EXAMINATION REPORT OF
JOHN DEERE INSURANCE COMPANY
JOHNSTON, IOWA
AS OF DECEMBER 31, 2011 Johnston, Iowa December 4, 2012
HONORABLE SUSAN E. VOSS Commissioner of Insurance State of Iowa Des Moines, Iowa
Commissioner:
In accordance with your authorization and pursuant to Iowa statutory provisions, an Association Examination has been made of the records, business affairs and financial condition of
JOHN DEERE INSURANCE COMPANY
JOHNSTON, IOWA
AS OF DECEMBER 31, 2011 at its Home Office, 6400 NW 86th Street, Johnston, Iowa.
INTRODUCTION
John Deere Insurance Company, previously known as HCC Insurance Company, hereinafter referred to as the “Company” or “JDIC”, was last examined as of December 31, 2008 under the Association Plan by the Indiana Department of Insurance. The examination reported herein was conducted under the Association Plan solely by examiners for the Iowa Insurance Division, representing the Midwestern Zone.
SCOPE OF EXAMINATION
This is the regular comprehensive financial examination of the Company covering the intervening period from January 1, 2009 to the close of business on December 31, 2011, including any material transactions and/or events occurring and noted subsequent to the examination period.
The examination was conducted in accordance with the NAIC Financial Condition Examiners Handbook. The Handbook requires the examination to be planned and performed to evaluate the financial condition and identify prospective risks of the Company by obtaining information about the Company, including corporate governance, identifying and assessing inherent risks within the organization, 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, management’s compliance with Statutory Accounting Principles and annual statement instructions, when applicable to domestic state regulations.
All accounts and activities of the organization were considered in accordance with the risk-focused examination process. The Company’s assets were verified and evaluated and the liabilities determined to reflect herein a statement of its financial condition as of December 31, 2011.
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HISTORY
The Company was incorporated in 1979 as the Lumbermens National Insurance Company. In 1985, the Company was acquired by Brougher Insurance Group, Inc. and the Company’s name was changed to North Atlantic Casualty and Surety Company, Inc. On June 1, 1991, the Company’s name was changed to VASA North Atlantic Insurance Company.
In December 1998, the Company was acquired by Centris Group Inc., and its name was subsequently changed to Centris Insurance Company. In December 1999, the Company was acquired by HCC Insurance Holdings, Inc. (HCC), a Delaware corporation. After the acquisition, the Company became a subsidiary of HCC Life Insurance Company.
Effective September 1, 2004, the Company changed its name to HCC Insurance Company (HCCIC). On December 31, 2004, HCC Life Insurance Company made an extraordinary dividend of the Company’s common stock to Houston Casualty Company. As a result of that transaction, the Company became a direct subsidiary of Houston Casualty Company.
In 2010, John Deere Credit Company (n/k/a John Deere Financial Services, Inc.) acquired HCC Insurance Company, domiciled in Indiana. The acquisition was approved by the Insurance Commissioner of Indiana on March 12, 2010. HCC Insurance Company was redomesticated to the State of Iowa and renamed John Deere Insurance Company (“JDIC, the “Company”) on March 18, 2010.
John Deere Credit Company, a Delaware corporation headquartered in Johnston, Iowa, entered the crop insurance market in 2005 through its downstream subsidiary John Deere Risk Protection, Inc. (JDRP), an Iowa corporation. Since 2008, JDRP offered federally reinsured multiple peril crop insurance (MPCI), crop-hail insurance (Hail), and related products as a managing general agency (MGA) on behalf of the Insurance Company of the State of Pennsylvania (“ISOP”, an unaffiliated crop insurer). With respect to MPCI, ISOP held the Standard Reinsurance Agreement (“SRA”) with the Federal Crop Insurance Corporation (“FCIC”) from 2008 to 2011.
