security and determines it will not more likely than not be required to sell the security but does not expect to recover the entire amortized cost basis, the impairment must be bifurcated into the amount attributed to the credit loss, which must be recognized in the results of operations, and all other causes, which must be recognized in comprehensive income, the same as any other unrealized fair value adjustment. When the fair value of equity securities is lower than its cost, and such decline is determined to be other-than-temporary, the cost of the investment is written down to fair value and the amount of the writedown is included in net gain on investments in the accompanying statements of operations. Costs of investments sold are determined on a first-in, first-out basis. The Company maintains a diverse portfolio of investments. The Company abides by applicable insurance laws which may place restrictions on the type, amount and quality of investments, as well as internal corporate policies which place additional restrictions on investment activity. Management does not believe that the Company has any significant concentrations of credit risk. Fair Value Measurements The Company obtains one price for each security primarily from the Company s custodian which uses multiple third party pricing services. These prices are typically derived through recently reported trades for identical or similar securities making adjustments through the reporting date based upon available observable market information. For securities not actively traded, the pricing service may use quoted market prices of comparable instruments or discounted cash flow analyses, incorporating inputs that are currently observable in the markets for similar securities. Inputs that are often used in the valuation methodologies include, but are not limited to, nonbinding broker quotes, benchmark yields, credit spreads, default rates, and prepayment speeds. The Company made no adjustments to quoted market prices obtained from its custodian during the years ended December 31, 2010 and 2009 that were material to the combined financial statements. Assets and liabilities recorded at fair value in the combined balance sheets are categorized based upon the inputs used to measure their fair value. Level inputs, as defined by FASB ASC Topic 820, Fair Value Measurements, are as follows: Level Input: Level 1 Level 2 Level 3 Input Definition: Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date. Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data at the measurement date. Unobservable inputs that reflect management s best estimate of what market participants would use in pricing the asset or liability at the measurement date. An asset s classification is based on the lowest-level input that is significant to its measurement. For example, a Level 3 fair value measurement may include inputs that are both observable (Levels 1 and 2) and unobservable (Level 3). 15

16 Deferred Policy Acquisition Costs Deferred policy acquisition costs include commissions in excess of ultimate renewal commissions, solicitation and printing costs, sales material and some support costs, such as underwriting and policy issuance expenses. Amortization is determined as a level proportion of premium based on commonly accepted actuarial methods and reasonable assumptions about mortality, morbidity, lapse rates, expenses and future yield on investments established when the policy is issued. Aggregate Liability for Policy and Contract Claims This liability represents management s estimate of future obligations on policies currently in force. The liability has been computed using the net level premium method and is based upon assumptions as to future investment yield, mortality, utilization, and withdrawal. These assumptions, which are consistent with those used for pricing purposes, have been developed from information provided by an independent consulting actuary. Management believes that the aggregate liability for policy and contract claims at December 31, 2010 and 2009 is appropriately established in the aggregate and is adequate to cover the ultimate net cost of reported and unreported claims arising from losses which had occurred by those dates. The establishment of appropriate liabilities is an inherently uncertain process. Such liabilities are necessarily based on estimates, and the ultimate net cost may vary from such estimates. These estimates are regularly reviewed and updated using the most current information available. Any resulting adjustments are reflected in current operations. Premium Deposits and Unearned Premiums Premium deposits are retained by the Company until medical underwriting is complete. Upon acceptance or denial of a policy, deposits are recorded as unearned premiums or refunded to the applicant. Policyholder premiums are billed in advance of the respective coverage periods. Premiums applicable to the unexpired portion of coverage are recorded as unearned premiums in the accompanying combined balance sheets. Premiums Earned Premiums, which are generally billed in advance, are recognized as revenue ratably throughout the respective periods of coverage. Reinsurance premiums earned and reinsurance premiums ceded are included within premiums earned, as described Note 2. Income Taxes MedAmerica NY, MedAmerica, MedAmerica FL, and Excellus Insurance Agency, Inc. are included in the consolidated federal tax return of Lifetime. Income tax expense and benefit are allocated to each member based on the equivalent of a separate company basis. The Company accounts for income taxes using the liability method in accordance with the provisions of FASB ASC Topic 740, Income Taxes. Under Topic 740, deferred income tax assets and liabilities are determined based on temporary differences between the financial statement and income tax bases of assets and liabilities. MIG is also a taxable entity, but files a separate life insurance company tax return. In July 2006, the FASB issued certain provisions of Topic 740. These provisions of Topic 740 create a model to address uncertainty in tax positions and clarifies the accounting for income taxes by prescribing a minimum recognition threshold, which all income tax positions must achieve to meet before being recognized in the combined financial statements. Any differences between the amounts recognized in the combined balance sheets prior to the adoption of Topic 740 and the amounts reported after adoption are generally accounted for as a cumulative-effect adjustment recorded to the beginning balance of accumulated deficit. Topic 740 was effective for the Company on January 1, The adoption of Topic 740 did not have an impact on the Company s combined financial statements. The Company recognizes any interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying combined statements of operations. Accrued interest and penalties are included within the accounts payable and accrued expenses line in the combined balance sheets. There were no interest and penalties recognized in 2010 or The Company does not anticipate significant increases or decreases in its uncertain tax positions within the next twelve months. Comprehensive Income Comprehensive income includes all changes in stockholders equity during a period except those resulting from investments by owners and distributions to owners. The Company s comprehensive income includes net income and unrealized gains or losses on available for sale investments that are not other-than-temporarily impaired. 16

