STATE OF NEBRASKA
Department of Insurance
EXAMINATION REPORT
OF
AMERICAN LIFE & SECURITY CORP.
as of
December 31, 2016
TABLE OF CONTENTS
Item Page
Salutation ...... 1
Introduction ...... 1
Scope of Examination ...... 1
Description of Company: History...... 3 Management and Control: Holding Company ...... 4 Shareholder ...... 4 Surplus Note...... 5 Board of Directors...... 5 Officers ...... 6 Committees ...... 7 Transactions with Affiliates: Management and Service Agreement ...... 7 Administrative Services Agreement ...... 8 Cost Sharing Agreement Subsequent to Examination Date ...... 8 Territory and Plan of Operation ...... 9 Reinsurance: Assumed ...... 9 Ceded ...... 9 General ...... 11
Body of Report: Growth ...... 11 Financial Statements ...... 12 Examination Changes in Financial Statements ...... 15 Compliance with Previous Recommendations ...... 15 Commentary on Current Examination Findings ...... 16
Subsequent Event: Reduction to Credited Rate ...... 16
Summary of Comments and Recommendations ...... 17
Acknowledgment ...... 18
Lincoln, Nebraska August 31, 2017
Honorable Bruce R. Ramge Director of Insurance Nebraska Department of Insurance 941 “O” Street, Suite 400 Lincoln, Nebraska 68508
Dear Sir:
Pursuant to your instruction and authorizations, and in accordance with statutory
requirements, an examination has been conducted of the financial condition and business affairs of:
AMERICAN LIFE & SECURITY CORP. 2900 South 70th Street, Suite 400 Lincoln, Nebraska 68506
(hereinafter also referred to as the “Company”) and the report of such examination is respectfully
presented herein.
INTRODUCTION
The Company was last examined as of December 31, 2012 by the State of Arizona. The
current financial condition examination covers the intervening period to, and including, the close
of business on December 31, 2016, and includes such subsequent events and transactions as were
considered pertinent to this report. The State of Nebraska participated in this examination and
assisted in the preparation of this report.
SCOPE OF EXAMINATION
This examination was conducted pursuant to and in accordance with both the NAIC
Financial Condition Examiners Handbook (Handbook) and Section §44-5904(1) of the Nebraska
Insurance Statutes. The Handbook requires that examiners plan and perform the examination to evaluate the financial condition and identify prospective risks of the Company by obtaining
information about the Company including, but not limited to: corporate governance, identifying and assessing inherent risks within the Company, and evaluating system controls and procedures used to mitigate those risks. The examination also includes assessing the principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation and management’s compliance with Statutory Accounting Principles and Annual
Statement Instructions, when applicable to domestic state regulations.
A general review was made of the Company’s operations and the manner in which its business has been conducted in order to determine compliance with statutory and charter provisions. The Company’s history was traced and has been set out in this report under the caption “Description of Company”. All items pertaining to management and control were reviewed, including provisions for disclosure of conflicts of interest to the Board of Directors and the departmental organization of the Company. The Articles of Incorporation and By-Laws were reviewed, including appropriate filings of any changes or amendments thereto. The minutes of the meetings of the shareholder, Board of Directors and committees, held during the examination period, were read and noted. Attendance at meetings, proxy information, election of Directors and Officers, and approval of investment transactions were also noted.
The fidelity bond and other insurance coverages protecting the Company’s property and interests were reviewed, as were plans for employee welfare and pension. Certificates of
Authority to conduct the business of insurance in the various states were inspected and a survey was made of the Company’s general plan of operation.
Data reflecting the Company's growth during the period under review, as developed from the Company's filed annual statements, is reflected in the financial section of this report under the caption “Body of Report”.
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The Company's reinsurance facilities were ascertained and noted, and have been
commented upon in this report under the caption “Reinsurance”. Accounting records and procedures were tested to the extent deemed necessary through the risk-focused examination
process. The Company’s method of claims handling and procedures pertaining to the adjustment
and payment of incurred losses were also noted.