Upon its’ acquisition, the Company began to make the appropriate state insurance regulatory filings to become licensed to write crop insurance in the states where JDRP offered crop insurance through ISOP. On July 1, 2010, (the day JDIC became the holder of the SRA), the Company had not yet received approval in all states. The Company entered into an agreement with ISOP whereby ISOP became a “policy issuing company” under the SRA to offer crop insurance in states where the Company had not yet received appropriate approvals. As part of this arrangement, the Company agreed to a 100% quota share reinsurance agreement with ISOP and JDRP entered into a revised managing general agent agreement. In 2012, JDIC received all necessary regulatory approvals to offer crop insurance in its writing territory and the relationship with ISOP expired July 1, 2012.
HOLDING COMPANY ACT
The Company is a member of a Stock Insurance Holding Company System and properly filed Holding Company Registrations in accordance with Chapter 521A, Code of Iowa. The Company became a member of the Deere & Company (“Deere”) holding company system on March 18, 2010 upon acquisition by John Deere Credit Company (n/k/a John Deere Financial Services, Inc. (“JDF”)) of all the issued and outstanding voting securities.
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A partial organization chart follows:
Deere & Company John Deere Financial Services, Inc. (JDF) John Deere Capital Corporation (JDCC) Deere Credit, Inc. Deere Credit Services, Inc. (DCSI) John Deere Insurance Company (JDIC) John Deere Leasing Company John Deere Risk Protection, Inc. (JDRP)
CAPITAL STOCK
Per the Articles of Incorporation, the aggregate number of shares of stock that the corporation is authorized to issue is 10,000 shares of common stock, $2,500 par value. The common stock shall have unlimited voting rights and shall be entitled to the net assets upon dissolution. Common capital stock issued and outstanding consists of 1,500 shares or $3,750,000, with gross paid in and contributed surplus of $78,741,923.
On March 18, 2010, JDF acquired all of the issued and outstanding voting securities of HCCIC consisting of 1,064 shares of common stock. On May 26, 2010 and January 5, 2011, JDIC issued 136 and 300 shares, respectfully, of common stock that was purchased by the parent company, JDF.
On July 31, 2011, JDF surrendered all of the prior stock certificates to JDIC in return for one certificate consisting of 1,500 shares valued at $2,500 each representing $3,750,000 in common capital stock.
After the change in ownership, the Company received $20,000,000 in gross paid in and contributed surplus. During 2011, the Company received a total of $54,250,000 in gross paid in and contributed surplus. No dividends to shareholders were declared or paid by John Deere Insurance Company.
MANAGEMENT AND CONTROL
SHAREHOLDERS
The annual meeting of the shareholders for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held each year at such place, time and date as fixed by the board of directors. Special meetings of the shareholders may be called by the Chief Executive Officer, President or the Board of Directors upon the written demand of the holders of at least ten percent of all the votes entitled to be cast on any issue proposed to be considered at the meeting. Every shareholder entitled to vote may vote in person or by proxy.
BOARD OF DIRECTORS
The business and affairs of the Corporation shall be managed by a Board of Directors which may exercise all powers of and do all such lawful acts and things as are by statute or by the Articles or the Bylaws of the Corporation directed or authorized to be exercised or done by the stockholders. The number of Directors, which shall constitute the whole Board, shall not be less than five (5) nor more than twenty-one (21), the exact number to be fixed by the Board of Directors.
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The Board of Directors shall meet annually for the purposes of organization, the election of officers and the transaction of other business. Such meeting may be held at any time or place as shall be specified in a notice given as hereinafter provided for special meetings of the board of directors or in a consent and waiver of notice thereof signed by all the directors, at which meeting the same matters will be acted upon as is above provided. Regular meetings of the Board of Directors shall be held at such place and at such times as the Board of Directors shall by resolution fix and determine from time to time. No notice shall be required for any such regular meeting of the Board. Special Meetings of the Board of Directors shall be held whenever called by direction of the Chief Executive Officer, the President, or one third of the directors at the time being in office.