17 Use of Estimates The preparation of combined financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the combined financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Subsequent Events Subsequent events have been evaluated by the Company through March 14, 2011, the date of issuance of these combined financial statements. Recently Issued Accounting Pronouncements In October 2010, the FASB issued Accounting Standard Update (ASU) , Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts, to address diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. Under ASU , acquisition costs are to include only those costs that are directly related to the acquisition or renewal of insurance contracts. An entity may defer incremental direct costs of contract acquisition that are incurred in transactions with independent third parties or employees as well as the portion of employee compensation costs related to underwriting, policy insurance and processing, medical inspection, and contract selling for successfully negotiated contracts. Additionally, an entity may capitalize as a deferred acquisition cost only those advertising costs meeting the capitalization criteria for direct-response advertising. This change is effective for fiscal years beginning after December 15, 2011 and interim periods within those years. Early adoption as of the beginning of a fiscal year is permitted. ASU is to be applied prospectively upon the date of adoption, with retrospective application permitted, but not required. The Company is currently assessing the impact of ASU on the Company s financial position, results of operations, and financial statement disclosures. 2. Reinsurance The Company operates under agreements to reinsure 50%-100% of the risk for certain long term care insurance policies issued by other insurance companies (the Reinsureds ). As a result of transactions with the Reinsureds, the combined financial statements included the following: Combined Balance Sheets Receivables $ ,547 $ ,678 Aggregate liability for policy and contract claims $ 501,960 $ 488,718 Combined Statements of Operations Reinsurance premiums assumed $ 47,497 $ 54,382 Reinsurance premiums assumed is included in premiums earned in the accompanying combined statements of operations. The Company has also entered into agreements to cede the risks of certain written long term care insurance policies to other unrelated insurance companies (the Reinsurers ). As a result of transactions with the Reinsurers, the Company s combined financial statements include the following: Combined Statements of Operations Reinsurance premiums ceded $ 13,892 $ 13,763 Premiums earned is reduced by reinsurance premiums ceded in the accompanying combined statements of operations. In connection with reinsurance transactions, the Company evaluates the applicable contracts to ensure appropriate risk transfer and any needed adjustments are reflected in the accompanying combined financial statements. 17

18 3. Investments The cost or amortized cost and unrealized gains and losses of available-for-sale securities as of December 31, 2010 and 2009, were as follows: 2010 U.S. Treasury securities and obligations of Carrying Value Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value U.S. government corporations and agencies $ 23,904 $ 966 $ 415 $ 24,455 U.S. agency mortgage-backed securities 17, ,060 States and municipal obligations 34, ,027 34,652 Residential mortgage-backed securities 14,555 2, ,457 Commercial mortgage-backed securities 83,494 12, ,618 Asset backed securities 11, ,439 Corporate obligations 799,824 59,792 4, ,526 Total debt securities 984,956 77,811 6,560 1,056,207 Bond Funds 159,962 1, ,210 Common Stock 3, ,269 TOTAL $ 1,148,059 $ 79,550 $ 6,923 $ 1,220, U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 11,476 $ 803 $ 64 $ 12,215 U.S. agency mortgage-backed securities 26, ,150 States and municipal obligations 29, ,429 Residential mortgage-backed securities 17, ,564 15,683 Commercial mortgage-backed securities 72,205 8,982 1,403 79,784 Asset backed securities 13, ,723 Corporate obligations 655,323 35,423 5, ,833 Total debt securities 825,525 48,021 10, ,817 Common Stock 198,232 9,200 19, ,303 Preferred Stock 2, ,714 TOTAL $ 1,025,986 $ 57,722 $ 29,874 $ 1,053,834 The amortized cost and estimated fair value of debt securities at December 31, 2010, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. 18 Amortized Cost Estimated Fair Value Due within one year $ 2,898 $ 2,937 Due after one year through five years 78,101 83,614 Due after five years through ten years 171, ,036 Due after ten years 605, ,045 Mortgage-backed securities 126, ,575 TOTAL $ 984,956 $ 1,056,207