All accounts and activities of the Company were considered in accordance with the risk-
focused examination process. This included a review of workpapers prepared by RSM US LLP,
the Company’s external auditors, during their audit of the Company’s accounts for the years
ended December 31, 2015 and 2016. Portions of the auditor’s workpapers have been
incorporated into the workpapers of the examiners and have been utilized in determining the
scope and areas of emphasis in conducting the examination. This utilization was performed
pursuant to Title 210 (Rules of the Nebraska Department of Insurance), Chapter 56, Section 013.
Any failure of items to add to the totals shown in schedules and exhibits appearing
throughout this report is due to rounding.
DESCRIPTION OF COMPANY
HISTORY
The Company was organized and incorporated under the name Old Reliance Insurance
Company (Old Reliance) as a domestic limited capital stock life and disability insurer under the
laws of the State of Arizona on September 15, 1960, and received its first Certificate of
Authority on October 16, 1961. On February 8, 1967, the Company qualified as a full legal
reserve life and disability insurer and is currently licensed to write life and disability insurance.
On July 28, 2011, the Arizona Department of Insurance (ADOI) approved the acquisition
of Old Reliance by Midwest Holding, Inc. (25%) and the Company (75%), which is wholly-
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owned by Midwest Holding, Inc. (MHI). Also on July 28, 2011, the ADOI approved the merger
of Old Reliance and the Company with Old Reliance being the surviving corporation. The
Nebraska Department of Insurance (NDOI) approved the merger on August 3, 2011. On August
4, 2011, Old Reliance amended its Articles of Incorporation and By-Laws to change its corporate name to American Life & Security Corp.
On June 14, 2016, the NDOI approved the redomestication of the Company from
Arizona. Since that time two affiliates, First Wyoming Life Insurance Company (First
Wyoming) and Great Plains Life Assurance Company (Great Plains) have merged into the
Company effective September 1, 2016 and December 1, 2016, respectively. Also, effective
August 29, 2016, the Company sold its dormant insurance subsidiary Capital Reserve Life
Insurance Company (Capital Reserve).
MANAGEMENT AND CONTROL
Holding Company
The Company is a member of an insurance holding company system as defined by
Nebraska Statute. An organizational listing flowing from the “Ultimate Controlling Person”, as
reported in the 2016 Annual Statement, is represented by the following (subsidiaries are denoted through the use of indentations, and unless otherwise indicated, all subsidiaries are 100% owned):
Midwest Holding Inc. American Life & Security Corp. Pacific Northwest Capital Corp. (22.4%) New Mexico Capital Corp. (11.7%)
Shareholder
The Company is 100% wholly owned by its sole shareholder and parent, MHI. Article I,
Section 2 of the Company’s By-Laws provides that, “the annual meeting of the Shareholders of
the Corporation shall be held at its principal place of business in Phoenix, Arizona, or at such
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other place or places within or without the State of Arizona which its Board of Directors may
designate, at 10:00 a.m. on the first Saturday in March of each year, unless such day falls on a
holiday, in which event the regular annual meeting shall be held on the next succeeding business day, at which time there shall be elected a Board of Directors for the ensuing year and any other business properly coming before said meeting transacted.”
Article V of the Company’s Articles of Incorporation state that, “the aggregate number of shares which the Company shall have the authority to issue is 1,500,000 shares consisting only of common stock with a par value of $1.00 per share.”
During the exam period, no dividends were issued by the Company. The Company received surplus contributions of $4,239,747 in 2014 and $1,000,000 in 2015. Taking into account the mergers of First Wyoming Life Insurance Company and Great Plains Life Assurance
Company that occurred in 2016, the total paid in and contributed surplus for the Company as of the examination date is $19,075,587.
Surplus Note
The Company entered into two surplus note agreements with its then parent, First
American Capital Corporation in 2006. These notes are in the amounts of $100,000 and
$150,000. The Company also has a surplus notes due to David G. Elmore in the amount of
$400,000. All notes matured in 2016, but the Company has not received regulatory approval to
pay.