At December 31, 2011, duly elected and serving as directors were:
Name and Address Term
James Alan Israel 2012 Johnston, Iowa
Patrick Edward Mack 2012 Clive, Iowa
Daniel Cyril McCabe 2012 Grimes, Iowa
Lawrence Wayne Sidwell 2012 West Des Moines, Iowa
Andrew Charles Traeger 2012 Johnston, Iowa
All directors serve as officers under Deere & Company, either directly for John Deere Insurance Company or for another affiliate.
Directors do not receive a directors’ fee, but may be reimbursed for travel expenses, out of pocket expenses or other compensation as determined by resolution of the Board.
COMMITTEES
The Board of Directors, by resolution adopted by the affirmative vote of a majority of the number of directors then in office, may establish one or more committees, including an Executive Committee, each committee to consist of one or more directors appointed by the Board of Directors, except as otherwise required under the Iowa Business Corporation Act. Any such committee shall serve at the will of the Board of Directors.
The Board elected an Audit Committee which is comprised of the full membership of the Board of Directors. An Investment Management Committee and Underwriting Estimation Committee were also established.
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OFFICERS
The Executive Officers of the corporation shall be a Chief Executive Officer, a President, one or more Vice Presidents, (the number thereof to be determined by the Board of Directors), a Secretary, a Treasurer, and such other officers as may from time to time be elected by the board of directors. One person may hold the offices and perform the duties of any two or more of said offices. In its discretion the Board of Directors may delegate the powers or duties of any officer to any other officer or agents, notwithstanding any provisions of these bylaws and the board of directors may leave unfilled for any such period as it may fix, any office except those of President, Secretary and Treasurer. The officers of the Corporation shall be elected annually by the Board of Directors at the annual meeting thereof. Each such officer shall hold office until the next succeeding annual meeting of the Board of Directors and until his or her successor shall have been duly chosen and shall qualify or until his or her death or until he or she shall resign or shall have been removed.
Duly elected officers at December 31, 2011 were as follows:
Name Title
Donald H. Preusser President Patrick E. Mack Chief Executive Officer Andrew C. Traeger Chief Financial Officer Gregory R. Noe Secretary James A. Israel Senior Vice President Timothy V. Haight Vice President and Chief Counsel Marie Z. Ziegler Vice President and Treasurer Norris J. Young Vice President Annette M. Roth Assistant Treasurer Thomas K. Jarrett Assistant Treasurer Cheryl M. Critelli Assistant Secretary John E. Sheeley Assistant Secretary
The salaries of the officers are shown in Exhibit “A” to be found at the end of this report.
CONFLICT OF INTEREST STATEMENTS
The Company has an established procedure for annual disclosure to its Board of Directors of any material interest or affiliation of its officers or directors, which is in conflict with their duties. The disclosures were found to be signed annually by the directors and officers. No conflicts were disclosed.
CORPORATE RECORDS
ARTICLES OF INCORPORATION and BYLAWS
On March 18, 2010, the Board of Directors approved the change of domicile from the State of Indiana to the State of Iowa. The Articles of Incorporation and the Bylaws are amended to reflect the change of domicile and the name change of the Company from HCC Insurance Company to John Deere Insurance Company. The Restated Articles and amended Bylaws were approved by and filed with the Iowa Insurance Commissioner on March 19, 2010.
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PRIOR EXAMINATION REPORT
On March 17, 2010, by Unanimous Written Consent of the Board of Directors of HCC Insurance Company, the examination report prepared by the Indiana Insurance Division, for the period January 1, 2005 through December 31, 2008, was approved.
AFFILIATED AGREEMENTS
Management Agreement
Effective April 9, 2010, John Deere Insurance Company entered into a Management General Agent Agreement with John Deere Risk Protection, Inc., whereby JDRP agrees to act as the Managing General Agent for the production, underwriting and marketing of JDIC insurance business.
Service Agreement - 2010
Effective April 9, 2010, John Deere Insurance Company entered into a Service Agreement with Deere Credit Services, Inc., whereby DCSI is to provide certain support services necessary for the operations of JDIC.
Service Agreement - 2012
Effective March 1, 2012, the Company replaced the prior Service Agreement. Deere Credit Services, Inc., and Deere & Company are to provide certain support services necessary for the operations of JDIC.