19 Investment securities available for sale in an unrealized loss position as of December 31, 2010 and 2009, are summarized as follows: 2010 Less than 12 Months More than 12 Months Total Market Value Unrealized Losses Market Value Unrealized Losses Market Value Unrealized Losses U.S. treasury and government securities $ 10,245 $ 415 $ - $ - $ 10,245 $ 415 U.S. agency mortgage-backed securities 2, , States and municipal obligations 17, ,022 1,027 Residential mortgage-backed securities 1, , , Commercial mortgage-backed securities 8, , , Asset backed securities 1, , Corporate obligations 114,198 3,317 13, ,148 4,088 Bond Funds 21, , TOTAL $ 177,654 $ 5,343 $ 20,713 $ 1,580 $ 198,367 $ 6, Less than 12 Months More than 12 Months Total Market Value Unrealized Losses Market Value Unrealized Losses Market Value Unrealized Losses U.S. treasury and government securities $ 1,743 $ 64 $ - $ - $ 1,743 $ 64 U.S. agency mortgage-backed securities States and municipal obligations 18, , Residential mortgage-backed securities ,664 2,512 10,138 2,565 Commercial mortgage-backed securities 5, ,911 1,279 14,899 1,403 Corporate obligations 130,996 3,214 26,342 2, ,338 5,913 Common Stock 111,619 19, ,753 19,129 Preferred Stock TOTAL $ 269,369 $ 23,325 $ 45,269 $ 6,549 $ 314,638 $ 29,874 Proceeds from sales of investments during 2010 and 2009, were $525,399 and $485,797, respectively. Gross realized gains and losses on those sales were as follows: Realized gains $ 45,533 $ 58,111 Realized losses (26,573) (29,670) Fair Value Adjustment (36) TOTAL $ 18,924 $ 28,441 19

20 The Company holds a diversified portfolio of investments in the general investment categories shown above. As of December 31, 2010, in the fixed income categories there are 266 debt securities in an unrealized loss position. These positions are not considered other-thantemporarily impaired (OTTI) since the unrealized loss is due to changes in the overall level of interest rates, excessive liquidity premiums or excessive changes in credit spreads. The Company has a policy, which considers historic interest rate volatility and the target and actual duration of its investments in debt securities to initially identify potentially OTTI fixed income securities. When evaluating a debt security for OTTI, the Company analyzes relevant factors including the length of time and extent to which fair value has been less than amortized cost, the financial condition and near-term prospects of the issuer as well as specific events or circumstances that may influence the operations of the issuer, and whether the Company has the intent to sell or if it is more likely than not it will be required to sell a security before there is sufficient time to recover the Company s amortized cost. When the Company intends to sell or it is more likely than not it will be required to sell a security before recovery of its entire amortized cost, it records the full difference between fair value and amortized cost in results of operations. When the Company does not have intent to sell or it is not more likely than not it will be required to sell a security, and it does not expect to receive all amounts due contractually, it bifurcates the loss between a credit component, which is recorded in the results of operations, and all other causes, which are recorded in other comprehensive income. The credit component is defined as the difference between the amortized cost basis of the debt security and the net present value of its projected future cash flows. In the bond funds category, there are 40 securities with a fair value of $21,468 in an unrealized loss position at December 31, The bond funds in an unrealized loss position have an unrealized loss of $363. This temporary impairment is due to general market, economic and industry fluctuations since the time of acquisition and, in some cases, factors particularly affecting the bond funds. For the years ended December 31, 2010 and 2009, the Company recorded impairment charges of $93 and $3,606, respectively, for OTTI. 4. Fair Value Measurements The Company s investments recorded at fair value that are measured on a recuring basis at December 31, 2010 and 2009 are as follows: Available-for-sale securities: U.S. Treasury securities and obligations of U.S. Quoted Prices in Active Markets for Identical Assets (Level 1) Fair Value Measurement Using Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Fair Value government corporations and agencies $ 24,455 $ - $ - $ 24,455 U.S. agency mortgage-backed securities 18,060 18,060 States and municipal obligations 34,652 34,652 Residential mortgage-backed securities 16,457 16,457 Commercial mortgage-backed securities 95,618 95,618 Asset backed securities 11,439 11,439 Corporate obligations 855, ,526 Bond Funds 161, ,210 Common Stock 3,269 3,269 $ 188,934 $ 1,031,752 $ - $ 1,220,686 Trading securities: Corporate obligations $ - $ 16,501 $ 838 $ 17,339 Preferred stock 3,473 3,473 $ 3,473 $ 16,501 $ 838 $ 20,812 Total Investments $ 192,407 $ 1,048,253 $ 838 $ 1,241,498