Board of Directors
Article II, Section 1 of the Company's By-Laws provides that, “the number of Directors
which shall constitute the whole board shall be not fewer than five (5) nor more than fifteen (15).
The Directors shall be elected at the annual meeting of the Shareholders, except as provided in
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Section 3 of this Article, and each Director elected shall hold office until his or her successor is elected and qualified.”
The following persons were serving as Directors at December 31, 2016:
Name and Residence Principal Occupation
Steve Craig Conner Agricultural Consultant, Midwest PMS, Inc. Windsor, Colorado
John Thomas Hompe Managing Partner, J.P. Charter Oak Advisors, LLC New Canaan, Connecticut
Firman Leung Executive Managing Director, American Capital New York, New York Partners, LLC
Scott Allen Morrison Managing Partner, Oaks, Hartline & Daly LLP Lakeway, Texas
Mark Adrian Oliver Chairman, Chief Executive Officer, American Life & Lincoln, Nebraska Security Corp.
Dana Gordon Stapleton Farmer/Rancher Sisseton, South Dakota
Jack Steven Theeler Partner, Morgan Theeler LLP Mitchell, South Dakota
Officers
Article III, Section 1 of the Company's By-Laws provides that, “the Officers of the
Corporation shall be chosen by the Board of Directors and shall be a President, a Vice President, a
Secretary and a Treasurer.”
The following is a listing of Officers elected and serving the Company at December 31,
2016:
Name Office
Mark A. Oliver Chief Executive Officer, Chairman and Treasurer
Name Office
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Joel H. Mathis Senior Vice President, Investor Relations and Human Resources
Todd C. Boeve Vice President, Chief Operating Officer and Secretary
Debra K. Havranek Vice President, Financial Reporting
Committees
Article II, Section 12 of the Company's By-Laws provides that, “the Board of Directors, by resolution adopted by a majority of the full Board of Directors, may designate from among its members an Executive Committee and one or more other committees each of which, to the extent provided in such resolution or in the Articles of Incorporation or the By-Laws of the Corporation, shall have and may exercise all the authority of the Board of Directors, but no such committee shall possess any authority of the Board of Directors prohibited by law.” As of the examination date, the
Company did not designate an Executive Committee, but has designated an Audit Committee.
The following persons were serving on the Audit Committee at December 31, 2016:
John T. Hompe Jack S. Theeler Scott A. Morrison
TRANSACTIONS WITH AFFILIATES
Management and Service Agreement
The Company executed a Cost Sharing Agreement, effective September 1, 2011 with
MHI, whereby MHI provides office space, office equipment, and other unspecified services or
allocable items. The Company, in return, makes an advance payment towards its fees and
expenses for the month. The advance payment is 90% of a rolling-average of previous months’
fees incurred. The parties agree to settle any fees or reimbursements within thirty days following
the end of the calendar month in which they are earned. The agreement carried an initial five-
7 year term, but shall automatically renew for additional five-year terms unless terminated by either party.
Administrative Services Agreement
The Company executed an Administrative Services Agreement, effective February 1,
2012 with MHI, whereby MHI provides certain administrative services in connection with certain life insurance products. The administrative services provided shall include the following items; underwrite all applications for life insurance, provide actuarial services for all life insurance and related products, issuance and cancellation of all policies upon request, and assist in the development of the Company’s life insurance and related products. Additionally provided per this agreement are services for; maintenance of policy and administrative forms and records, billing, collection, receipt, and accounting of all premiums, investigate, adjudicate, settle and pay claims with Company approval, provide maintenance and summary of accounting records, prepare all statutory filings and actuarial certifications to the appropriate regulatory entity, respond to agent and policyholder inquiries, pay commissions, and prepare federal and state tax filings. The agreement calls for MHI to provide monthly approved cost-sharing allocation entries to the Company by the 10th of the month following close. The initial term if this agreement was three years with a compensation schedule outlined as an exhibit to the agreement.