FIDELITY BONDS AND OTHER INSURANCE
Deere & Company and named affiliates, including the Company, are protected by a $20,000,000 fidelity bond which meets the N.A.I.C.’s suggested minimum amount of coverage.
The other interests of the Company appear to be adequately protected through coverages afforded by policies in force with admitted insurers.
EMPLOYEE WELFARE
The Company does not have direct employees. All personnel services are provided by Deere & Company and Deere Credit Services, Inc. in accordance with the Service Agreement.
REINSURANCE
ASSUMED
The Company is a party to a 100% Policy Issuing Company and Reinsurance Agreement with The Insurance Company of the State of Pennsylvania (ISOP). The Company is an approved insurance provider authorized to issue federally reinsured crop insurance policies under the FDIC’s Standard Reinsurance Agreement. The Company has appointed ISOP as a Policy-Issuing Company in territories (as defined in the agreement) where the Company is not currently licensed to write business. The appointment is limited to the book of insurance business managed by John Deere Risk Protection, Inc., the managing general agent. As the Company becomes licensed in additional territories, this business will transition to the Company as the direct writer. The Company assumed $16.8 million in written premiums for 2011 under this agreement.
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CEDED
MPCI Standard Reinsurance Agreement (SRA)
The Standard Reinsurance Agreement is a cooperative financial assistance agreement between the Federal Crop Insurance Corporation (FCIC) and the Company. The FCIC is a government corporation within the USDA authorized to carry out programs of the Federal Crop Insurance Act. The Risk Management Agency acts on behalf of FCIC to administer all Federal crop insurance programs. The SRA establishes the terms under which the FCIC provides reinsurance and subsidies on eligible crop insurance contracts sold by the Company. By regulation, an insurance company must be in good financial standing and in compliance with the state laws where domiciled and writing business prior to being considered for approval of an SRA.
MPCI Excess of Loss
The reinsurer shall indemnify the Company for 95% of the amount, if any, by which the aggregate of the Company’s Ultimate Net Loss exceeds an amount equal to the Company’s Retention, as respects to policies classified as Multiple Peril Crop Insurance reinsured under the Standard Reinsurance Agreement by the Federal Crop Insurance Corporation. The Reinsurer’s liability shall not exceed the amounts set forth below:
Retention and Limit Schedule
Excess Layer Company Retention Reinsurer’s Limits of Liability
95% of 4.5% of Net Retained First 102.5% of Net Retained Premium Premium or 95% of $9,100,000, whichever is the lesser
102.5% of Net Retained Premium plus 95% of 7.0% of Net Retained Second the lesser of $9,100,000 or 4.5% of Premium or 95% of $14,100,000, Net Retained Premium whichever is the lesser
102.5% of Net Retained Premium plus 95% of 11.0% of Net Retained Third the lesser of $23,200,000 or 11.5% Premium or 95% of $22,100,000, of Net Retained Premium whichever is the lesser
102.5% of Net Retained Premium plus 95% of 15.0% of Net Retained Fourth the lesser of $45,300,000 or 22.5% Premium or 95% of $30,100,000, of Net Retained Premium whichever is the lesser
102.5% of Net Retained Premium plus 95% of 14.5% of Net Retained Fifth the lesser of $75,400,000 or 37.5% Premium or 95% of $29,100,000, of Net Retained Premium whichever is the lesser
MPCI Quota Share
The reinsurer shall indemnify the Company for 30% quota share of the Company’s liability on all business reinsured, as respects to policies classified as Multiple Peril Crop Insurance reinsured under the Standard Reinsurance Agreement by the Federal Crop Insurance Corporation.
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Multiple Line Crop Quota Share
Section 1 – Crop Hail and Private Product Business:
The Company shall cede, and the reinsurer shall accept as reinsurance, a 90% share of all crop hail and private product business. However, in no event shall the liability of the reinsurer exceed $5,000,000 (90% of $5,555,555) as respects any one township. The Company may submit to the reinsurer for special acceptance, townships with limits in excess of that amount. In the event the Company’s subject Gross Net Written Premium Income exceeds $35,000,000, the percentage of the Company’s liability ceded shall be reduced to the portion that 90% of $35,000,000 bears to the Company’s total Gross Net Written Premium Income for this Section 1.