21 2009 Available-for-sale securities: U.S. Treasury securities and obligations of U.S. Quoted Prices in Active Markets for Identical Assets (Level 1) Fair Value Measurement Using Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Fair Value government corporations and agencies $ 12,215 $ - $ - $ 12,215 U.S. agency mortgage-backed securities 27,150 27,150 States and municipal obligations 29,429 29,429 Residential mortgage-backed securities 15,683 15,683 Commercial mortgage-backed securities 79,784 79,784 Asset backed securities 13,723 13,723 Corporate obligations 684, ,833 Common Stock 188, ,303 Preferred Stock 2,714 2,714 Total Investments $ 203,232 $ 850,602 $ - $ 1,053,834 There were no significant transfers between security levels during 2010 or Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Corporate Obligations Balance January 1, 2010 $ - Purchases, Issuances, and Settlements 838 Balance December 31, 2010 $ Aggregate Liability for Policy and Contract Claims Activity in the aggregate liability for policy and contract claims at December 31, 2010 and 2009, which includes a reserve for claim adjustment expenses, is summarized as follows: Balance at January 1: $ 1,018,666 $ 926,262 Less: Liability for claims administration expenses (24,301) (23,162) Beginning aggregate liability for policy and contract claims 994, ,100 Reinsurance reserve transfers - (24,155) Mod-co reserve adjustment Change in reinsurance recoverable (8,286) 24,051 Incurred related to: Current year 153, ,561 Prior year 21,418 12,464 Total incurred 174, ,025 Paid related to: Current year (12,092) (13,827) Prior year (58,855) (52,250) Total paid (70,947) (66,077) Ending aggregate liability for policy and contract claims 1,090, ,365 Plus: Liability for claims administration expenses 28,349 24,301 Balance at December 31 $ 1,118,803 $ 1,018,666 21

22 As a result of changes in estimates of insured events in prior years, the aggregate liability for policy and contract claims increased by $21,418 and $12,464 in 2010 and 2009, respectively, because actual lengths of stay for active claimants and reported claims differed from those anticipated. During 2010 and 2009, the Company did not enter into any additional reinsurance agreements to assume risk. During 2009, the Company entered into an assumption and indemnity reinsurance agreement to cede risk for long term care insurance policies to another insurance company. Pursuant to this agreement, policy reserves were transferred in the amount of $24, Stockholders Equity The separate components of the Company s common stock and additional paid-in capital at December 31, 2010 and 2009, are as follows: MedAmerica, MedAmerica, MedAmerica MIG Excellus Total Inc NY Insurance Agency 2010 Common stock: Par value per share (whole dollars) $ $ 300 $ $ 1 $ 0.01 Shares outstanding (whole amounts) 10,000,000 6, ,600 3, Amount outstanding $ 10 $ 1,800 $ 7,840 $ 3 $ - $ 9,653 Additional paid-in capital $ - $ 92,067 $ 52,089 $ 297 $ 1 $ 144, Common stock: Par value per share (whole dollars) $ $ 300 $ $ 1 $ 0.01 Shares outstanding (whole amounts) 10,000,000 6, ,600 3, Amount outstanding $ 10 $ 1,800 $ 7,840 $ 3 $ - $ 9,653 Additional paid-in capital $ - $ 72,067 $ 52,089 $ 297 $ 1 $ 124,454 During 2010 and 2009, Excellus contributed additional capital to MedAmerica, Inc. who contributed this capital to MedAmerica NY in the amounts of $20,000 and $15,000, respectively, which is included in additional paid-in capital above. During 2009, MedAmerica sold 140,000 shares of common stock to Excellus for $5,500 resulting in an increase in common stock of $1,865 and additional paid-in-capital of $3,