Cost Sharing Agreement Subsequent to Examination Date
The Company drafted a new Cost Sharing Agreement with MHI that was non- disapproved in February 2017 by the Nebraska Department of Insurance and put into effect
March 1, 2017. This new agreement replaces both the Management and Service Agreement and the Administrative Services Agreement noted above.
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TERRITORY AND PLAN OF OPERATION
As evidenced by current or continuous Certificates of Authority, the Company is licensed to
transact business in Arizona, Colorado, Hawaii, Idaho, Illinois, Indiana, Michigan, Missouri,
Nebraska, New Mexico, Oklahoma, South Dakota, Texas, Utah, and the US Virgin Islands.
The Company is licensed to transact Life, A&H and Annuity business, dependent upon
the jurisdiction. The Company markets traditional life insurance products to individual residents
in the midwest. The Company offers ordinary whole life, limited-pay juvenile whole life, fixed-
rate, single-premium deferred annuities, fixed-rate, flexible-premium annuities, and other non- interest sensitive life insurance products. The Company generates business based on referrals and utilizes a small group of captive sales representatives.
REINSURANCE
Assumed
Under an agreement made effective January 1, 2010, the Company assumes 100% of a
closed-block of individual life business from Security National Life Insurance Company
(Security National), a Utah domiciled insurer. The initial agreement term was for one year and is
automatically renewed for successive one year terms. The business is administered by Security
National and in return the Company pays a service fee quarterly. At December 31, 2016, the
Company reported assumed life premiums of $31,915 and assumed reserves of $2,546,280 under this agreement.
Ceded
As part of the merger with Old Reliance, the Company maintains various reinsurance
contracts with Optimum Re Insurance Company (Optimum Re), Security Life of Denver
Insurance Company, Scottish Re (U.S.) Inc., and Swiss Re Life & Health America, Inc. with
9 effective dates ranging between 1976 and 2003, whereby the Company cedes closed blocks of
Yearly Renewable Term (YRT) life and Accidental Death Benefit (ADB) business.
The Company is party to two Master Reinsurance Agreements with Sagicor Life
Insurance Company (Sagicor), formerly known as American Founders life Insurance Company, an authorized insurer domiciled in Texas. Under the combined 75% and 25% coinsurance agreements effective December 30, 1999, and April 1, 2000, respectively, Sagicor agreed to assume 100% of the Company’s life insurance risks on a closed block of Old Reliance business written prior to its merger with the Company.
Effective August 1, 2009, the Company entered into an automatic and facultative excess of loss contract with Optimum Re, whereby the Company cedes YRT life in excess of $40,000.
Effective September 1, 2009, the Company entered into a quota share agreement with
Optimum Re, whereby the Company cedes 100% of the ADB and riders issued subsequent to the effective date. The Company retains no net risk from the ADB policies and riders ceded to
Optimum Re. First Wyoming and Great Plains each had identical reinsurance agreements with
Optimum Re. When First Wyoming and Great Plains were merged into the Company, amendments were issued for the existing agreements, September 1, 2016 and November 30,
2016 respectively, and the Company became the cedant.
Effective January 1, 2010, Great Plains entered an excess of loss reinsurance agreement with Optimum Re, whereby Great Plains ceded YRT life in excess of $55,000 on an automatic and facultative basis. Effective August 1, 2012, the Company assumed YRT business from
Great Plains on an automatic and facultative basis in excess of $30,000 up to the $55,000 retention of the Optimum Re agreement. Since Great Plains merged into the Company, an
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amendment effective December 6, 2016, removed Great Plains and changed Optimum Re’s attachment point to $30,000.
Effective May 1, 2012, First Wyoming entered an automatic and facultative excess of loss contract with Optimum Re, whereby First Wyoming cedes YRT life in excess of $40,000.
Since First Wyoming merged into the Company, the agreement was amended on September 1,
2016 to continue the agreement with the Company as the cedent.