Section 2 – MPCI:
The Company shall cede and the reinsurer shall accept as reinsurance a quota share percentage of the Company’s Section 2 business equal to the ratio that 56.45% of Section 1 quota share percentage of the Company’s Crop Hail and Private Products Gross Net Written Premium Income bears to the Company’s Net Retained Premium for the 2011 FCIC Reinsurance Year, after cession to the FCIC. In no event shall the reinsurer’s quota share percentage for Section 2 – MPCI business be less than that associated with ceded Net Retained Premium of $10,000,000, nor shall it exceed that associated with ceded Net Retained Premium of $17,800,000.
STATUTORY DEPOSIT
The book/adjusted carrying value of securities held in an authorized custodial account, and vested in the Iowa Commissioner of Insurance for the benefit of all policyholders, totaled $2,419,805.
The book/adjusted carrying value of securities were held for special deposits by the following jurisdictions:
Arkansas $103,164 New Mexico $213,438 Georgia 35,529 North Carolina 305,990 Massachusetts 101,637 South Carolina 162,620 Missouri 515,082 Virginia 264,257 Nevada 213,268
TERRITORY AND PLAN OF OPERATION
The Company is licensed to write business in 43 jurisdictions. Direct written premiums totaled $426,420,938 for 2011 with $397,708,767 or 93% written under the Multiple Peril Crop Insurance (MPCI) program. The remaining premium is written in crop hail coverage. The top five states represent 48% of direct written premium: Texas 14%, Nebraska 9%, Iowa 9%, Minnesota 8%, and Kansas 8%.
John Deere Risk Protection (JDRP) is the managing general agent (MGA) for the Company. The agency force consists entirely of independent agents at approximately 169 agencies along with 135 sub-agencies.
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MPCI is a federally subsidized farm risk management program under the auspices of the Federal Crop Insurance Corporation (FCIC) and administered by the FCIC's Risk Management Agency (RMA). The program is designed to encourage farmers to share, through premium payments, in the federal government's risk management system. The current program, authorized by Congress in 1980 and modified in subsequent legislation, provides premium subsidies and reinsurance protection on eligible crop insurance contracts. The program is administered by the RMA and offered through private carriers pursuant to a Standard Reinsurance Agreement (SRA) contract.
GROWTH OF COMPANY
The following information was obtained from the office copies of the annual statements. Net Net Investment Admitted Surplus to Premiums Losses Income Year Assets Policyholders Earned Incurred Earned
2010 38,473,000 28,467,411 931,661 866,062 150,680 2011 278,716,156 44,985,887 149,253,503 128,162,394 936,673
The Company began operations as John Deere Insurance Company on March 18, 2010.
ACCOUNTS AND RECORDS
Trial balances were prepared for year-end 2010 and 2011. Amounts from the electronic general ledger accounts were reconciled and found to be in agreement with balances reported on the annual statements for assets, liabilities, income or disbursements.
During the course of the examination, an aggregate unassigned funds (surplus) decrease of $25,671,329 was identified from the amount reflected in the financial statements, as presented in the annual statement at December 31, 2011. A reconciling schedule and comments regarding the surplus differences follow the financial statements depicted in this examination report.
INTER-UNIT CASH BORROWING
The Company reported $49,413,300 payable to John Deere Capital Corporation, related to inter-unit cash borrowings utilized to fund cash flow needs. In accordance with Iowa Code 521A, a domestic insurer and a person in its holding company system shall not enter into loans or extension of credit between each other involving amounts equal to or exceeding the lesser of three percent of a nonlife insurer's admitted assets or twenty-five percent of the surplus as regards policyholders with respect to nonlife insurers as of the next preceding December 31, unless the domestic insurer notifies the commissioner in writing of its intention to enter into the transaction at least thirty days prior to entering into the transaction or within a shorter time permitted by the commissioner and the commissioner has not disapproved of the transaction within the time period. The Company failed to notify the Commissioner about this transaction.
The Company has an accounting policy in place that outlines inter-unit borrowing, however, a written agreement is not in place. This violates SSAP No. 25, which prescribes that 'transactions between related parties must be in the form of a written agreement'.
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F I N A N C I A L S T A T E M E N T S
A N D C O M M E N T S T H E R E O N
NOTE: Except as otherwise stated, the financial statements immediately following reflect only the transactions for the period ending December 31, 2011, and the assets and liabilities as of that date. Schedules may not add or tie precisely due to rounding.
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STATEMENT OF ASSETS AND LIABILITIES
ASSETS Not Ledger Admitted Admitted
Bonds $ 56,461,469 $ $ 56,461,469 Cash and short-term investments 30,448,595 27,594,979 2,853,616 Investment income due and accrued 387,265 387,265 Uncollected premiums and agents' balances in course of collection 8,617,301 77,661 8,539,640 Amounts recoverable from reinsurers 79,461,405 79,461,405 Current federal and foreign income tax recoverable and interest thereon 5,904,471 5,904,471 Net deferred tax asset 9,675,538 1,070,550 8,604,988 Due from FCIC 114,579,652 114,579,652 Assets allowed - Iowa Code 515.35(4)(n)(1) (1,923,650) 1,923,650
Total assets $305,535,696 $26,819,540 $278,716,156
LIABILITIES, SURPLUS AND OTHER FUNDS
Losses $ 35,908,005 Loss adjustment expenses 5,410,298 Commissions payable, contingent and other 15,379,065 Taxes, licenses and fees 650,942 Unearned premiums 6,357,200 Ceded reinsurance premiums payable 120,202,584 Amounts withheld or retained for account of others 68,436 Provisions for reinsurance 918,598 Payable to parent and affiliates 49,513,300 Retroactive Reinsurance Ceded (678,159)
Total liabilities $233,730,269
Common capital stock $ 3,750,000 Gross paid in and contributed capital 78,741,923 Unassigned funds (surplus) (37,506,036)
Surplus as regards policyholders $ 44,985,887
Total liabilities and surplus $278,716,156
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STATEMENT OF INCOME
ONE-YEAR PERIOD ENDING DECEMBER 31, 2011
Underwriting Income Premiums earned $149,253,503
Deductions Losses Incurred $128,162,394 Loss expenses incurred 14,428,780 Other underwriting expenses incurred 26,689,236 Total underwriting deductions 169,280,410
Net underwriting gain (loss) $(20,026,907)
Investment Income Net investment income earned $ 936,673 Net realized capital gains (losses) 4,385 Net investment income 941,058
Other Income Net gain or (loss) from agents' balances charged off $ (569,081) Finance and service charges not included in premiums 491,193 Retroactive reinsurance gain 71,744 Miscellaneous expense (65,236) Total other income (71,380)
Net income before Federal income tax $(19,157,229) Federal and foreign income taxes incurred 912,788
Net income $(20,070,017)
CAPITAL AND SURPLUS ACCOUNT
Surplus as regards policyholders, December 31, 2010 $ 28,467,412
Gains and (Losses) in Surplus Net income $(20,070,017) Change in net deferred income tax 9,104,292 Change in nonadmitted assets (26,807,802) Change in provision for reinsurance (918,598) Cumulative effect of changes in accounting principles 210,600 Capital changes: paid in 750,000 Surplus adjustments: paid in 54,250,000
Change in surplus as regards policyholders for the year $ 16,518,475
Surplus as regards policyholders, December 31, 2011 $ 44,985,887
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CASH FLOW
Cash from Operations
Premiums collected net of reinsurance $157,706,929 Net investment income 971,197 Miscellaneous income (71,380) Total $158,606,746
Benefit and loss related payments $172,970,706 Commissions, expenses paid and aggregate write-ins for deductions 24,134,020 Federal income taxes (paid) recovered 6,045,172 Total 203,149,898