General
All contracts reviewed contained standard insolvency, arbitration, errors and omissions, and
termination clauses where applicable. All contracts contained the clauses necessary to assure
reinsurance credits could be taken.
BODY OF REPORT
GROWTH
The following comparative data reflects the growth of the Company during the period
covered by this examination (merger of affiliates account for the increases in 2016):
2013 2014 2015 2016
Bonds $10,251,174 $11,633,667 $13,605,305 $29,119,083 Admitted assets 14,781,743 17,431,833 19,694,965 31,173,264 Aggregate reserves for life contracts 11,950,140 13,953,045 16,338,960 25,787,740 Total liabilities 12,916,543 15,002,229 17,168,573 27,355,420 Capital and surplus 1,865,200 2,429,604 2,526,392 3,817,844 Premium income 4,642,004 4,354,615 3,847,021 5,906,484 Net investment income 420,118 382,863 418,819 840,762 Death benefits 554,384 884,895 653,499 488,787 Annuity benefits 268,797 417,981 278,196 961,408 Net income (20,497) (1,465,181) (1,275,874) (1,979,009)
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FINANCIAL STATEMENTS
The following financial statements are based on the statutory financial statements filed by
the Company with the State of Nebraska Department of Insurance and present the financial condition of the Company for the period ending December 31, 2016. The accompanying comments on financial statements reflect any examination adjustments to the amounts reported in the annual statements and should be considered an integral part of the financial statements. A reconciliation of the capital and surplus account for the period under review is also included.
FINANCIAL STATEMENT December 31, 2016
Assets Net Assets Not Admitted Assets Admitted Assets
Bonds $29,119,083 $29,119,083 Real estate held for production of income 517,729 517,729 Cash, cash equivalents, and short-term
investments 548,982 548,982
Contract loans 412,583 412,583
Subtotal, cash and invested assets $30,598,377 $30,598,377 Investment income due and accrued 312,053 312,053 Uncollected premiums 2,457 $ 2,457 Deferred premiums 241,252 241,252 Electronic data processing equipment 10,417 10,417 Furniture and equipment 69,264 69,264 Prepaid expenses 44,340 44,340 Miscellaneous receivable 11,165 11,165
Totals $31,289,325 $116,061 $31,173,264
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Liabilities, Surplus, and Other Funds
Aggregate reserve for life contracts $25,787,740 Aggregate reserve for accident and health contracts 10,180 Liability for deposit-type contracts 582,783 Life claims 203,311 Accident and health claims 188 Premiums received in advance 12,094 Other amounts payable on reinsurance 124,263 Interest maintenance reserve 56,701 General expenses due and accrued 41,725 Taxes, licenses and fees 10,577 Federal income taxes 484 Unearned investment income 12,400 Amounts withheld or retained by company 1,845 Remittances and items not allocated 6,636 Asset valuation reserve 181,993 Payable to parent, subsidiaries and affiliates 114,463 Payable for securities 208,037
Total liabilities $27,355,420
Common capital stock $ 1,050,000 Surplus notes 550,000 Gross paid in and contributed surplus 19,075,587 Unassigned funds (surplus) (16,857,743)
Total capital and surplus $ 3,817,844
Totals $31,173,264
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SUMMARY OF OPERATIONS – 2016
Premiums and annuity considerations $ 5,906,484 Net investment income 840,762 Amortization of interest maintenance reserve 24,381
Totals $ 6,771,627
Death benefits 488,787 Annuity benefits 961,408 Disability benefits 3,548 Coupons and similar benefits 3,883 Surrender benefits and withdrawals 303,516 Interest and adjustments on contract or deposit-type contract funds 24,958 Payments on supplementary contracts with life contingencies 3,271 Increase in aggregate reserves 3,132,934
Totals $ 4,922,305
Commissions (direct business only) 164,198 Commissions on reinsurance assumed 35 General insurance expenses 3,257,562 Insurance taxes, licenses and fees 70,385 Increase in loading on deferred and uncollected premiums (3,473)
Totals $ 8,411,012
Net gain from operations before federal income taxes and net realized capital gains (1,639,385) Net realized capital gains (339,624)
Net income $(1,979,009)
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CAPITAL AND SURPLUS ACCOUNT