Net cash from operations $(44,543,152)
Cash from Investments
Proceeds from investments sold, matured or repaid: Bonds $ 1,668,411 Miscellaneous proceeds 200,875 Total investment proceeds $ 1,869,286 Cost of investments acquired (long-term only): Bonds $ 36,471,469 Total investments acquired 36,471,469
Net cash from investments $(34,602,183)
Cash from Financing and Miscellaneous Sources
Cash provided: Capital and paid in surplus, less treasury stock $ 55,000,000 Other cash provided (applied) 45,663,768 Net cash from financing and miscellaneous sources $100,663,768
RECONCILIATION OF CASH AND SHORT-TERM INVESTMENTS
Net change in cash and short-term investments $ 21,518,433 Cash and short-term investments: Beginning of year 8,930,162 End of year $ 30,448,595
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STATEMENT OF INCOME
THREE-YEAR PERIOD ENDING DECEMBER 31, 2011
Underwriting Income Premiums earned $150,188,764
Deductions Losses Incurred $128,858,416 Loss expenses incurred 14,503,166 Other underwriting expenses incurred 31,820,170 Total underwriting deductions 175,181,752
Net underwriting gain (loss) $(24,992,988)
Investment Income Net investment income earned $ 2,213,566 Net realized capital gains (losses) 360,782 Net investment income 2,574,348
Other Income Net gain or (loss) from agents' balances charged off $ (569,081) Finance and service charges not included in premiums 491,193 Retroactive reinsurance gain 357,874 Miscellaneous expense (65,206) Total other income 214,780
Net income before Federal income tax $(22,203,860) Federal and foreign income taxes incurred 262,182
Net income $(22,466,042)
CAPITAL AND SURPLUS ACCOUNT
Surplus as regards policyholders, December 31, 2008 $ 28,572,936
Gains and (Losses) in Surplus Net income $(22,466,042) Change in net unrealized capital gains or (losses) 231,321 Change in net deferred income tax 9,484,820 Change in nonadmitted assets (26,818,892) Change in provision for reinsurance (918,598) Cumulative effect of changes in accounting principles 210,600 Capital changes: paid in 1,090,000 Surplus adjustments: paid in 55,599,742
Change in surplus as regard policyholders for the exam period $ 16,412,951
Surplus as regards policyholders, December 31, 2011 $ 44,985,887
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EXAMINATION SURPLUS RECONCILIATION Surplus Per Per Increase Company Exam (Decrease) Assets Cash and short-term investments $30,448,595 $2,853,616 $(27,594,979) Assets allowed under Iowa Code 515.35(4)(n)(1) 0 1,923,650 1,923,650
Net examination surplus difference $(25,671,329) Surplus as regards policyholders reported by Company 70,657,216 Surplus as regards policyholders per examination $ 44,985,887
COMMENT
The Company held $27,594,979 of invested assets, in a Class 1 cash management fund, in excess of statutory limits as prescribed by Iowa Code 515.35(4)(f)(2). The Company is allowed to hold securities of $1,923,650 in accordance with Iowa Code 515.35(4)(n)(1). The net investment holding in excess of Iowa statutory limitations is $25,671,329. The Company moved funds into a US Direct Obligations/Full Faith & Credit Exempt cash management fund on July 6, 2012 to comply with the Iowa Investment Code.
CONCLUSION
The cooperation and assistance extended by the officers and employees of the Company is hereby acknowledged.
In addition to the undersigned, Randy Guzman, Alex Matovu, and Bob Wong, CFE Examiners for the Iowa Insurance Division, participated in the examination and preparation of this report.
A review of losses and related items was performed under the direction of Charles C. Emma, FCAS, MAAA, Managing Principal with EVP Streff Insurance Advisors.
Respectfully submitted,
_ /s/ Virginia West VIRGINIA WEST, CFE Examiner in Charge Insurance Division State of Iowa Representing the Midwestern Zone
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