2013 2014 2015 2016
Capital and surplus, beginning $1,981,613 $ 1,865,200 $ 2,429,604 $ 5,288,649*
Net income $ (20,497) $(1,465,181) $(1,275,874) $(1,979,009) Change in net unrealized capital gains 32,148 (337,729) (19,369) 350,885 Change in nonadmitted assets (101,436) (1,866,455) 408,502 186,160 Change in asset valuation reserve (6,923) (5,978) (16,471) (28,842) Surplus paid in 4,239,747 1,000,000 Adjustment 7,813 Amortization of goodwill (27,518) ______
Net change for the year $ (116,413) $ 564,404 $ 96,788 $(1,470,805)
Capital and surplus, ending $1,865,200 $ 2,429,604 $ 2,526,392 $ 3,817,844
*change in beginning capital and surplus due to merger of affiliates in 2016
EXAMINATION CHANGES IN FINANCIAL STATEMENTS
Unassigned funds (surplus) in the amount of $(16,857,743), as reported in the Company's
2016 Annual Statement, has been accepted for examination purposes. Examination findings, in
the aggregate, were considered to have no material effect on the Company’s financial condition.
COMPLIANCE WITH PREVIOUS RECOMMENDATIONS
The recommendations appearing in the previous report of examination are reflected
below together with the remedial actions taken by the Company to comply therewith:
Accounts and Records – General Accounting – For 2012, and then again in 2013, the Company included both related party as well as non-related party activity within a general ledger account ultimately reported as a related party receivable in the Company’s filed Annual Statements. This financial statement presentation does not adhere to NAIC Annual Statement Instructions.
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Action: The Company has complied with this recommendation.
Comments on Financial Statements – Based on the examination work performed, capital and surplus as reported by the Company in its Annual Statement filed for the year ended December 31, 2012, was decreased by $197,585 as follows: 1. The carrying value of the Company’s investment in Capital Reserve was reduced by $142,629 to reflect impairment of unamortized goodwill originating from the 2010 acquisition of Capital Reserve. 2. The Company’s reported $111,072 investment in EDP equipment exceeded the SSAP No. 16 limitation by $54,956 and an examination adjustment was made to nonadmit the excess investment. 3. The actuarial assumptions used by the Company and the resulting reserve balances were reviewed for this examination by Alice Fontaine, FSA, FCIA, MAAA, FCA, of the firm Fontaine Consulting, LLC. The examination actuary recommended no adjustments to the Company stated reserves and had no Asset Adequacy issues as of December 31, 2012. The examination actuary also reviewed the actuarial assumptions used by the Company and the resulting reserve balances for December 31, 2013. The examination actuary noted no adjustments appeared necessary to Company stated reserves as of December 31, 2013. This review, however, indicated that available assets to support the Asset Adequacy Analysis, as well as the expected yield on those assets changed materially from the prior year. Based on this review, other noted subsequent events and management’s action with respect to credited rates, a qualified opinion would be given as of December 31, 2013. No amount was quantified as the qualification would be removed should sufficient invested assets with current market yields be available, and credited rates declared on a basis supported by those assets.
Action: The Company has complied with these recommendations.
COMMENTARY ON CURRENT EXAMINATION FINDINGS
There are no comments or recommendations that have been made as a result of this examination.
SUBSEQUENT EVENT
REDUCTION TO CREDITED RATE
Based on asset adequacy testing performed by the Appointed Actuary, the Company has adjusted its credited rate strategy lowering it from 5.75% to a credited rate of 4%, effective July
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1, 2017. The lowering of this credited rate mitigates the risk of a potential future deficiency and avoids the need to establish additional reserves for asset adequacy.
SUMMARY OF COMMENTS AND RECOMMENDATIONS
There are no comments or recommendations that have been made as a result of this examination.
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